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Accounting for Merchandising Operations. Chapter. 5. Learning objective. Describe merchandising activities and identify income components for a merchandising company. Identify and explain the inventory asset of a merchandising company.

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learning objective
Learning objective
  • Describe merchandising activities and identify income components for a merchandising company.
  • Identify and explain the inventory asset of a merchandising company.
  • Prepare adjustments and close accounts for a merchandising company.
  • Define and prepare multiple-step and single-step income statements.
learning objective3
Learning objective
  • Describe merchandising activities and identify income components for a merchandising company.
merchandising activities
Service organizations sell time to earn revenue.

Examples: accounting firms, law firms, and plumbing services





Merchandising Activities


merchandising activities5
Merchandising companies sell goods to earn revenue.

Example: supermarket





Merchandising Activities


merchandising activities6
Merchandising Activities

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

Cost ofGoods Sold




operating cycle for a merchandiser
Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise.Operating Cycle for a Merchandiser

Credit Sale

Cash Sale








Credit sales

learning objective9
Learning objective
  • Identify and explain the inventory asset of a merchandising company.
inventory systems
Inventory Systems


Net cost ofpurchases


Merchandiseavailable for sale


Ending Inventory

Cost of GoodsSold


inventory systems11
Inventory Systems
  • Perpetual inventory system continuously updates accounting records for merchandising transactions — specifically, for those records of inventory available for sale and inventory sold.
  • Periodic inventory system updates the accounting records for merchandise transactions only at the end of a period.
learning objective12
Learning objective
  • Analyze and record transactions for merchandising purchases and sales using a perpetual system.
accounting for merchandise purchases
Accounting for Merchandise Purchases
  • Trade discounts vs. purchase discounts
  • Purchase returns and allowances
  • Transportation costs
accounting for merchandise purchases14
Accounting for Merchandise Purchases

On June 20, Jason, Inc. purchased $14,000 of Merchandise Inventory paying cash.


SellerInvoice datePurchaser Order numberCredit termsFreight termsGoodsInvoice amount

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


Matrix, Inc. offers a 30% trade

discount on orders of 1,000

units or more of their popular

product Racer. Each

Racer has a list price of $5.25.

purchase discounts
A deduction from the invoice price granted to induce early payment of the amount due.Purchase Discounts




Discount Period

Credit Period

Full amount

less discount

Full amount due

Purchase or Sale

purchase discounts18

Number of Days Discount Is Available

Otherwise, Net (or All) Is Due

Discount Percent


Purchase Discounts


purchase discounts19
On May 7, Jason, Inc. purchased $27,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.Purchase Discounts
purchase discounts21
After we post these entries, the accounts involved look like this:

Merchandise Inventory

Accounts Payable

5/15 27,000

5/7 27,000

5/7 27,000

5/15 540

Bal. 26,460

Bal. 0

Purchase Discounts
failure to pay within the discount period
If we fail to take a 2/10, n/30 discount, is it really expensive?


in a



of additional

days before



paid to



Failure to Pay Within the Discount Period

365 days ÷ 20 days × 2% =36.5% annual rate

purchase returns and allowances
Purchase Return . . .

Merchandise returned by the purchaser to the supplier.

Purchase Allowance . . .

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

Purchase Returns and Allowances
transportation costs
Transportation Costs




FOB shipping point

(buyer pays)

FOB destination

(seller pays)

transportation costs28
On May 12, Jason, Inc. purchased $8,000 of Merchandise Inventory for cash and also paid $100 transportation costs.Transportation Costs
quick check
Quick Check 

On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will be part of Buyer’s July 6 journal entry?

a. Credit Sales $7,500

b. Credit Purchase Discounts $150

c. Debit Merchandise Inventory $100

d. Debit Accounts Payable $7,450

FOB shipping point indicates the buyer ultimately pays the freight. This is recorded witha debit to Merchandise Inventory.

accounting for merchandise sales
Accounting for Merchandise Sales
  • Sales of merchandise
  • Sales discounts
  • Sales returns and allowances
sales of merchandise
On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was carried in inventory at a cost of $18,000.Sales of Merchandise
sales discounts
On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. Let’s prepare the journal entries.Sales Discounts
sales discounts35
On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale.Sales Discounts

Contra Revenue Account

sales returns and allowances37
On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is related to the June 12 sale.Sales Returns and Allowances
learning objective39
Learning objective
  • Prepare adjustments and close accounts for a merchandising company.
learning objective45
Learning objective
  • Define and prepare multiple-step and single-step income statements.
operating expenses
Operating expenses
  • Selling expenses include the expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers.
  • General and administrative expenses support a company’s overall operations and include expenses related to accounting, HR management, and financial management.
multiple step vs single step income statement
Multiple-Step vs. Single-Step Income statement
  • A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and report subtotals for various classes of items.
    • Gross profit
    • Income from operations
    • Net income
  • A single-step income statement lists revenues and expenses with very few categories.
acid test and gross margin ratios



Quick Assets

Current Liabilities


Cash + S-T Investments + Receivables

Current Liabilities




Acid-Test and Gross Margin Ratios

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.

homework for chapter 5
Homework for chapter 5
  • Ex 5-1, 5-4, 5-5, 5-12
  • Problem 5-1A, 5-4A
  • Due on June 19, 2006 (Monday)