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Accounting for Merchandise Operations

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  1. Accounting for Merchandise Operations Chapter 4

  2. Income Statement Accounts • Sales • Revenue account • Sales discounts • Amounts deducted from sales price if customer meets certain payment terms • 2/10, n/30 – 2% discount if paid within 10 days, or entire amount due within 30 days • EOM – end of month • Sales returns and allowances • Amounts returned by customer, or price reductions given for various reasons

  3. Income Statement Accounts • Presentation of net sales on the income statement

  4. Income Statement Accounts • Purchases • Inventory purchased from suppliers • Purchase discounts • Discounts received from supplier for prompt payment • Purchase returns and allowances • Amounts returned to supplier, or price reductions granted by supplier for various reasons

  5. Income Statement Accounts • Freight-in • Amount paid to have merchandise shipped from the supplier • Additional cost of the merchandise inventory • Delivery expense • Amount paid to deliver merchandise to the customer

  6. Income Statement Accounts • Calculation of the cost of merchandise sold

  7. Inventory Methods • Periodic • Inventory account does not change during the year • Purchases, purchase discounts, purchase returns and allowances are recorded in their respective accounts • No entry is made to record the cost of merchandise sold • Inventory is counted at year-end and records are adjusted at that time

  8. Inventory Methods • Perpetual • Any transaction affecting inventory is recorded in the inventory account • Purchases, purchase discounts, purchase returns and allowances, transportation-in accounts are not used • Cost of merchandise sold is recorded at the time of the sale • Provides “real-time” information on inventory levels and cost of merchandise sold

  9. Accounting for Merchandise Transactions • Sales • Increase revenue (retained earnings) and increase cash or accounts receivable • Sales discounts • Sale is recorded at the gross amount • If customer pays within the discount period • Increase cash by the amount received • Decrease accounts receivable by the gross amount • Record the sales discount (decrease in retained earnings)

  10. Accounting for Merchandise Transactions • Sales returns and allowances • If the sale was for cash • Decrease cash • Record the sales return (decrease retained earnings) • If the sale was on credit • Decrease accounts receivable • Record the sales return (decrease retained earnings) • Record the return of the merchandise • Increase inventory • Reduce the cost of merchandise sold (increase retained earnings)

  11. Accounting for Merchandise Transactions • Purchases of merchandise from supplier • Periodic method • Record the purchase (decrease retained earnings) • Increase accounts payable or decrease cash • Perpetual method • Increase inventory • Increase accounts payable or decrease cash

  12. Accounting for Merchandise Transactions • Purchase discounts • Periodic method • Decrease accounts payable by the gross amount • Decrease cash by the amount paid • Record the purchase discount (increase retained earnings) • Perpetual method • Decrease accounts payable by the gross amount • Decrease cash by the amount paid • Decrease inventory by the amount of the discount

  13. Accounting for Merchandise Transactions • Purchase returns and allowances • Periodic method • Record the amount of the return or allowance (increase retained earnings) • Decrease accounts payable or increase cash • Perpetual method • Decrease inventory • Decrease accounts payable or increase cash

  14. Accounting for Merchandise Transactions • Transportation-in • Periodic method • Record transportation-in (decrease retained earnings) • Decrease cash or increase accounts payable • Perpetual method • Increase inventory • Decrease cash or increase accounts payable

  15. Statement of Cash FlowsIndirect Method • Cash flows from operating activities may be calculated indirectly by starting with net income and adjusting for various items • Add depreciation and other non-cash expenses • Add (subtract) decreases (increases) in all current asset accounts except cash • Add (subtract) increases (decreases) in all current liability accounts

  16. Statement of Cash FlowsIndirect Method • Dr. B’s easy rule for the indirect method • If it sounds good, treat it as something bad • Did a current asset increase? That sounds good, so treat it as something bad (subtract the increase from net income) • Did a current liability increase? That sounds bad, so treat it as something good (add the increase to net income)