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Power Notes. Chapter F5. Accounting for Merchandising Businesses. 1. Nature of Merchandising Business 2a. Accounting for Purchases 2b. Accounting for Sales 2c. Transportation Costs 2d. Merchandise Transactions 3. Merchandising Chart of Accounts 4. Merchandising Income Statement

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Power Notes

ChapterF5

Accounting for Merchandising Businesses

1. Nature of Merchandising Business

2a. Accounting for Purchases

2b. Accounting for Sales

2c. Transportation Costs

2d. Merchandise Transactions

3. Merchandising Chart of Accounts

4. Merchandising Income Statement

5. Merchandising Accounting Cycle

6. Financial Analysis and Interpretation

Learning Objectives

C5


Power Notes

ChapterF5

Accounting for Merchandising Businesses

Slide # Power Note Topics

  • 3

  • 6

  • 8

  • 13

  • 25

  • 27

  • 34

  • Nature of Merchandising Businesses

  • Inventory Costs and Relationships

  • Perpetual Inventory Systems

  • Merchandising Transactions

  • Merchandising Chart of Accounts

  • Merchandising Financial Statements

  • Ratio of Net Sales to Assets

Note: To select a topic, type the slide # and press Enter.


Merchandising and Inventory

  • Merchandising involves selling inventory

  • Inventory is usually an important asset

  • Inventory must be accounted for periodically or perpetually

  • Traditional periodic method is often being replaced by perpetual inventory accounting


Income Statement Comparison

Service Business

Fees earned $150,000

Operating expenses 120,000

Net income $ 30,000

20% of revenues

Merchandising Business

Sales revenue $600,000

Cost of mdse. sold 450,000

Gross profit $150,000

Operating expenses 120,000

Net income $ 30,000

5% of revenues


Income Statement Comparison

Service Business

Fees earned $150,000

Operating expenses 120,000

Net income $ 30,000

20% of revenues

Merchandising Business

Sales revenue $600,000

Cost of mdse. sold 450,000

Gross profit $150,000

Operating expenses 120,000

Net income $ 30,000

75% of revenues

5% of revenues


Inventory Costs and Relationships

LIABILITIES

Merchandise

Inventory

OWNER’S

EQUITY

ASSETS

overstated

understated

overstated

overstated

Net Income

Cost of

Mdse. Sold

REVENUES

COSTS &EXPENSES

If merchandise inventory is . . . . . . .

Cost of merchandise sold is . . . . . .

Gross profit and net income are . . .

Ending owner’s equity is . . . . . . . . .


Inventory Costs and Relationships

LIABILITIES

Merchandise

Inventory

OWNER’S

EQUITY

ASSETS

understated

overstated

understated

understated

Net Income

Cost of

Mdse. Sold

REVENUES

COSTS &EXPENSES

If merchandise inventory is . . . . . . .

Cost of merchandise sold is . . . . . .

Gross profit and net income are . . .

Ending owner’s equity is . . . . . . . . .


Advantages of Using Perpetual Inventory

  • Continuous determination of inventory value

  • Continuous determination of gross profit

  • Affordable with computers, scanners, and bar codes on most products

  • Perpetual inventory accounting provides management controls

  • Managers know which items are selling fastest and the profit margin on those items


A

A

A

B

Perpetual Inventory System

General Journal

General Ledger

Description Debit Credit

Mdse. Inventory

Mdse. Inventory 5,000

Accts. Payable 5,000

5,000

Cost of Mdse. Sold

In a perpetual system, Mdse. Inventory is an active asset account.

All changes are recorded as they occur.

Purchase on account

Return of merchandise


A

B

A

Bal

B

A

B

C

Perpetual Inventory System

General Journal

General Ledger

Description Debit Credit

Mdse. Inventory

Mdse. Inventory 5,000

Accts. Payable 5,000

Accts. Payable 1,000

Mdse. Inventory 1,000

5,000

1,000

4,000

Cost of Mdse. Sold

In a perpetual system, Mdse. Inventory is an active asset account.

All changes are recorded as they occur.

