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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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operating cycle of a merchandising company
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
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

retailers and wholesalers
Retailers and Wholesalers

Wholesalers buy goods from several different manufacturers and then sell thesegoods to several retailers.

Retailers sell goods directly to the public.

income statement of a merchandising company
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.

perpetual inventory systems
Perpetual Inventory Systems

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

perpetual inventory systems1

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

perpetual inventory systems2
Perpetual Inventory Systems

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

perpetual inventory systems3
Perpetual Inventory Systems

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

taking a physical inventory
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.

closing entries in a perpetual inventory system
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.
periodic inventory system
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.

periodic inventory system1
Periodic Inventory System

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

Retail

periodic inventory system2
Periodic Inventory System

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

periodic inventory system3
Periodic Inventory System

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

computing cost of goods sold
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

creating a cost of goods sold account
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.

credit terms and cash discounts
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

recording purchases at net cost
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

recording purchases at net cost1
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.

recording purchases at net cost2
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

recording purchases at gross invoice price
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.

recording purchases at gross invoice price1
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

recording purchases at gross invoice price2
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.

returns of unsatisfactory goods
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

transportation costs on purchases
Transportation Costs on Purchases

Transportation costs related to the acquisition of assets are part of the cost of the assetbeing acquired.

transactions related to sales
Transactions Related to Sales

Credit terms and goods returns affect the amount of revenue earned by the seller.

sales
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.

sales returns and allowances
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

sales discounts
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.

sales discounts1
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

sales discounts2
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.

delivery expenses
Delivery Expenses

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

accounting for sales taxes
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

modifying an accounting system
Modifying an Accounting System

Most businesses use special journals rather than a general journal to record routine transactions that occur frequently.

financial analysis
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
ethics fraud and corporate governance
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.