ch06 wrd25e instructor

Accounting for

Merchandising

BusinessesBusinesses

Chapter 6Chapter 6

Learning ObjectivesLearning Objectives

1.1. Distinguish between the activities and financial Distinguish between the activities and financial statements of service and merchandising statements of service and merchandising businesses.businesses.

2.2. Describe and illustrate the accounting for Describe and illustrate the accounting for merchandise transactions.merchandise transactions.

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

4.4. Describe the adjusting and closing process for a Describe the adjusting and closing process for a merchandising business.merchandising business.

5.5. Describe and illustrate the use of the ratio of net Describe and illustrate the use of the ratio of net sales to assets in evaluating a company’s sales to assets in evaluating a company’s operating performance.operating performance.

Learning Objective

Learning ObjectiveDistinguish between the activities

Distinguish between the activities

and financial statements of service

and merchandising businesses.

Service Business

Fees earned

$XXXOperating expenses

–XXXNet income

Nature of Merchandising BusinessesNature of Merchandising Businesses

Merchandising Business

Sales $XXXCost of Merchandise Sold –XXXGross Profit $XXXOperating Expenses –XXXNet Income $XXX

o When merchandise is sold, the revenue is When merchandise is sold, the revenue is reported as sales, and its cost is recognized as reported as sales, and its cost is recognized as an expense called an expense called cost of merchandisecost of merchandise soldsold..

GrossProfit

o The cost of merchandise sold is subtracted The cost of merchandise sold is subtracted from sales to arrive at from sales to arrive at gross profitgross profit. It is the . It is the profit before deducting operating expenses.profit before deducting operating expenses.

o Merchandise on hand (not sold) at the end of Merchandise on hand (not sold) at the end of an accounting period is called an accounting period is called merchandise merchandise inventoryinventory..

NATURE OF NATURE OF MERCHANDISINMERCHANDISIN

G BUSINESSESG BUSINESSES

Learning Objective

Learning ObjectiveDescribe and illustrate the

Describe and illustrate the

accounting for merchandise

accounting for merchandise transactions.transactions.

Purchase Transactions Purchase Transactions

o If merchandise inventory at the end of the If merchandise inventory at the end of the period is determined by taking a physical period is determined by taking a physical count of inventory on hand, a count of inventory on hand, a periodicperiodic inventory systeminventory system is being used. is being used.

Purchase TransactionsPurchase Transactions

o Under the Under the perpetual inventory systemperpetual inventory system, the , the amounts of inventory purchased, available for amounts of inventory purchased, available for sale, and sold are continuously (perpetually) sale, and sold are continuously (perpetually) updated in the inventory records.updated in the inventory records.

o On January 3, NetSolutions purchased On January 3, NetSolutions purchased merchandise for cash.merchandise for cash.

NOTE: We will assume a perpetual NOTE: We will assume a perpetual inventory system is used.inventory system is used.

o On January 4, NetSolutions purchased On January 4, NetSolutions purchased merchandise on account from Thomas merchandise on account from Thomas Corporation.Corporation.

Credit TermsCredit Terms

o To encourage the buyer to pay before the end To encourage the buyer to pay before the end of the credit period, the seller may offer a of the credit period, the seller may offer a discount. Credit terms of 2/10, n/30 are discount. Credit terms of 2/10, n/30 are summarized in the next slide (summarized in the next slide (Exhibit 2Exhibit 2).).

Purchases DiscountsPurchases Discounts

o A buyer may receive a discount from the seller A buyer may receive a discount from the seller (sales discount) for early payment of the (sales discount) for early payment of the amount owed. From the buyer’s perspective, amount owed. From the buyer’s perspective, such discounts are called such discounts are called purchases discountspurchases discounts..

o Alpha Technologies issues an invoice for Alpha Technologies issues an invoice for $3,000 to NetSolutions dated January 5, with $3,000 to NetSolutions dated January 5, with terms 2/10, n/30. NetSolutions is trying to terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within determine if it should pay the invoice within the discount period.the discount period.