Purchase on account

Return of merchandise

Sale of merchandise


A

B

A

C

B

Bal

C

C

A

B

C

Perpetual Inventory System

General Journal

General Ledger

Description Debit Credit

Mdse. Inventory

Mdse. Inventory 5,000

Accts. Payable 5,000

Accts. Payable 1,000

Mdse. Inventory 1,000

Accts. Receivable 3,250

Sales 3,250

Cost of Mdse. Sold 2,500

Mdse. Inventory 2,500

5,000

1,000

2,500

1,500

Cost of Mdse. Sold

2,500

In a perpetual system, Mdse. Inventory is an active asset account.

All changes are recorded as they occur.

Purchase on account

Return of merchandise

Sale of merchandise


A

B

A

C

B

Bal

C

C

A

B

C

Perpetual Inventory System

General Journal

General Ledger

Description Debit Credit

Mdse. Inventory

Mdse. Inventory 5,000

Accts. Payable 5,000

Accts. Payable 1,000

Mdse. Inventory 1,000

Accts. Receivable 3,250

Sales 3,250

Cost of Mdse. Sold 2,500

Mdse. Inventory 2,500

5,000

1,000

2,500

1,500

Cost of Mdse. Sold

2,500

In a perpetual system, Mdse. Inventory is an active asset account.

All changes are recorded as they occur.

Purchase on account

Return of merchandise

Sale of merchandise


No

Credit Terms, Cash Discounts

Credit Terms: 2/10, n/30

Is invoice paid within 10 days of invoice

date?

Full amount is due within 30 days of invoice date.


No

Credit Terms, Cash Discounts

Credit Terms: 2/10, n/30

Is invoice paid within 10 days of invoice

date?

Full amount is due within 30 days of invoice date.

Yes

2% of invoice amount is allowed as a cash discount.


No

Credit Terms, Cash Discounts

Credit Terms: 2/10, n/30

Is invoice paid within 10 days of invoice

date?

Full amount is due within 30 days of invoice date.

Example: Merchandise was purchased for $1,500 with credit terms of 2/10, n/30. Payment within 10 days is calculated as:

Invoice $1,500

Less 2% discount 30

Net cost paid $1,470

Yes

2% of invoice amount is allowed as a cash discount.


Selling and Buying Merchandise Inventory

Seller

Buyer

Description Debit Credit

Description Debit Credit

Mdse. Inventory 1,470

Accts. Payable 1,470

Accts. Receivable 1,500

Sales 1,500

Cost of Mdse. Sold 900

Mdse. Inventory 900

Recorded at net cost

$1,500 - $30 (discount)

Jan 12. Merchandise was sold with credit terms of 2/10, n/30.

Jan 22. Payment was made within the discount period.


Selling and Buying Merchandise Inventory

Seller

Buyer

Description Debit Credit

Description Debit Credit

Mdse. Inventory 1,470

Accts. Payable 1,470

Accts. Payable 1,470

Cash 1,470

Accts. Receivable 1,500

Sales 1,500

Cost of Mdse. Sold 900

Mdse. Inventory 900

Cash 1,470

Sales Discounts 30

Accts. Receivable 1,500

Recorded at net cost

$1,500 - $30 (discount)

Jan 12. Merchandise was sold with credit terms of 2/10, n/30.

Jan 22. Payment was made within the discount period.


Selling and Buying Merchandise Inventory

Seller

Buyer

Description Debit Credit

Description Debit Credit

Mdse. Inventory 1,500

Accts. Payable 1,500

Accts. Payable 1,500

Mdse. Inventory 30

Cash 1,470

Accts. Receivable 1,500

Sales 1,500

Cost of Mdse. Sold 900

Mdse. Inventory 900

Cash 1,470

Sales Discounts 30

Accts. Receivable 1,500

Recorded at full cost

Jan 12. Merchandise was sold with credit terms of 2/10, n/30.

Jan 22. Payment was made within the discount period.


Accounting for Merchandise Transactions

Scully Company (Seller)

Burton Co. (Buyer)

Description Debit Credit

Description Debit Credit

Mdse. Inventory 5,000

Accts. Payable 5,000

Accts. Receivable 5,000

Sales 5,000

Cost of Mdse. Sold 3,500

Mdse. Inventory 3,500

July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.


Accounting for Merchandise Transactions

Scully Company (Seller)

Burton Co. (Buyer)

Description Debit Credit

Description Debit Credit

Accts. Receivable 5,000

Sales 5,000

Cost of Mdse. Sold 3,500

Mdse. Inventory 3,500

Mdse. Inventory 5,000

Accts. Payable 5,000

No entry.

Transportation Out 250

Cash 250

July 7. Scully Company paid transportation costs of $250, for delivery of merchandise sold to Burton Co.


Accounting for Merchandise Transactions

Scully Company (Seller)

Burton Co. (Buyer)

Description Debit Credit

Description Debit Credit

Accts. Receivable 5,000

Sales 5,000

Cost of Mdse. Sold 3,500

Mdse. Inventory 3,500

Transportation Out 250

Cash 250

Mdse. Inventory 5,000

Accts. Payable 5,000

No entry.

Accts. Payable 1,000

Mdse. Inventory 1,000

Sales Ret. & Allow. 1,000

Accts Receivable 1,000

Mdse. Inventory 700

Cost of Mdse. Sold 700

July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.


Accounting for Merchandise Transactions

Scully Company (Seller)

Burton Co. (Buyer)

Description Debit Credit

Description Debit Credit

Accts. Payable 4,000

Cash 4,000

Cash 4,000

Accts. Receivable 4,000

July 15. Scully Company received payment from Burton Co. for purchase of July 1.


Accounting for Merchandise Transactions

Scully Company (Seller)

Burton Co. (Buyer)

Description Debit Credit

Description Debit Credit

Cash 4,000

Accts. Receivable 4,000

Accts. Payable 4,000

Cash 4,000

Mdse. Inventory 12,500

Accts. Payable 12,500

Accts. Receivable 12,500

Sales 12,000

Cash 500

Cost of Mdse. Sold 7,200

Mdse. Inventory 7,200

July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200.


Accounting for Merchandise Transactions

Scully Company (Seller)

Burton Co. (Buyer)

Description Debit Credit

Description Debit Credit

Cash 4,000

Accts. Receivable 4,000

Accts. Receivable 12,500

Sales 12,000

Cash 500

Cost of Mdse. Sold 7,200

Mdse. Inventory 7,200

Accts. Payable 4,000

Cash 4,000

Mdse. Inventory 12,500

Accts. Payable 12,500

Accts. Payable 12,500

Mdse. Inventory 240

Cash 12,260

Cash 12,260

Sales Discounts 240

Accts. Receivable 12,500

July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).


NetSolutions

Merchandising Chart of Accounts

Balance Sheet Accounts

200 Liabilities

210 Accounts Payable

211 Salaries Payable

212 Unearned Rent

215 Notes Payable

300 Stockholders’ Equity

310 Capital Stock

311 Retained Earnings

312 Dividends

313 Income Summary

100 Assets

110 Cash

111 Notes Receivable

112 Accounts Receivable

113 Interest Receivable

115 Merchandise Inventory

116 Office Supplies

117 Prepaid Insurance

120 Land

123 Store Equipment

124 Accumulated Depreciation—

Store Equipment

125 Office Equipment

126 Accumulated Depreciation—

Office Equipment


NetSolutions

Merchandising Chart of Accounts

Income Statement Accounts

500 Costs and Expenses

510 Cost of Merchandise Sold

520 Sales Salaries Expense

521 Advertising Expense

522 Depreciation Expense—

Store Equipment

523 Transportation Out

529 Misc. Selling Expense

530 Office Salaries Expense

531 Rent Expense

532 Depreciation Expense—

Office Equipment

533 Insurance Expense

534 Office Supplies Expense

539 Misc. Admin. Expense

400 Revenue

410Sales

411 Sales Returns and

Allowances

412 Sales Discounts

600 Other Income

610 Rent Revenue

611 Interest Revenue

700 Other Expense

710 Interest Expense


Netsolutions income statement multiple step for year ended december 31 2004
NetSolutionsIncome Statement (Multiple-Step)For Year Ended December 31, 2004

