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Chapter Five Accounting for Merchandising Businesses Sale Merchandising Businesses Merchandising businesses generate revenue by selling goods. The goods purchased for resale are called merchandise inventory . Product Costs Selling & Admin. Costs Costs that are included in inventory.

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chapter five

Chapter Five

Accounting for Merchandising Businesses

merchandising businesses

Sale

Merchandising Businesses

Merchandising businesses generate revenue by selling goods. The goods purchased for resale are called merchandise inventory.

product costs versus selling and administrative costs

Product Costs

Selling & Admin. Costs

Costs that are included in inventory.

Costs that are not included in inventory. They are sometimes called period costs.

Product Costs Versus Selling and Administrative Costs
allocation of inventory cost between asset and expense accounts

Merchandise Inventory (Balance Sheet)

Cost of Goods Available for Sale

Cost of Goods Sold (Income Statement)

Allocation of Inventory Cost Between Asset and Expense Accounts
perpetual inventory system

Perpetual Inventory System

Inventory account is adjusted perpetually (continually) throughout the accounting period.

Perpetual Inventory System
perpetual inventory system9
Perpetual Inventory System

Let’s see how a perpetual inventory system works by looking at transactions for June’s Plant Shop (JPS).

slide10

Event 1: JPS acquired $15,000 by issuing common stock.

  • Increase assets (cash).
  • Increase equity (common stock).

Asset Source Transaction

slide11

Event 2: JPS purchased merchandise inventory for $14,000 cash.

Asset Exchange Transaction

  • Decrease assets (cash).
  • Increase assets (merchandise inventory).
slide12

Event 3a: JPS recognized sales revenue from selling inventory for $12,000.

Asset Source Transaction

  • Increase assets (cash).
  • Increase equity (sales revenue).
slide13

Event 3b: JPS recognized $8,000 of cost of goods sold.

  • Decrease assets (merchandise inventory).
  • Decrease equity (cost of goods sold).

Asset Use Transaction

slide14

Event 4: JPS paid $1,000 cash for selling expenses.

Asset Use Transaction

  • Decrease assets (cash).
  • Decrease equity (selling expenses).
other topics
Other Topics
  • Purchasing inventory often involves:
    • Transportation costs
    • Inventory returns
    • Purchase allowances
    • Cash discounts

Let’s look at these transactions for JPS.

slide18

Event 1: JPS purchased merchandise inventory on account with a list price of $8,000. The payment terms are 2/10 n/30.

Before analyzing this transaction, let’s learn a little about cash discounts.

cash discounts

Terms

Time

Due

Discount Period

Credit Period

Full amount

less discount

Full amount due

Purchase or Sale

Cash Discounts

A deduction from the invoice price granted to induce early payment of the amount due.

cash discounts20
Cash Discounts

2/10, n/30

Percentage of Discount

# of Days Discount Is Available

Otherwise, the Full Amount Is Due

# of Days when Full Amount Is Due

slide21

Event 1: JPS purchased merchandise inventory on account with a list price of $8,000. The payment terms are 2/10 n/30.

  • Increase assets (merchandise inventory).
  • Increase liabilities (accounts payable).

Asset Source Transaction

slide22

Event 2: JPS returned some of the inventory purchased in Event 1. The list price of the returned merchandise was $1,000.

  • Decrease assets (merchandise inventory).
  • Decrease liabilities (accounts payable).

Asset Use Transaction

slide23

Event 3: JPS paid cash to settle the account payable due on the inventory purchased in Event 1. The payment was made after the end of the discount period.

  • Decrease assets (cash).
  • Decrease liabilities (accounts payable).
  • Decrease equity (interest expense).

Asset Use Transaction

slide24

Event 4: The shipping terms for the inventory purchased in Event 1 were FOB shipping point. JPS paid the freight company $300 cash for delivering the merchandise.

Before analyzing this transaction, let’s learn a little about transportation costs.

transportation costs

Buyer

Seller

Merchandise

FOB shipping point

(buyer pays)

FOB destination

(seller pays)

Transportation Costs

FOB = Free on Board

slide26

Event 4: The shipping terms for the inventory purchased in Event 1 were FOB shipping point. JPS paid the freight company $300 cash for delivering the merchandise.

Asset Exchange Transaction

  • Decrease assets (cash).
  • Increase assets (merchandise inventory).
slide27

Event 5a: JPS recognized $24,750 of revenue on the cash sale of merchandise that cost $11,500.

