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Merchandising Activities

Merchandising Activities. Chapter 6. Operating Cycle of a Merchandising Company. Cash. Purchase of goods. 3. Collection of the receivables. Accounts Receivable. Inventory. 2. Sale of goods on account. Comparing Merchandising Activities with Manufacturing Activities.

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Merchandising Activities

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  1. Merchandising Activities Chapter 6

  2. Operating Cycle of a Merchandising Company Cash • Purchase • of goods 3. Collection of the receivables Accounts Receivable Inventory 2. Sale of goods on account

  3. Comparing Merchandising Activities with Manufacturing Activities Manufacture inventory and have a longer and more complex operating cycle. Purchase inventory in ready-to-sell condition. Manufacturing Company Merchandising Company

  4. Retailers and Wholesalers Wholesalers buy goods from several different manufacturers and then sell thesegoods to several retailers. Retailers sell goods directly to the public.

  5. Income Statement of a Merchandising Company Cost of goods soldrepresents the expense of goods that are sold to customers. Gross profit is a useful means of measuring the profitability of sales transactions.

  6. Accounting System Requirements for Merchandising Companies Control Account Subsidiary Ledgers

  7. Perpetual Inventory Systems On 5 September, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account.

  8. Retail Cost Perpetual Inventory Systems On 10 September, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios. 10 X $30 = $300

  9. Perpetual Inventory Systems On 15 September, Worley Co. paid Electronic City $3,000 for the 5 September purchase.

  10. Perpetual Inventory Systems On 22 September, Worley Co. received $500 from ABC Radios as payment in full for their purchase on 10 September.

  11. Taking a Physical Inventory In order to ensure the accuracy of their perpetual records, most businesses take a complete physical count of the inventory on hand at least once a year. Reasonable amounts of inventory shrinkage are viewed as a normal cost of doing business. Examples include breakage, spoilage and theft. On 31 December, Worley Co. counts its inventory. An inventory shortage of $2,000 is discovered.

  12. Closing Entries in a Perpetual Inventory System The closing entries are the same! • Close Revenue accounts (including Sales) to Income Summary. • Close Expense accounts (including Cost of Goods Sold) to Income Summary. • Close Income Summary account to Retained Earnings. • Close Dividends to Retained Earnings.

  13. Periodic Inventory System On 5 September, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account. Notice that no entry is made to Inventory.

  14. Periodic Inventory System On 10 September, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios. Retail

  15. Periodic Inventory System On 15 September, Worley Co. paid Electronic City $3,000 for the 5 September purchase.

  16. Periodic Inventory System On 22 September, Worley Co. received $500 from ABC Radios as payment in full for their purchase on 10 September.

  17. Computing Cost of Goods Sold The accounting records of Party Supply show the following: Inventory, 1 Jan. $ 14,000 Purchases (during year) 130,000 Inventory, 31 Dec. 12,000

  18. Creating a Cost of Goods Sold Account Party Supply must create the Cost of Goods Sold account. Party Supply must record the ending inventory amount.

  19. Selecting an Inventory System

  20. Credit Terms and Cash Discounts When manufacturers and wholesalers sell their products on account, the credit terms are stated in the invoice. Read as: “Two ten, net thirty” 2/10, n/30 # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due Percentage of Discount

  21. Recording Purchases at Net Cost On 6 July, Jack & Jill, Co. purchased $4,000 of goods on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Jack & Jill, Co. $4,000 X 98% = $3,920

  22. Recording Purchases at Net Cost On 15 July, Jack & Jill, Co. pays the full amount due to Kid’s Clothes. Prepare the journal entry for Jack & Jill, Co.

  23. Recording Purchases at Net Cost Now, assume that Jack & Jill, Co. waited until 20 July to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Jack & Jill, Co. Nonoperating Expense

  24. Recording Purchases at Gross Invoice Price On 6 July, Jack & Jill, Co. purchased $4,000 of goods on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Jack & Jill, Co.

  25. Recording Purchases at Gross Invoice Price On 15 July, Jack & Jill, Co. pays the full amount due to Kid’s Clothes. Prepare the journal entry for Jack & Jill, Co. Reduces Cost of Goods Sold $4,000 X 98% = $3,920

  26. Recording Purchases at Gross Invoice Price Now, assume that Jack & Jill, Co. waited until 20 July to pay the full amount due to Kid’s Clothes. Prepare the journal entry for Jack & Jill, Co.

  27. Returns of Unsatisfactory Goods On 5 August, Jack & Jill, Co. returned $500 of unsatisfactory goods purchased from Kid’s Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at net cost. Prepare the entry for Jack & Jill, Co. $500 X 98% = $490

  28. Transportation Costs on Purchases Transportation costs related to the acquisition of assets are part of the cost of the assetbeing acquired.

  29. Transactions Related to Sales Credit terms and goods returns affect the amount of revenue earned by the seller.

  30. Sales On 2 August, Kid’s Clothes sold $2,000 of goods to Jack & Jill, Co. on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the goods. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.

  31. Sales Returns and Allowances On 5 August, Jack & Jill, Co. returned $500 of unsatisfactory goods to Kid’s Clothes from the 2 August sale. Kid’s Clothes cost for this goods was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Contra-revenue

  32. Sales Discounts On 6 July, Kid’s Clothes sold $4,000 of goods to Jack & Jill, Co. on credit with terms of 2/10, n/30. The goods originally cost Kid’s Clothes $2,000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries.

  33. Sales Discounts On 15 July, Kid’s Clothes receives the full amount due from Jack & Jill, Co. from the 6 July sale. Prepare the journal entry for Kid’s Clothes. Contra-revenue $4,000 X 98% = $3,920

  34. Sales Discounts Now, assume that it wasn’t until 20 July that Kid’s Clothes received the full amount due from Jack & Jill, Co. from the 6 July sale. Prepare the journal entry for Kid’s Clothes.

  35. Delivery Expenses Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense.

  36. Accounting for Sales Taxes Businesses collect sales tax at the point of sale. Then, they remit the tax to the appropriate governmental agency at times specified by law. $10,000 sale x 7% tax = $700 sales tax

  37. Modifying an Accounting System Most businesses use special journals rather than a general journal to record routine transactions that occur frequently.

  38. Financial Analysis Net Sales Gross Profit Rates • Gross profit ¸ Net sales • Overall gross profit rate • Gross profit rates by departments and products • Trends over time • Comparable store sales • Sales per square foot of selling space

  39. Ethics, Fraud, andCorporate Governance Sales discounts and allowances are contra-revenue accounts. Sales discounts and allowances reduce gross sales. As such, profit will be incorrect if discounts and allowances are not properly recorded. The pressure brought to bear on subordinates to implement fraudulent schemes developed by top management can often be intense. Top management can threaten employees with termination if they fail to participate in the fraud. Unfortunately, employees who acquiesce to such pressure face tremendous legal risks.

  40. End of Chapter 6

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