Revenue from sales:

Sales $ 720,185

Less:Sales returns and allow. $ 6,140 Sales discounts 5,790 11,930

Net sales $708,255

Cost of merchandise sold 525,305

Gross profit $182,950

Continued


Operating expenses:

Selling expenses:

Sales salaries expense $60,030

Advertising expense 10,860

Depr. expense–store equip. 3,100

Miscellaneous selling expense 630

Total selling expenses $ 74,620

Administrative expenses:

Office salaries expense $21,020

Rent expense 8,100

Depr. expense–office equip. 2,490

Insurance expense 1,910

Office supplies expense 610

Misc. admin. expenses 760

Total admin. expenses 34,890

Total operating expenses 109,510

Income from operations $ 73,440

Continued


Other income:

Interest revenue $ 3,800

Rent revenue 600

Total other income $ 4,400

Other expense:

Interest expense 2,440 1,960

Net income $75,400


Netsolutions income statement single step for year ended december 31 2004
NetSolutionsIncome Statement (Single-Step)For Year Ended December 31, 2004

Revenues:

Net sales $708,255

Interest revenue 3,800

Rent revenue 600

Total revenues $712,655

Expenses:

Cost of merchandise sold $525,305

Selling expenses 74,620

Administrative expenses 34,890

Interest expense 2,440

Total expenses 637,255

Net income $ 75,400


Netsolutions balance sheet december 31 2004
NetSolutionsBalance SheetDecember 31, 2004

Assets

Current assets:

Cash $ 52,950

Notes receivable 35,000

Accounts receivable 55,880

Interest receivable 200

Merchandise inventory 62,150

Office supplies 480

Prepaid insurance 2,650

Total current assets $209,310

Continued


Netsolutions balance sheet december 31 20041
NetSolutionsBalance SheetDecember 31, 2004

Assets

Property, plant, and equipment:

Land $ 20,000

Store equipment $ 27,100

Less accum. depreciation 5,700 21,400

Office equipment $ 15,570

Less accum. depreciation 4,720 10,850 Total property, plant, and

equipment 52,250

Total assets $261,560

Continued


Netsolutions balance sheet december 31 20042
NetSolutionsBalance SheetDecember 31, 2004

Liabilities

Current liabilities:

Accounts payable $ 22,420

Note payable (current portion) 5,000

Salaries payable 1,140

Unearned rent 1,800

Total current liabilities $30,360

Long-term liabilities:

Note payable (due 2001) 20,000

Total liabilities $ 50,360

Owner’s Equity

Capital stock $ 25,000

Retained earnings 186,200 211,200

Total liabilities and owner’s equity $261,560


Profitability Analysis

Profitability is the ability of an entity to earn profits.

This ability to earn profits depends on the effectiveness and efficiency of operationsas well as resources available.

Profitability analysisfocuses primarily on the relationship between operating results reported in the income statementand resources reported in the balance sheet.


Profitability Measures — Effective Use of Assets

Ratio of Net Sales to Assets

2003 1992

Net sales $1,498,000 $1,200,000

Total assets:

Beginning of year $1,053,000 $1,010,000

End of year 1,044,500 1,053,000

Total $2,097,500 $2,063,000

Average $1,048,750 $1,031,500


Profitability Measures — Effective Use of Assets

Ratio of Net Sales to Assets

2003 2002

Net sales $1,498,000 $1,200,000

Total assets:

Beginning of year $1,053,000 $1,010,000

End of year 1,044,500 1,053,000

Total $2,097,500 $2,063,000

Average $1,048,750 $1,031,500

Ratio of net sales to assets 1.4 1.2

Use: To assess the effectiveness in the use of assets.


Note: To see the topic slide, type 2 and press Enter.

Power Notes

ChapterF5

Accounting for Merchandising Businesses

This is the last slide in Chapter F5.


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