Presentation Transcript

1. Chapter 5: Accounting for Merchandising Operations

   ACT 201 Lecture By: Ms. Adina Malik
2. Merchandising Operations Wholesalers: Merchandising companies that buy goods in large quantities, warehouses them and resell to retailers. Retailers: Merchandising companies that sell goods/commodities in small quantities directly to customers. The primary source of revenue is the sale of merchandise, referred to as ‘sales revenue or sale’. Cost of Goods Sold is the total cost of merchandise sold during the period
3. Operating Cycles The operating cycle of a merchandise company is ordinarily longer than that of a service company.
4. Perpetual Inventory System Perpetual System Maintain detailed records of the cost of each inventory purchase and sale. Records continuously show inventory that should be on hand. Company determines Cost of Goods Sold each time a sale occurs. Additional Consideration Traditionally used for merchandise with high unit value. For e.g. automobiles, furniture, etc. More importance due to growing use of computers and electronic scanners. Provides better control over inventory. Requires additional clerk work and additional cost to maintain inventory records.
5. Periodic Inventory System Do not keep detailed records of the goods on hand. Cost of Goods Sold determined by physical inventory count at the end of the accounting period.
6. Recording Purchase of Merchandise Made using cash or credit (on account). Normally recorded when goods are received. The sales invoice can be used as a purchase invoice by the buyer. Purchase invoice should support each credit purchase.
7. Recording Purchase of Merchandise Question: Sauk Stereo (the buyer) uses as a purchase invoice the sales invoice prepared by PW Audio Supply, Inc. (the seller). Prepare the journal entry for Sauk Stereo for the invoice from PW Audio Supply, assuming that he has not paid for the goods. May 4 Merchandise Inventory 3,800 Accounts Payable 3,800 (To record goods purchased on account from PW Audio Supply)
8. Recording Purchase of Merchandise Freight Cost: Terms of Sale Freight cost incurred by the buyer are part of the cost of merchandise purchased. Freight cost incurred by the seller are an operating expense to the seller. (freight-out or delivery expense) Seller places goods Free On Board the carrier, and buyer pays freight costs. Seller places goods Free On Board to the buyer’s place of business, and seller pays freight costs.
9. Recording Purchase of Merchandise Question: Assume upon delivery of the goods on May 6, Sauk Stereo pays Acme Freight Company $150 for freight charges, the entry on Sauk Stereo’s books is: May 6 Merchandise Inventory 150 Cash 150 (To record payment of freight on goods purchased) Question: Assume the freight terms on the invoice had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would have been: May 6 Freight-out (or, Delivery Expense) 150 Cash 150 (To record payment on goods sold)
10. Recording Purchase of Merchandise Purchase Returns and Allowances Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications. Question:Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods on credit costing $300. May 8 Accounts Payable 300 Merchandise Inventory 300 (To record return of goods purchased on credit from PW Audio Supply) Purchase Return Purchase Allowance Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price.
11. Recording Purchase of Merchandise Purchase Discounts Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Purchaser saves money Seller shortens the operating cycle 2/10, n/30 1/10 EOM n/10 EOM 2% discount if paid within 10 days, otherwise net amount due within 30 days. 1% discount if paid within first 10 days of next month. Net amount due within the first 10 days of the next month.
12. Recording Purchase of Merchandise Question: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period (2/10, n30). Prepare the journal entry Sauk Stereo makes to record its May 14 payment. May 14 Accounts Payable 3,500 Merchandise Inventory 70 Cash 3,430 (To record payment within discount period) (Discount = $3,500 x 2% = $70) Question: If Sauk Stereo failed to take the discount, and instead made full payment of $3,500 on June 3, the journal entry would be: Jun 03 Accounts Payable 3,500 Cash 3,500 (To record payment with no discount taken)
13. Recording Purchase of Merchandise Summary of purchasing transactions Merchandise Inventory 4th - Purchase $3,800 $300 8th - Return 70 14th - Discount 6th – Freight-in 150 Balance $3,580
14. Question E5-2 Information related to Steffens Co. is presented below: On April 5, purchased merchandise from Byrant Co. for $ 25,000 terms 2/10, n/30, FOB Shipping Point. On April 6, paid freight costs of $900 on merchandise purchased from Byrant. On April 8, returned damaged merchandise to Byrant Co. and was granted a $4,000 credit for returned merchandise. On April 15, paid the amount due to Byrant Co. in full. Instructions: (a)Prepare the journal entries to record these transactions on the books of Steffens Co. under a perpetual inventory system. (b) Assume that Steffens Co. paid the balance due to Byrant Co. on May 4 instead of April 15. Prepare the journal entry to record this transaction.