Asset Source Transaction

  • Increase assets (cash).
  • Increase equity (sales revenue).
slide28

Event 5b: JPS recognized $11,500 of cost of goods sold.

  • Decrease assets (merchandise inventory).
  • Decrease equity (cost of goods sold).

Asset Use Transaction

slide29

Event 6: JPS incurred $450 of freight costs on inventory delivered to customers.

Asset Use Transaction

  • Decrease assets (cash).
  • Decrease equity (transportation-out).
slide30

Event 7: JPS purchased $14,000 of merchandise inventory on account with credit terms of 1/10 n/30. The inventory was delivered FOB destination. The freight costs were $400.

Asset Source Transaction

  • Increase assets (merchandise inventory).
  • Increase liabilities (accounts payable).
slide31

Event 8a: JPS recognized $16,800 of revenue from the sale on account of merchandise that cost $8,660. The freight terms were FOB shipping point. The party responsible paid freight costs of $275 in cash. JPS does not offer a cash discount to purchasers.

Asset Source Transaction

  • Increase assets (accounts receivable).
  • Increase equity (sales revenue).
slide32

Event 8b: JPS recognized $8,660 of cost of goods sold.

  • Decrease assets (merchandise inventory).
  • Decrease equity (cost of goods sold).

Asset Use Transaction

slide33

Event 9: JPS paid $9,900 cash in partial settlement of the account payable that arose from purchasing inventory on account in Event 7. The partial payment was made within the discount period for merchandise with a list price of $10,000.

Asset Use Transaction

  • Decrease assets (cash).
  • Decrease liabilities (accounts payable).
slide34

Event 10: JPS paid $8,000 cash for selling and administrative expenses.

Asset Use Transaction

  • Decrease assets (cash).
  • Decrease equity (selling and admin. expense).
events affecting sales
Events Affecting Sales
  • Sales of inventory often involves:
    • Inventory returns
    • Purchase allowances
    • Cash discounts

Let’s look at these transactions for JPS.

slide39

Event 1a: JPS sold on account merchandise with a list price of $8,500. Payment terms were 1/20 n/30. The merchandise had cost JPS $5,100.

Asset Source Transaction

  • Increase assets (accounts receivable).
  • Increase equity (sales revenue).
slide40

Event 1b: JPS recognized $5,100 of cost of goods sold.

  • Decrease assets (merchandise inventory).
  • Decrease equity (cost of goods sold).

Asset Use Transaction

slide41

Event 2a: The customer in Event 1a returned inventory with a $1,000 list price that JPS had sold with 1/10 n/30 payment terms. The merchandise had originally cost JPS $600.

Asset Use Transaction

  • Decrease assets (accounts receivable).
  • Decrease equity (retained earnings).
slide42

Event 2b: The cost of the goods ($600) is returned to the inventory account.

  • Increase assets (merchandise inventory).
  • Increase equity (cost of goods sold).

Asset Source Transaction

slide43

Event 3: JPS collected the balance of the account receivable from the customer that purchased the goods in Event 1a.

Asset Exchange Transaction

  • Increase assets (cash).
  • Decrease assets (accounts receivable).

Let’s assume the customer paid within the discount period.

slide44

Event 3: JPS collected the balance of the account receivable from the customer that purchased the goods in Event 1a.

  • Increase assets (cash).
  • Decrease assets (accounts receivable).
  • Increase equity (interest revenue).

Asset Exchange & Source

Now, let’s assume the customer did not pay within the discount period.

lost damaged or stolen inventory
Lost, Damaged, or Stolen Inventory

Most merchandise companies experience some level of inventory shrinkage, a term that reflects decreases in inventory for reasons other than sales to customers.

lost damaged or stolen inventory46

In general journal form, the entry is as follows:

Lost, Damaged, or Stolen Inventory

Assume a company determined that $500 of inventory was lost through shrinkage. Here is how it would effect the statements:

gross margin percentage

Gross Margin

Net Sales

Gross Margin Percentage

This measure indicates how much

of each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit.

Other things being equal, the company with the higher gross margin percentage is pricing its products higher.

return on sales

Net Income

Net Sales

Return on Sales

Net income expressed as a percentage of sales provides insight as to how much of each sales dollar is left as net income after all expenses are paid.

Other things being equal, the company with the higher return on sales percentage is doing a better job of controlling costs.

financing merchandise inventory

Interest Expense

Opportunity Cost

Higher Prices and/or Interest

Financing Merchandise Inventory

Borrow Money from Bank

Use Cash

Purchase on Account