Discount of 2% on $3,000 $60.00Interest for 20 days at the rate

of 6% on $2,940 – 9.80Savings from borrowing $50.20

YESYES

o If NetSolutions can borrow cash at an annual If NetSolutions can borrow cash at an annual interest rate of 6%, should the firm borrow interest rate of 6%, should the firm borrow cash to pay the invoice within the discount cash to pay the invoice within the discount period?period?

Purchase Transactions Purchase Transactions

o Alpha Technologies issued an invoice for Alpha Technologies issued an invoice for $3,000 to NetSolutions dated January 5, with $3,000 to NetSolutions dated January 5, with terms 2/10, n/30. Based on the calculation in terms 2/10, n/30. Based on the calculation in the previous slide, NetSolutions pays the the previous slide, NetSolutions pays the amount due, less the discount, on January 15.amount due, less the discount, on January 15.

Discount Not TakenDiscount Not Taken

o Assume that, instead of paying the invoice Assume that, instead of paying the invoice within the discount period, NetSolutions pays within the discount period, NetSolutions pays the invoice on February 4.the invoice on February 4.

Purchases Returns and AllowancesPurchases Returns and Allowances

o A A purchases returnpurchases return involves actually returning involves actually returning merchandise that is damaged or does not meet merchandise that is damaged or does not meet the specifications of the order. From a buyer’s the specifications of the order. From a buyer’s perspective, suchperspective, such returns are calledreturns are called purchases purchases returns and allowancesreturns and allowances..

Debit MemoDebit Memo

o A A debit memorandumdebit memorandum, often called a , often called a debitdebit memomemo, informs the seller of the amount the , informs the seller of the amount the buyer proposes to debit to the account buyer proposes to debit to the account payable due the seller.payable due the seller.

Debit MemoDebit Memo

o NetSolutions records the return of the NetSolutions records the return of the merchandise indicated in the debit memo in merchandise indicated in the debit memo in Exhibit 3Exhibit 3 as follows: as follows:

Merchandise PurchasedMerchandise Purchased

o On May 2, NetSolutions purchased $5,000 of On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, merchandise on account from Delta Data Link, terms 2/10, n/30.terms 2/10, n/30.

Merchandise ReturnedMerchandise Returned

o On May 4 , NetSolutions returned $3,000 of the On May 4 , NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link.merchandise purchased from Delta Data Link.

Invoice PaidInvoice Paid

o On May 12, NetSolutions paid for the purchase On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.of May 2 less the return and discount.

Cash SalesCash Sales

o On March 3, NetSolutions sold $1,800 of On March 3, NetSolutions sold $1,800 of merchandise for cash.merchandise for cash.

o Using the perpetual inventory system, the cost Using the perpetual inventory system, the cost of merchandise sold and the decrease in of merchandise sold and the decrease in merchandise inventory are also recorded. The merchandise inventory are also recorded. The cost of merchandise sold on March 3 is $1,200.cost of merchandise sold on March 3 is $1,200.

o Sales made to customers using credit cards are Sales made to customers using credit cards are recorded as cash sales. Assume that recorded as cash sales. Assume that NetSolutions paid credit card processing fees NetSolutions paid credit card processing fees of $4,150 on March 31.of $4,150 on March 31.

Sales on AccountSales on Account

o On March 10, NetSolutions sold merchandise On March 10, NetSolutions sold merchandise on account for $18,000. The cost of on account for $18,000. The cost of merchandise sold was $10,800.merchandise sold was $10,800.

Sales DiscountsSales Discounts

o The terms for when payments for merchandise The terms for when payments for merchandise are to be made are called are to be made are called creditcredit termsterms. If . If payment is required on delivery, the terms are payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the allowed an amount of time, known as the creditcredit periodperiod, in which to pay., in which to pay.

Receipts on AccountReceipts on Account

o On March 19, NetSolutions receives the amount On March 19, NetSolutions receives the amount due within ten days, so the buyer deducted due within ten days, so the buyer deducted $360 ($18,000 x 2%) from the invoice amount.$360 ($18,000 x 2%) from the invoice amount.

