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Chapter 9. Accounting for Merchandising Operations. In Chapters 1-6. You learned how to: Prepare Adjusting Entries Prepare Closing Entries Use the Adjusted Balances to prepare Financial Statements Complete the Accounting Cycle. Accrual Basis Accounting.
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Chapter 9 Accounting for Merchandising Operations
In Chapters 1-6 • You learned how to: • Prepare Adjusting Entries • Prepare Closing Entries • Use the Adjusted Balances to prepare Financial Statements • Complete the Accounting Cycle
Accrual Basis Accounting • Revenue recorded only when earned not when cash is received • Expense recorded only when incurred not when cash paid—in the period in which the company benefited from it
Accrual Basis adheres to... • Generally • Accepted • Accounting • Principles
Adjusting Entries Adjusting entries make the: • revenue recognition & • matching principles HAPPEN!
Still confused? • Do we need another way to learn this concept?
Revenue Recognition – a rap • If you wanna be accrual • Here’s what you gotta do, • When the service is performed • You book the Revenue!
In Chapter 9 • You will learn: • How Merchandise is Acquired and Sold • How Inventory Purchases and Sales are recorded in a firm’s accounting records –using Perpetual Inventory system • How to prepare Financial Statements that are meaningful for a merchandising operation • Appendix: Periodic inventory system
Merchandising Operations Buy Merchandise to Sell to their Customers Wholesalers sell their merchandise to Retailers 2 Categories Retailers Sell their merchandise directly to the final consumer
In Chapter 2, we discussed the Historical Cost Principle Assets are recorded on the Balance Sheet at cost Cost includes all costs necessary to get the asset ready for its intended purpose $5,000
The Historical Cost Principle also applies to Inventory • Inventory is a Current Asset • It is recorded on the Balance Sheet at Historical Cost • Cost includes all costs necessary to get the inventory ready for its intended purpose • Let’s look at the cost components for Inventory…..
Let’s assume a Perpetual Inventory System • A Perpetual Inventory system records all changes in the value of Inventory directly in the Inventory Account.
This example begins on page 229 in your text. On June 1, 20X6, Quality Lawn Mowers purchases 100 lawn mowers for $150 each on account from Black & Decker.
Here’s the invoice….. This is the Invoice Date This information is needed to record the purchase of inventory This is the Invoice Amount
The Purchase of Inventory is restricted to the Balance Sheet Assume the Initial Investment by shareholders was $100,000 cash.
Goods in Transit These are goods on board a truck, train, ship, or plane at the end of the period.
Goods in Transit Who includes these in inventory? • Buyer? • Seller? The Company with Legal Title 36
Shipping Terms • FOB (free on board) shipping point- ownership of goods passes to buyer when public carrier accepts the goods • FOB (free on board) destination- ownership of goods remains with the seller until the goods reach the buyer
Ownership passes to owner here Illustration 6-4 FOB Shipping Point Public Carrier Co Seller Buyer Ownership passes to buyer here FOB Destination Point Public Carrier Co Seller Buyer
Freight Costs – Memory Jog Incoming Freight is added to Inventory IN As it Exits, It’s an Expense! EX
Back to the invoice….. Goods were purchased FOB Shipping Point Title transferred to Quality Lawn Mowers at the time the units were shipped.
The journal entry to record the incoming freight charge Incoming Freight is Charged to Inventory
When Inventory is purchased FOB Shipping Point, the Freight Cost is added to Inventory Assume the Initial Investment by shareholders was $100,000 cash.
Purchase Returns and Allowances reduce the cost of the Inventory and the amount owed to the vendor
Purchase Discounts If paid within 10 days of invoice Are Discounts for Early Payment Otherwise, total is due within 30 days 2/10 net 30 Take a 2% discount
Payment Terms • Are included on the Invoice • To encourage prompt payment Take a 1% discount if paid within 10 days, otherwise entire balance is due in 30 days.
Purchase Discounts Balance Owed = $14,700 $14,700 * 1% = $147 $14,700 minus $147 = $14,553 Notice that the Payable Balance is now $0
Notice that the Cost of the Inventory equals the sum of the cash payments. $14,896
Inventory T account $14,896 ÷ 98 units = $152 per mower
All transactions related to the Acquisition of inventory have been restricted to the Balance Sheet
As Assets are consumed, they are recorded as expenses on the Income Statement…. Income Statement Balance Sheet Supplies Supplies Expense Insurance Expense Prepaid Insurance Rent Expense Prepaid Rent
As Inventory is consumed, it is expensed as Cost of Goods Sold. So as Inventory is consumed… It is subtracted on the Multiple-Step Income Statement It will be recorded as Inventory Expense? What’s a Multiple Step Income Statement?!! Yes, but the Expense is called “Cost of Goods Sold”
Why is it called a Multiple-Step Income Statement? • Because rather than taking total revenues and subtracting total expenses in a single step: • We “Step our way down” to Net Income Revenues Subtract Something and Calculate a subtotal Subtract something else, Calculate another subtotal, etc. • Each subtotal will provide important information.
Multiple-Step Income Statement ← Amount Customer pays for the goods Net Sales - Cost of Goods Sold = Gross Profit - Operating Expenses = Income from Operations - Other Expenses + Other Revenues = Net Income ← Amount the Company paid for the goods ← This is our markup! ← Selling, General and Administrative Expenses ← Profitability of our Core Business ← Profitability of Peripheral Activities ← Transferred to Statement of Retained Earnings
Yikes! That’s a lot to remember! No Chance….I’m a GONER! Time for another JOG!
Multiple Step Income Statement – Memory Jog NC GONER! Net Sales - Cost of Goods Sold = Gross Profit - Operating Expenses = Net Operating Income - Other Expenses + Other Revenues = Net Income N C G O N E R
A Scanner System is a perpetual inventory system… This allows for an instantaneous match of revenues and expenses Every time an item is scanned… 2) The inventory database is updated 1) The Sale is Recorded
Simultaneously, the cost of the units are removed from Inventory…. $14,896 ÷ 98 units = $152 per mower
Reporting Sales and Cost of Goods Sold Each mower sold for $400. Each unit cost $152. That’s a $248 markup per unit.
But our customer isn’t completely happy…. Sales Returns and Allowances is a contra-revenue account. Its purpose is to reduce sales, and provide more detailed information on the Income Statement.
Reporting Sales Returns and Allowances Sales Returns and Allowances is subtracted from Sales In the Calculation of Net Sales They reduced the price by $100 to make me happy! It allows the reader to know how content the customers are with the product.
We offered our customer payment terms of 2/10 net 30 to encourage prompt payment $3,900 - $78 = $3,822 $3,900 * 2% = $78 Receivable Balance = $3,900 Notice that the Receivable Balance is now $0
Reporting Sales Discounts Sales Discounts is subtracted from Sales In the Calculation of Net Sales Paying early saved me $78. I paid $3,822 for the mowers It allows the reader to know how many customers took advantage of the early payment incentives
Merchandisers generate revenue by delivering goods to their customers. The detail provided on a multiple-step income statement Allows the reader to assess how successful they are in achieving that goal.