15. Recording Sales of Merchandise Made using cash or credit (on account). Normally recorded when earned, usually when goods transfer from seller to buyer. Sales invoice should support each credit sale Question: PW Audio Supply records its May 4 sale of $3,800 to Sauk Stereo on account . Assume the merchandise cost to PW Audio Supply is $2,400. May 4 Accounts Receivable 3,800 Sales 3,800 (To record credit sale to Sauk Stereo as per invoice) May 4 Cost of Goods Sold 2,400 Merchandise Inventory 2,400 (To record cost of merchandise sold to Sauk Stereo)
16. Recording Sales of Merchandise Sales Returns and Allowances ‘Flipside’ of purchase returns and allowances Contra-revenue account (debit) Sales not reduced (debited) because: Would obscure importance of sales returns and allowances as a percentage of sales. Could distort comparisons.
17. Recording Sales of Merchandise Question: Prepare the entry PW Audio Supply would make to record the credit for returned goods on May 8 that had a $300 selling price (assume a $140 cost). Assume the goods were not defective. May 8 Sales Returns and Allowances 300 Accounts Receivable 300 (To record credit granted to Sauk Stereo for returned goods) May 8 Merchandise Inventory 140 Cost of Goods Sold 140 (To record cost of goods returned)
18. Recording Sales of Merchandise Sales Discount Offered to customers to promote prompt payment ‘Flipside’ of purchase discount Contra-revenue account (debit) Question: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14. May 14 Cash 3,430 Sales Discount 70 Accounts Receivable 3,500 (To record collection within 2/10, n/30 discount period from Sauk Stereo) <($3,800-$300)X 2%>
19. Question E5-5 Presented below the transactions related to Wheeler Company. 1. On Dec 3, Wheeler Co. sold $500,000 of merchandise to Hashmi Co., terms 2/10,n/30, FOB Shipping Point. The cost of the merchandise sold was $350,000. 2. On Dec 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on Dec 3. 3. On Dec 13, Wheeler Co. received the balance due from Hashmi Co. Instructions: (a) Prepare the journal entries to record these transactions on the books of Wheeler Co. under a perpetual inventory system. (b) Assume that Wheeler Co. received the balance due from Hashmi Co. on Jan 2 of the following year instead of Dec 13 Prepare the journal entry to record the receipt of payment on Jan 2.
20. Forms of Financial Statements Multiple-Step Income Statement Shows several steps in determining net income. Two steps relate to principal operating activities. Distinguishes between operating and non-operating activities Income Statement Presentation of Sales
21. Multiple-Step Income Statement Non-Operating Activities
22. Forms of Financial Statements Single-Step Income Statement Subtract total expenses from total revenue Two reasons for using the single-step format: Companies does not realize any profit until total revenue exceeds total expenses Format is simpler and easier to read
23. Question Maine Department Store is located near the village shopping mall. At the end of the calendar year on December 31, 2010, the following accounts appeared in its trial balance. Items $ Items $ Items $ Accounts Payable 79,300 Interest Payable 8,000 Property Tax Payable 4,800 Accounts Receivable 50,300 Interest Revenue 4,000 Sales Salaries Exp 76,000 Building 190,000 Merchandise Inv 75,000 Utilities Exp 12,000 Cash 23,800 Sales Comm. Exp 14,500 Utilities Exp. Payable 1,000 B. Maine, Capital 176,600 Sales Comm. Payable 4,300 Sales 628,000 Equipment 110,000 Office Salaries Exp 32,000 Mortgage Payable 80,000 Insurance Expense 7,200 Prepaid Insurance 2,400 B. Maine, Drawings 28,000 Interest Expense 11,000 Property Tax Exp 4,800 Sales Rtns & Allowances 8,000 Cost of Goods Sold 412,700 Long-term Note Payable 71,700 Prepare a multiple-step income statement Prepare an owner’s equity statement Prepare a classified balance sheet