Credit MemoCredit Memo

o A A creditcredit memorandummemorandum, often called a , often called a creditcredit memomemo, authorizes a credit to (decreases) the , authorizes a credit to (decreases) the buyer’s account receivable. An example of a buyer’s account receivable. An example of a credit memo issued by NetSolutions is shown credit memo issued by NetSolutions is shown in in Exhibit 4Exhibit 4 (next slide). (next slide).

Credit MemoCredit Memo

o On April 13, issued Credit Memo No. 321 to On April 13, issued Credit Memo No. 321 to Krier Company for merchandise returned to Krier Company for merchandise returned to NetSolutions. Selling price, $2,250; cost to NetSolutions. Selling price, $2,250; cost to NetSolutions, $1,600.NetSolutions, $1,600.

FreightFreight

o If ownership of the merchandise passes to the If ownership of the merchandise passes to the buyer when the seller delivers the buyer when the seller delivers the merchandise to the freight carrier, the terms merchandise to the freight carrier, the terms are said to be are said to be FOB (free on board) shipping FOB (free on board) shipping pointpoint..

FreightFreight

o On June 10, NetSolutions buys merchandise On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB from Magna Data on account, $900, terms FOB shipping point and pays the shipping cost of shipping point and pays the shipping cost of $50.$50.

FreightFreight

o If ownership of the merchandise passes to the If ownership of the merchandise passes to the buyer when the buyer receives the buyer when the buyer receives the merchandise, the terms are said to be merchandise, the terms are said to be FOBFOB (free on board) destination(free on board) destination..

Sale Plus Freight CostSale Plus Freight Cost

o On June 15, NetSolutions sells merchandise to On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold destination. The cost of the merchandise sold is $480.is $480.

Sale Plus Freight CostSale Plus Freight Cost

o On June 15, NetSolutions pays freight of $40 on On June 15, NetSolutions pays freight of $40 on the sale of June 15.the sale of June 15.

Seller Prepays FreightSeller Prepays Freight

o On June 20, NetSolutions sells merchandise to On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost $45, which was added to the invoice. The cost of the merchandise sold is $360. of the merchandise sold is $360.

Seller Prepays FreightSeller Prepays Freight

FREIGHT TERMSFREIGHT TERMS

SUMMARY: SUMMARY: RECORDING RECORDING

MERCHANDISE MERCHANDISE INVENTORYINVENTORY

DUAL NATURE DUAL NATURE OF OF

MERCHANDISE MERCHANDISE TRANSACTIONS TRANSACTIONS

CHART OF CHART OF ACCOUNTSACCOUNTS

Sales TaxesSales Taxes

o On August 12, merchandise is sold on account On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% to Lemon Company, $100. The state has a 6% sales tax.sales tax.

Sales TaxesSales Taxes

o On a regular basis, the seller pays to the taxing On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes authority (state) the amount of the sales taxes collected.collected.

Trade DiscountsTrade Discounts

o When wholesalers offer special discounts to When wholesalers offer special discounts to certain classes of buyers who order large certain classes of buyers who order large quantities, these discounts are called quantities, these discounts are called tradetrade discountsdiscounts..

Learning Objective

Learning ObjectiveDescribe and illustrate the financial

Describe and illustrate the financial

statements of a merchandising

statements of a merchandising business.business.

Multiple-Step Income Statement Multiple-Step Income Statement

o The The multiple-step income statementmultiple-step income statement contains contains several sections, subsections, and subtotals.several sections, subsections, and subtotals.

REVENUE FROM REVENUE FROM SALESSALES

Revenue from SalesRevenue from Sales

o SalesSales is the total amount charged customers for is the total amount charged customers for merchandise sold, including cash sales and merchandise sold, including cash sales and sales on account.sales on account.

o Sales returns and allowancesSales returns and allowances are granted by are granted by the seller to customers for damaged or the seller to customers for damaged or defective merchandise.defective merchandise.

o Sales discounts Sales discounts are granted by the seller to are granted by the seller to customers for early payment of amounts owed.customers for early payment of amounts owed.

o Net salesNet sales is determined by subtracting sales is determined by subtracting sales returns and allowances and sales discounts returns and allowances and sales discounts from sales.from sales.

