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Chapter 9. Accounting for Merchandising Operations. In Chapters 1-6. You learned how to: Prepare Adjusting Entries Prepare Closing Entries Use the Adjusted Balances to prepare Financial Statements Complete the Accounting Cycle. Accrual Basis Accounting.

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Chapter 9

Chapter 9

Accounting for Merchandising Operations


In chapters 1 6
In Chapters 1-6

  • You learned how to:

    • Prepare Adjusting Entries

    • Prepare Closing Entries

    • Use the Adjusted Balances to prepare Financial Statements

    • Complete the Accounting Cycle


Accrual basis accounting
Accrual Basis Accounting

  • Revenue recorded only when earned not when cash is received

  • Expense recorded only when incurred not when cash paid—in the period in which the company benefited from it


Accrual basis adheres to
Accrual Basis adheres to...

  • Generally

  • Accepted

  • Accounting

  • Principles


Adjusting entries
Adjusting Entries

Adjusting entries make the:

  • revenue recognition &

  • matching principles

HAPPEN!


Still confused
Still confused?

  • Do we need another way to learn this concept?


Revenue recognition a rap
Revenue Recognition – a rap

  • If you wanna be accrual

  • Here’s what you gotta do,

  • When the service is performed

  • You book the Revenue!


In chapter 9
In Chapter 9

  • You will learn:

    • How Merchandise is Acquired and Sold

    • How Inventory Purchases and Sales are recorded in a firm’s accounting records –using Perpetual Inventory system

    • How to prepare Financial Statements that are meaningful for a merchandising operation

    • Appendix: Periodic inventory system


Merchandising operations
Merchandising Operations

Buy Merchandise to Sell to their Customers

Wholesalers sell their merchandise to Retailers

2 Categories

Retailers Sell their merchandise directly to the final consumer




In chapter 2 we discussed the historical cost principle
In Chapter 2, we discussed the Historical Cost Principle

Assets are recorded on the Balance Sheet at cost

Cost includes all costs necessary to get the asset ready for its intended purpose

$5,000


The historical cost principle also applies to inventory
The Historical Cost Principle also applies to Inventory

  • Inventory is a Current Asset

  • It is recorded on the Balance Sheet at Historical Cost

  • Cost includes all costs necessary to get the inventory ready for its intended purpose

  • Let’s look at the cost components for Inventory…..


Let s assume a perpetual inventory system
Let’s assume a Perpetual Inventory System

  • A Perpetual Inventory system records all changes in the value of Inventory directly in the Inventory Account.


This example begins on page 229 in your text
This example begins on page 229 in your text.

On June 1, 20X6, Quality Lawn Mowers purchases 100 lawn mowers for $150 each on account from Black & Decker.


Here s the invoice
Here’s the invoice…..

This is the Invoice Date

This information is needed to record the purchase of inventory

This is the Invoice Amount



The purchase of inventory is restricted to the balance sheet
The Purchase of Inventory is restricted to the Balance Sheet

Assume the Initial Investment by shareholders was $100,000 cash.


Goods in transit
Goods in Transit

These are goods on board a truck, train, ship, or plane at the end of the period.


Goods in transit1
Goods in Transit

Who includes these in inventory?

  • Buyer?

  • Seller?

The Company with Legal Title

36


Shipping terms
Shipping Terms

  • FOB (free on board) shipping point- ownership of goods passes to buyer when public carrier accepts the goods

  • FOB (free on board) destination- ownership of goods remains with the seller until the goods reach the buyer


Ownership passes to owner here

Illustration 6-4

FOB Shipping Point

Public

Carrier

Co

Seller

Buyer

Ownership

passes to

buyer here

FOB Destination Point

Public

Carrier

Co

Seller

Buyer


Freight costs memory jog
Freight Costs – Memory Jog

Incoming Freight is added to Inventory

IN

As it Exits,

It’s an Expense!

EX


Back to the invoice
Back to the invoice…..

Goods were purchased FOB Shipping Point

Title transferred to Quality Lawn Mowers at the time the units were shipped.


The journal entry to record the incoming freight charge
The journal entry to record the incoming freight charge

Incoming Freight is Charged to Inventory


When inventory is purchased fob shipping point the freight cost is added to inventory
When Inventory is purchased FOB Shipping Point, the Freight Cost is added to Inventory

Assume the Initial Investment by shareholders was $100,000 cash.


Purchase returns and allowances
Purchase Returns and Allowances Cost is added to Inventory


Purchase returns and allowances reduce the cost of the inventory and the amount owed to the vendor
Purchase Returns and Allowances reduce the cost of the Inventory and the amount owed to the vendor


Purchase discounts
Purchase Discounts Inventory and the amount owed to the vendor

If paid within 10 days of invoice

Are Discounts for Early Payment

Otherwise, total is due within 30 days

2/10 net 30

Take a 2% discount


Payment terms
Payment Terms Inventory and the amount owed to the vendor

  • Are included on the Invoice

  • To encourage prompt payment

Take a 1% discount if paid within 10 days, otherwise entire balance is due in 30 days.


Purchase discounts1
Purchase Discounts Inventory and the amount owed to the vendor

Balance Owed = $14,700

$14,700 * 1% = $147

$14,700 minus $147 = $14,553

Notice that the Payable Balance is now $0



Inventory t account
Inventory T account cash payments.

$14,896 ÷ 98 units = $152 per mower


All transactions related to the acquisition of inventory have been restricted to the balance sheet
All transactions related to the Acquisition of inventory have been restricted to the Balance Sheet


As assets are consumed they are recorded as expenses on the income statement
As Assets are consumed, they are recorded as expenses on the Income Statement….

Income Statement

Balance Sheet

Supplies

Supplies Expense

Insurance Expense

Prepaid Insurance

Rent Expense

Prepaid Rent


As inventory is consumed it is expensed as cost of goods sold
As Inventory is consumed, it is expensed as Cost of Goods Sold.

So as Inventory is consumed…

It is subtracted on the Multiple-Step Income Statement

It will be recorded as Inventory Expense?

What’s a Multiple Step Income Statement?!!

Yes, but the Expense is called “Cost of Goods Sold”


Why is it called a multiple step income statement
Why is it called a Multiple-Step Income Statement? Sold.

  • Because rather than taking total revenues and subtracting total expenses in a single step:

  • We “Step our way down” to Net Income

    Revenues

    Subtract Something and

    Calculate a subtotal

    Subtract something else,

    Calculate another subtotal, etc.

  • Each subtotal will provide important information.


Multiple step income statement
Multiple-Step Income Statement Sold.

← Amount Customer pays for the goods

Net Sales

- Cost of Goods Sold

= Gross Profit

- Operating Expenses

= Income from Operations

- Other Expenses

+ Other Revenues

= Net Income

← Amount the Company paid for the goods

← This is our markup!

← Selling, General and Administrative Expenses

← Profitability of our Core Business

← Profitability of Peripheral Activities

← Transferred to Statement of Retained Earnings


Yikes! That’s a lot to remember! Sold.

No Chance….I’m a GONER!

Time for another JOG!


Multiple step income statement memory jog nc goner
Multiple Step Income Statement – Memory Jog NC GONER! Sold.

Net Sales

- Cost of Goods Sold

= Gross Profit

- Operating Expenses

= Net Operating Income

- Other Expenses

+ Other Revenues

= Net Income

N

C

G

O

N

E

R


A scanner system is a perpetual inventory system
A Scanner System is a perpetual inventory system… Sold.

This allows for an instantaneous match of revenues and expenses

Every time an item is scanned…

2) The inventory database is updated

1) The Sale is Recorded



Simultaneously the cost of the units are removed from inventory
Simultaneously, the cost of the units are removed from Inventory….

$14,896 ÷ 98 units = $152 per mower


Reporting sales and cost of goods sold
Reporting Sales and Cost of Goods Sold Inventory….

Each mower sold for $400.

Each unit cost $152.

That’s a $248 markup per unit.


But our customer isn t completely happy
But our customer isn’t completely happy…. Inventory….

Sales Returns and Allowances is a contra-revenue account.

Its purpose is to reduce sales, and provide more detailed information on the Income Statement.


Reporting sales returns and allowances
Reporting Sales Returns and Allowances Inventory….

Sales Returns and Allowances is subtracted from Sales

In the Calculation of Net Sales

They reduced the price by $100 to make me happy!

It allows the reader to know how content the customers are with the product.


We offered our customer payment terms of 2 10 net 30 to encourage prompt payment
We offered our customer payment terms of 2/10 net 30 to encourage prompt payment

$3,900 - $78 = $3,822

$3,900 * 2% = $78

Receivable Balance = $3,900

Notice that the Receivable Balance is now $0


Reporting sales discounts
Reporting Sales Discounts encourage prompt payment

Sales Discounts is subtracted from Sales

In the Calculation of Net Sales

Paying early saved me $78. I paid $3,822 for the mowers

It allows the reader to know how many customers took advantage of the early payment incentives


Merchandisers generate revenue by delivering goods to their customers
Merchandisers generate revenue by delivering goods to their customers.

The detail provided on a multiple-step income statement

Allows the reader to assess how successful they are in achieving that goal.



Perpetual inventory system
Perpetual Inventory System customers.

  • Continuous “perpetual” accounting records are kept to track the Sales transaction AND the Cost of the Goods Sold.

  • Better tracking of item availability, on hand, on order

  • 2 journal entries for a sale


Periodic inventory system
Periodic Inventory System customers.

  • No tracking

  • Inventory just counted “periodically” to see what is on hand.

  • 1 journal entry for sale


Sales Revenues - customers.

Under a Periodic System

  • ONLY 1 entry is made for each sale

    • one to record sale


Key difference between periodic and perpetual inventory
Key difference between periodic and perpetual inventory… customers.

is the point at which the costs of goods sold is computed.


No attempt is made on date of sale to record the cost of merchandise sold
No attempt is made on date of sale to record the cost of merchandise sold...

Periodic Inventory


Companies that use periodic inventory take a physical count to
Companies that use periodic inventory take a physical count to...

  • determine ending inventory

  • compute cost of goods sold

Companies that use perpetual inventory must take a physical inventory to check accuracy of “book inventory” to actual inventory.




Shipping terms fob shipping point
Shipping Terms – FOB Shipping Point to...

Title transfers to BUYER at the time the goods are shipped

Buyer Owns the goods in transit

Freight Costs are paid by the BUYER

This increases the cost of the goods purchased.



Shipping terms fob destination
Shipping Terms – FOB Destination to...

Title Changes at the time the goods reach their destination

Seller owns the goods in transit

Freight costs are paid by the SELLER

The freight cost is recorded as an operating expense by the seller



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