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Chapter 05. Accounting for Merchandising Operations. Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services. Service Companies. C 1. Merchandiser. C 1. Merchandising Companies. Manufacturer. Wholesaler. Retailer. Consumers.

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service companies
Service organizations sell time to earn revenue.

Examples: Accounting firms, law firms and plumbing services

Service Companies

C 1


C 1

Merchandising Companies





reporting income for a merchandiser
Merchandising companies sell products to earn revenue.

Examples: sporting goods, clothing, and auto parts stores

Reporting Income for a Merchandiser

C 1

inventory systems7
Perpetual systems

continually update accounting records for merchandising transactions

Periodic systems

accounting records relating to merchandise transactions are updated only at the end of the accounting period

Inventory Systems

C 2

merchandise purchases
Merchandise Purchases


On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash.

trade discounts
Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.Trade Discounts



Z-Mart offers a 30% trade

discount for orders of 1,000

units or more on its popular

product Racer. Each

Racer has a list price of $5.25.

purchase discounts12

Number of Days Discount Is Available

Otherwise, Net (or All) Is Due in 30 Days

Discount Percent


Purchase Discounts



purchase discounts13
On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30.Purchase Discounts


purchase returns and allowances
Purchase Return . . .

Merchandise returned by the purchaser to the supplier.

Purchase Allowance . . .

A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier.

Purchase Returns and Allowances


purchase returns and allowances17
On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise.Purchase Returns and Allowances


purchase returns and allowances18
Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes the 2% discount only on the $900 remaining balance.Purchase Returns and Allowances


sales of merchandise
Sales of Merchandise


Each sales transaction for a seller of merchandise involves two parts:

Revenue received in the form of an asset from a customer.

Recognition of the cost of merchandise sold to a customer.

sales of merchandise24
On November 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of $1,600. Sales of Merchandise


sales discounts
Sales Discounts


Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts.

sales discounts26
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.Sales Discounts


The account was paid in full within the 60-day period.

The account was paid in full within the 10-day discount period.

sales returns and allowances
Sales Returns and Allowances


Sales returns and allowances usually involve dissatisfied customers and the possibility of lost future sales.

Sales returns refer to merchandise that customers return to the seller after a sale.

Sales allowances refer to reductions in the selling price of merchandise sold to customers.

sales returns and allowances28
Recall Z-Mart’s sale for $2,400 that had a cost of $1,600. Assume the customer returns part of the merchandise. The returned items sell for $800 and cost $600.Sales Returns and Allowances


sales allowances
Assume that $800 of the merchandise Z-Mart sold on November 3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction. Sales Allowances


merchandising cost flow in the accounting cycle

Beginning inventory

Net purchases

Merchandise available for sale

Period 1

Ending inventory

Cost of goods sold

To Income Statement

To Balance Sheet

To Income Statement

To Balance Sheet

Merchandising Cost Flow in the Accounting Cycle


Beginning inventory

Net purchases

Merchandise available for sale

Period 2

Ending inventory

Cost of goods sold

adjusting entries for merchandisers
Adjusting Entries for Merchandisers


A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of merchandise, including theft and deterioration.

Z-Mart’s Merchandise Inventory account at the end of year 2011 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists.



A multiple-step income statement format shows detailed computations of net sales and other

costs and expenses, and reports subtotals for various classes of items.

classified balance sheet
Classified Balance Sheet



global view
Global View

Accounting for Merchandise Purchases and Sales

Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales.

Financial Statement Differences

Order of expenses

Separate disclosures

Presentation of expenses

Classification of operating and nonoperating expenses

Alternative measures of income

Order of current and noncurrent items on the balance sheet

acid test ratio



Quick Assets

Current Liabilities


Acid-Test Ratio


Cash + S-T Investments + Receivables

Current Liabilities




A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future.

gross margin ratio




Net Sales - Cost of Goods Sold

Net Sales


Gross Margin Ratio


Percentage of dollar sales available to cover expenses and provide a profit.

appendix 5a periodic inventory system
Appendix 5A: Periodic Inventory System









A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold.