accounting-for merchandising business

Chapter Chapter 55Accounting for Accounting for

Merchandising BusinessesMerchandising BusinessesFinancial and Managerial Accounting

8th Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

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1. Distinguish the activities of a service business from those of a merchandising business.

2. Describe and illustrate the financial statements of a merchandising business.

3. Describe the accounting for the sale of merchandise.

4. Describe the accounting for the purchase of merchandise.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

5. Describe the accounting for transportation costs, sales taxes, and trade discounts.

6. Illustrate the dual nature of merchandising transactions.

7. Prepare a chart of accounts for a merchandising business.

8. Describe the accounting cycle for a merchandising business.

9. Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets.

ObjectivesObjectivesObjectivesObjectives

Service Business

Fees earned $XXX

Operating expenses –XXX

Net income $XXX

Nature of BusinessesNature of BusinessesNature of BusinessesNature of Businesses

Merchandising Business

Sales $XXX

Cost of Merchandise Sold –XXX

Gross Profit $XXX

Operating Expenses –XXX

Net Income $XXX

Nature of BusinessesNature of BusinessesNature of BusinessesNature of Businesses

Purchasing Purchasing ActivityActivity

Raw Materials

Production Production ActivityActivity

Products

Sales Sales ActivityActivity

Accounts Receivable

Collection Collection ActivityActivity

Cash

Multiple-Step Income

Statement

Revenue from sales:Sales $720,185Less:Sales returns and allowances $ 6,140

Sales discounts 5,790 11,930Net sales $708,255

Cost of merchandise sold 525,305

Gross profit $182,950

NetSolutionsIncome Statement For the Year Ended

December 31, 2007

ContinuedContinued

Operating expenses:Selling expenses:

Sales salaries expense $56,230Advertising expense 10,860Depr. Expense–store equipment 3,100Miscellaneous selling expense 630 Total selling expenses $ 70,820

Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equipment 2,490Insurance expense 1,910Office supplies expense 610Misc. administrative expense 760 Total admin. expenses 34,890

Total operating expenses 105,710Income from operations $ 77,240

ContinuedContinued

Other income and expenses:Rent revenue $ 600Interest expense (2,440) (1,840)

Net income $75,400

ConcludedConcluded

Periodic vs. Perpetual Methods of Periodic vs. Perpetual Methods of AccountingAccounting


Periodic Method

• A method of determining the cost of merchandise sold and the amount of merchandise on hand

• Under this method, the inventory records do not show the amount available for sale or the amount sold during the period

• Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts.

• The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.



Perpetual Method

Cost of Merchandise PurchasedCost of Merchandise PurchasedCost of Merchandise PurchasedCost of Merchandise Purchased

Purchases $521,980

Less: Purchase returns and allowances $9,100

Purchase discounts 2,525 11,625

Net purchases $510,355

Add transportation-in 17,400

Cost of merchandise purchased $527,755

Cost of Merchandise SoldCost of Merchandise SoldCost of Merchandise SoldCost of Merchandise SoldMerchandise inventory, 1/1/07 $ 59,700Purchases $521,980Less: Purchase returns and

allowances $9,100Purchase discounts 2,525 11,625

Net purchases $510,355Add transportation-in 17,400

Cost of merchandise purchased 527,755Merchandise available for sale $587,455Less merchandise inventory, 12/31/07 62,150Cost of merchandise sold $525,305

Single-Step Income Statement for a Merchandising

Business

Revenues:Net sales $708,255Rent revenue 600

Total revenues $708,855Expenses:

Cost of merchandise sold $525,305Selling expenses 70,820Administrative expenses 34,890Interest expense 2,440

Total expenses 633,455

Net income $ 75,400

NetSolutionsIncome Statement

For the Year Ended December 31, 2007

Retained Earnings Statement

Retained earnings, 1/1/07 $128800Net income for year $75,400Less dividends 18,000Increase in owner’s equity 57,400Retained earnings, 12/31/07 $186,200

NetSolutionsRetained Earnings Statement

For the Year Ended December 31, 2007

Balance Sheet

AssetsCurrent assets:

Cash $52,950Accounts receivable 91,080Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650 Total current assets $209,310

NetSolutionsBalance Sheet

December 31, 2007

ContinuedContinued

Property, plant, and equipment: Land $20,000Store equipment $27,100 Less accumulated

depreciation 5,70021,400Office equipment $15,570 Less accumulated

depreciation 4,72010,850 Total property, plant, and

equipment 52,250Total assets $261,560

ContinuedContinued

LiabilitiesCurrent liabilities:

Accounts payable $22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800

Total current liabilities $ 30,360Long-term liabilities:

Note payable (due 2017) 20,000

Total liabilities $ 50,360 Stockholders’ Equity

Capital stock $ 25,000Retained earnings 186,200 211,200

Total liab. and stockholders’ equity $261,560

LiabilitiesCurrent liabilities:

Accounts payable $22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800

Total current liabilities $ 30,360Long-term liabilities:

Note payable (due 2017) 20,000

Total liabilities $ 50,360 Stockholders’ Equity

Capital stock $ 25,000Retained earnings 186,200 211,200

Total liab. and stockholders’ equity $261,560

Sales TransactionsSales TransactionsSales TransactionsSales Transactions

JOURNAL

Date DescriptionPost. Ref. Dr Cr.

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Jan. 3 Cash 1 800 002007

Sales 1 800 00

To record cash sales.

On January 3, a firm sold $1,800 On January 3, a firm sold $1,800 of merchandise for cash.of merchandise for cash.

On January 3, a firm sold $1,800 On January 3, a firm sold $1,800 of merchandise for cash.of merchandise for cash.

Cash SalesCash SalesCash SalesCash Sales


Using a perpetual inventory, the inventory Using a perpetual inventory, the inventory cost of $1,200 must be recorded.cost of $1,200 must be recorded.

Using a perpetual inventory, the inventory Using a perpetual inventory, the inventory cost of $1,200 must be recorded.cost of $1,200 must be recorded.

6

7

89

3 Cost of Merchandise Sold 1 200 00

Merchandise Inventory 1 200 00

To record the cost ofmerchandise sold.

10

Credit card sales (MasterCard or Credit card sales (MasterCard or Visa) are recorded as cash sales.Visa) are recorded as cash sales.Credit card sales (MasterCard or Credit card sales (MasterCard or Visa) are recorded as cash sales.Visa) are recorded as cash sales.At the end of the month, $48 was At the end of the month, $48 was sent to cover this service charge.sent to cover this service charge.

At the end of the month, $48 was At the end of the month, $48 was sent to cover this service charge.sent to cover this service charge.

JOURNAL


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Cash 48 00

Jan. 31 Credit Card Expense 48 002007


To record service chargeson credit card sales for themonth.

Jan. 12 Accounts Receivable—Sims Co. 510 00

Invoice No. 7172.

Sales 510 00

12 Cost of Merchandise Sold 280 00 Merchandise Inventory 280 00

Cost of merchandise sold on Invoice No. 7172.

Sales on AccountSales on AccountSales on AccountSales on Account

On January 12, a firm sold Sims Company On January 12, a firm sold Sims Company merchandise on account, $510. The cost of merchandise on account, $510. The cost of

the merchandise to the seller was $280.the merchandise to the seller was $280.

On January 12, a firm sold Sims Company On January 12, a firm sold Sims Company merchandise on account, $510. The cost of merchandise on account, $510. The cost of

the merchandise to the seller was $280.the merchandise to the seller was $280.

Sales DiscountsSales DiscountsSales DiscountsSales Discounts

The terms for when payments for merchandise are to be made are

called credit terms.

The terms for when payments for merchandise are to be made are

called credit terms.

If buyer is allowed an amount of time to pay, it is known as the credit period.

If buyer is allowed an amount of time to pay, it is known as the credit period.

If invoice is paid within 10 days of

invoice date


Credit Terms

Invoice for $1,500Terms:

2/10, n/30

$1,470 paid (less 2% as a cash

discount)

If invoice is NOT paid within 10 days of

invoice date


Credit Terms

Invoice for $1,500Terms:

2/10, n/30

$1,500 PAID


On January 22, the firm receives $1,470 On January 22, the firm receives $1,470 from Sims Co. which is the amount due of from Sims Co. which is the amount due of

$1,500 less a 2 percent discount.$1,500 less a 2 percent discount.

On January 22, the firm receives $1,470 On January 22, the firm receives $1,470 from Sims Co. which is the amount due of from Sims Co. which is the amount due of

$1,500 less a 2 percent discount.$1,500 less a 2 percent discount.

Jan. 22 Cash 1 470 00

Accounts Receivable—Sims Co. 1 500 00

Sales Discounts 30 00

Collection of Invoice

No. 7172, less discount.

Sales Returns and AllowancesSales Returns and AllowancesSales Returns and AllowancesSales Returns and Allowances

Merchandise that is returned to the vendor is referred to as a sales return.

Merchandise that is returned to the vendor is referred to as a sales return.

If there is a defect in the product or the wrong item was shipped, the seller

may reduce the initial price at which the goods were sold. This is known as

a sales allowance.

If there is a defect in the product or the wrong item was shipped, the seller

may reduce the initial price at which the goods were sold. This is known as

a sales allowance.

Jan. 13 Sales Returns and Allowances 225 00

Credit Memo No. 32.

Accounts Receivable—Krier Co. 225 00

13 Merchandise Inventory 140 00 Cost of Merchandise Sold 140 00

Cost of merchandise returned—Credit Memo 32.

Sales Returns and AllowancesSales Returns and AllowancesSales Returns and AllowancesSales Returns and Allowances

On January 13, issued Credit Memo 32 to Krier On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Company for merchandise returned to NetSolutions.

Selling price, $225; cost to NetSolutions, $140.Selling price, $225; cost to NetSolutions, $140.

On January 13, issued Credit Memo 32 to Krier On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Company for merchandise returned to NetSolutions.

Selling price, $225; cost to NetSolutions, $140.Selling price, $225; cost to NetSolutions, $140.

Purchase Purchase TransactionsTransactions

Purchase Purchase TransactionsTransactions


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Jan. 3 Merchandise Inventory 2 510 002007

Cash 2 510 00

Purchased inventory from

Bowen Co.

Purchase TransactionsPurchase Transactions

On January 13, Purchased merchandise On January 13, Purchased merchandise for cash from Alden Company, $2,510.for cash from Alden Company, $2,510.On January 13, Purchased merchandise On January 13, Purchased merchandise for cash from Alden Company, $2,510.for cash from Alden Company, $2,510.

What’s the last day the invoice

can be paid?

What’s the last day the invoice

can be paid?

Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts

Alpha Technologies issues an invoice for

$3,000 to NetSolutions dated

March 12, with terms 2/10, n/30.

Alpha Technologies issues an invoice for

$3,000 to NetSolutions dated

March 12, with terms 2/10, n/30.

Invoice period 30Days in March 31Date of invoice 12Remaining days 19April 11

Let’s do a simple calculation.

Let’s do a simple calculation.

The full amount is due on April 11.

The full amount is due on April 11.


We can borrow at an annual interest rate of 6%. Should we borrow the to pay the

invoice within the discount period?

We can borrow at an annual interest rate of 6%. Should we borrow the to pay the

invoice within the discount period?


$60 discount (2% x

$3,000)?

$60 discount (2% x

$3,000)?

Discount $60.00Interest for 20 days

at the rate of 6%on $2,940 –9.80

Savings from borrowing $50.20

Let’s see… Interest on the amount due of $3,000

less the 2 percent…

Let’s see… Interest on the amount due of $3,000

less the 2 percent…


Looks like we should take advantage of the discount even if

we have to borrow the money.

Looks like we should take advantage of the discount even if

we have to borrow the money.


Discount $60.00Interest for 20 days

at the rate of 6%on $2,940 –9.80

Savings from borrowing $50.20

JOURNAL


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On March 12, NetSolutions purchased On March 12, NetSolutions purchased merchandise on account from Alpha merchandise on account from Alpha

Technologies, $3,000.Technologies, $3,000.

On March 12, NetSolutions purchased On March 12, NetSolutions purchased merchandise on account from Alpha merchandise on account from Alpha

Technologies, $3,000.Technologies, $3,000.

Mar. 12 Merchandise Inventory 3 000 002007

Accounts Payable—Alpha

Technologies 3 000 00


JOURNAL


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If payment is made by March 22 NetSolutions If payment is made by March 22 NetSolutions records the discount as a reduction in cost.records the discount as a reduction in cost.

If payment is made by March 22 NetSolutions If payment is made by March 22 NetSolutions records the discount as a reduction in cost.records the discount as a reduction in cost.

Mar. 22 Accounts Payable—Alpha Technol. 3 000 00

Cash 2 940 00

Merchandise Inventory 60 00

2007


JOURNAL


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If NetSolutions does not pay the invoice until If NetSolutions does not pay the invoice until April 11, it would pay the full amount.April 11, it would pay the full amount.

If NetSolutions does not pay the invoice until If NetSolutions does not pay the invoice until April 11, it would pay the full amount.April 11, it would pay the full amount.

Apr. 11 Accounts Payable—Alpha Technol. 3 000 00

Cash 3 000 00

2007


Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances

A purchases return involves actually returning merchandise that is damaged or does not meet the

specifications of the order.

A purchases return involves actually returning merchandise that is damaged or does not meet the

specifications of the order.

When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment,

this is a purchases allowance.

When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment,

this is a purchases allowance.

NetSolutions received the NetSolutions received the delivery from Maxim delivery from Maxim

Systems and determined that Systems and determined that $900 of the items were not $900 of the items were not the merchandise ordered. the merchandise ordered.

DebitDebit memorandummemorandum #18 is #18 is issued to Maxim Systems.issued to Maxim Systems.

NetSolutions received the NetSolutions received the delivery from Maxim delivery from Maxim

Systems and determined that Systems and determined that $900 of the items were not $900 of the items were not the merchandise ordered. the merchandise ordered.

DebitDebit memorandummemorandum #18 is #18 is issued to Maxim Systems.issued to Maxim Systems.


You sent me the wrong interface cards. We’ll send a debit

memorandum with the returned items.

You sent me the wrong interface cards. We’ll send a debit

memorandum with the returned items.

Mar. 7 Accounts Payable—Maxim Systems 900 00

Debit Memo No. 18

Merchandise Inventory 900 00



On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link,

subject to terms 2/10, n/30.

On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link,

subject to terms 2/10, n/30.

May 2 Merchandise Inventory 5 000 00

Purchased merchandise.

Accounts Payable—Delta Data 5 000 00


On May 4, NetSolutions returns $3,000 of the merchandise.

On May 4, NetSolutions returns $3,000 of the merchandise.

May 4 Accounts Payable—Delta Data Links 3 000 00

Returned portion of

merchandise purchased.



On May 12, NetSolutions pays the amount due.On May 12, NetSolutions pays the amount due.

May 12 Accounts Payable—Delta Data Links 2 000 00

Paid invoice.

Cash 1 960 00

Merchandise Inventory 40 00($5,000 ($5,000 – – $3,000) x $3,000) x

2%2%

($5,000 ($5,000 – – $3,000) x $3,000) x

2%2%

Transportation Transportation CostsCosts

FOB Shipping PointFOB Shipping PointFOB Shipping PointFOB Shipping Point

Buyer pays freight costs and debits Merchandise Inventory

Fruit Express

Title passes to buyer as shipment leaves shipping point.

Title passes to buyer as shipment leaves shipping point.

June 10 Merchandise Inventory 900 00

Purchased merchandise, terms FOB shipping point.

Accounts Payable—Magna Data 900 00

10 Merchandise Inventory 50 00 Cash 50 00

Paid shipping cost on merchandise purchased.

On June 10, NetSolutions buys merchandise from On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping Magna Data on account, $900, terms FOB shipping

point and pays the transportation cost of $50.point and pays the transportation cost of $50.

On June 10, NetSolutions buys merchandise from On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping Magna Data on account, $900, terms FOB shipping

point and pays the transportation cost of $50.point and pays the transportation cost of $50.

FOB Shipping PointFOB Shipping PointFOB Shipping PointFOB Shipping Point

FOB DestinationFOB DestinationFOB DestinationFOB Destination

Title passes to buyer upon arrival at

destination.

Title passes to buyer upon arrival at

destination.

Seller pays freight costs and debits Transportation Out

Fruit Express

On June 15, NetSolutions sells merchandise to Kranz On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. Company on account, $700, terms FOB destination.

The cost of the merchandise sold is $480. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.




June 15 Accounts Receivable—Kranz Co. 700 00

Sold merchandise, terms FOB

destination.

Sales 700 00

15 Cost of Merchandise Sold 480 00 Merchandise Inventory 480 00

Cost of sale of Kranz Co .


June 15 Transportation Out 40 00

Cash 40 00

Paid shipping cost on merchandise sold.





Sales TaxesSales TaxesSales TaxesSales Taxes

On August 12, merchandise is sold on On August 12, merchandise is sold on account to Lemon Company, $100. The account to Lemon Company, $100. The

state has a 6% sales tax.state has a 6% sales tax.

On August 12, merchandise is sold on On August 12, merchandise is sold on account to Lemon Company, $100. The account to Lemon Company, $100. The

state has a 6% sales tax.state has a 6% sales tax.

Aug. 12 Accounts Receivable—Lemon Co. 106 00

Sales 100 00

Sales Taxes Payable 6 00Invoice No. 339

Sales TaxesSales TaxesSales TaxesSales Taxes

On September 15, the seller sends in a On September 15, the seller sends in a payment of $2,900 to the taxing unit for payment of $2,900 to the taxing unit for

the August taxes collected.the August taxes collected.

On September 15, the seller sends in a On September 15, the seller sends in a payment of $2,900 to the taxing unit for payment of $2,900 to the taxing unit for

the August taxes collected.the August taxes collected.

Sept.15 Sales Tax Payable 2 900 00

Cash 2 900 00Payment for sales taxes collected during August.

Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions


July 1. Scully Company sold merchandise on account July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. to Burton Co., $7,500, terms FOB shipping point, n/45.

The cost of the merchandise sold was $4,500. The cost of the merchandise sold was $4,500.

Scully Company (Seller)Accounts Receivable—Burton Co. 7,500

Sales 7,500

Cost of Merchandise Sold 4,500Merchandise Inventory 4,500

Burton Company (Buyer)Merchandise Inventory. 7,500

Accounts Payable—Scully Co. 7,500



Scully Company (Seller)No entry.

Burton Company (Buyer)Merchandise Inventory 150

Cash 150

July 2. Burton Company paid transportation charges of July 2. Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.$150 on July 1 purchase from Scully Company.



July 5. Scully Company sold merchandise on account July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB shipping point, to Burton Co., $5,000, terms FOB shipping point,

n/30. The cost of the merchandise sold was $3,500.n/30. The cost of the merchandise sold was $3,500.

Scully Company (Seller)Accounts Receivable—Burton Co. 5,000

Sales 5,000

Cost of Merchandise Sold 3,500Merchandise Inventory 3,500

Burton Company (Buyer)Merchandise Inventory. 5,000




July 7. Scully Company paid transportation costs July 7. Scully Company paid transportation costs

of $of $250250 for delivery of merchandise sold to for delivery of merchandise sold to Burton Company on July 5.Burton Company on July 5.

Scully Company (Seller)Transportation Out 250

Cash 250

Burton Company (Buyer)No entry.



July 13. Scully Company issued Burton Company a credit July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 memorandum for $1,000 of merchandise returned from a July 5

purchase on account. The cost of the merchandise was $700.purchase on account. The cost of the merchandise was $700.

Scully Company (Seller)Sales Returns and Allowances 1,000

Accounts Receivable—Burton Co. 1,000

Merchandise Inventory 700Cost of Merchandise Sold 700

Burton Company (Buyer)Accounts Payable—Scully Co. 1,000

Merchandise Inventory 1,000



July 15. Scully Company received payment July 15. Scully Company received payment from Burton Company for purchase of July 5.from Burton Company for purchase of July 5.

Scully Company (Seller)Cash 4,000



Cash 4,000



July 18. Scully Company sold merchandise on account to Burton July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

prepaid transportation costs of $500, which were added to the prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.

Continued (Seller) Cost of Merchandise Sold 7,200


Burton Company (Buyer)



July 18. Scully Company sold merchandise on account to Burton July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

prepaid transportation costs of $500, which were added to the prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.

Scully Company (Seller)Cost of Merchandise Sold 7,200


Burton Company (Buyer)Merchandise Inventory 12,500




July 28. Scully Company received payment July 28. Scully Company received payment from Burton Company for purchase of July from Burton Company for purchase of July

18, less discount (2% x $12,000).18, less discount (2% x $12,000).

Scully Company (Seller)Cash 12,260Sales Discounts 240



Merchandise Inventory 240Cash 12,260

Balance Sheet Accounts

200 Liabilities210 Accounts Payable211 Salaries Payable212 Unearned Rent215 Notes Payable

300 Stockholders’ Equity310 Capital Stock311 Retained Earnings312 Dividends313 Income Summary

100 Assets110 Cash112 Accounts Receivable115 Merchandise Inventory116 Office Supplies117 Prepaid Insurance120 Land123 Store Equipment124 Accumulated Depreciation—

Store Equipment125 Office Equipment126 Accumulated Depreciation—

Office Equipment

NetSolutionsChart of Accounts

Income Statement Accounts

600 Other Income610 Rent Revenue

700 Other Expense710 Interest Expense

400 Revenues410 Sales411 Sales Returns and

Allowances412 Sales Discounts

500 Costs and Expenses510 Cost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—

Store Equipment523 Transportation Out529 Miscellaneous Selling Expense530 Office Salaries Expense531 Rent Expense532 Depreciation Expense—

Office Equipment533 Insurance Expense534 Office Supplies Expense539 Miscellaneous Admin. Expense

NetSolutionsChart of Accounts

Merchandise Inventory Merchandise Inventory ShrinkageShrinkage


NetSolutions inventory records indicate that

$63,950 of merchandise should be available for sale

on December 31, 2007. The physical count reveals

that only $62,150 is actually available.

NetSolutions inventory records indicate that

$63,950 of merchandise should be available for sale

on December 31, 2007. The physical count reveals

that only $62,150 is actually available.



Dec. 31 Cost of Merchandise Sold 1 800 00


Adjusting Entry

Inventory records $63,950Inventory count 62,150Inventory shortage $ 1,800

Profitability Measures -- Effective Use of AssetsProfitability Measures -- Effective Use of Assets

Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsSears Penney

Net sales $41,366,000 $31,846,000Total assets:

Beginning of year $50,409,000 $19,742,000End of year $44,317,000 $20,908,000Average $47,363,000 $20,325,000 Ratio of net sales to assetsRatio of net sales to assets .87 to 1.87 to 1 1.57 to 11.57 to 1

Ratio Use: To assess the effectiveness in the use of assets to generate sales.

Ratio Use: To assess the effectiveness in the use of assets to generate sales.

The EndThe End

Chapter 5Chapter 5

accounting-for merchandising business

Documents

purchase of merchandise

sale of merchandise

merchandise available

cost of merchandise

sales discounts

sales returns

purchase discounts

sales salaries expense