Cost of Merchandise SoldCost of Merchandise Sold

o The The cost of merchandise soldcost of merchandise sold is the cost of the is the cost of the merchandise sold to customers. Merchandise merchandise sold to customers. Merchandise costs consist of all the costs of acquiring the costs consist of all the costs of acquiring the merchandise and readying it for sale, such as merchandise and readying it for sale, such as purchase and freight costs.purchase and freight costs.

MULTIPLE-STEP MULTIPLE-STEP INCOME INCOME

STATEMENTSTATEMENT

INCOME FROM OPERATIONSINCOME FROM OPERATIONS

Selling expenses Selling expenses are are incurred directly in the incurred directly in the selling of merchandise.selling of merchandise.

Sales salariesSales salaries

Store supplies usedStore supplies used

Depreciation of store Depreciation of store equipmentequipment

Delivery expenseDelivery expense

Advertising expenseAdvertising expense

INCOME FROM OPERATIONSINCOME FROM OPERATIONS

AdministrativeAdministrative expensesexpenses, sometimes , sometimes called called generalgeneral expensesexpenses, are incurred , are incurred in the administration or in the administration or general operations of general operations of the business.the business.

Office salariesOffice salaries

Depreciation of office Depreciation of office equipmentequipment

Office supplies usedOffice supplies used

STATEMENTSTATEMENT

Multiple-Step Income StatementMultiple-Step Income Statement

o Income from operationsIncome from operations, sometimes called , sometimes called operating income, is determined by operating income, is determined by subtracting operating expenses from gross subtracting operating expenses from gross profit.profit.

STATEMENTSTATEMENT

Other Income and ExpenseOther Income and Expense

o Other incomeOther income is revenue from sources other is revenue from sources other than the primary operating activity of a than the primary operating activity of a business.business.

o Other expense Other expense is an expense that cannot be is an expense that cannot be traced directly to the normal operations of the traced directly to the normal operations of the business.business.

STATEMENTSTATEMENT

Single-Step Income StatementSingle-Step Income Statement

o An alternative form of income statement is the An alternative form of income statement is the single-step income statementsingle-step income statement. As shown in the . As shown in the next slide, the income statement for next slide, the income statement for NetSolutions deducts the total of all expenses NetSolutions deducts the total of all expenses in one stepin one step from the total of all revenues. from the total of all revenues.

SINGLE-STEP SINGLE-STEP INCOME INCOME

STATEMENTSTATEMENT

STATEMENT OF STATEMENT OF OWNER’S OWNER’S EQUITYEQUITY

Balance SheetBalance Sheet

o The form of balance sheet with the assets on The form of balance sheet with the assets on the left-hand side and the liabilities and the left-hand side and the liabilities and owner’s equity on the right-hand side is called owner’s equity on the right-hand side is called the the account formaccount form..

Balance SheetBalance Sheet

o When the balance sheet is presented in a When the balance sheet is presented in a downward sequence in three sections, it has downward sequence in three sections, it has been prepared using the report form. This is been prepared using the report form. This is the form used in the next two slides.the form used in the next two slides.

BALANCE SHEETBALANCE SHEET

(continued)

BALANCE SHEETBALANCE SHEET

Learning Objective

Learning ObjectiveDescribe the adjusting and closing

Describe the adjusting and closing

process for a merchandising

process for a merchandising business.business.

Adjusting Entry for Inventory ShrinkageAdjusting Entry for Inventory Shrinkage

o Merchandising businesses may experience Merchandising businesses may experience some loss of inventory due to shoplifting, some loss of inventory due to shoplifting, employee theft, or errors in recording or employee theft, or errors in recording or counting inventory. counting inventory.

Adjusting Entry for Inventory ShrinkageAdjusting Entry for Inventory Shrinkage

o If the balance of the Merchandise Inventory If the balance of the Merchandise Inventory account is larger than the total amount of the account is larger than the total amount of the merchandise count, the difference is often merchandise count, the difference is often called called inventory shrinkageinventory shrinkage or or inventoryinventory shortageshortage..

Dec. 31, 2015Dec. 31, 2015Account balance of Merchandise Inventory $63,950Physical merchandise inventory on hand 62,150Inventory shrinkage $ 1,800

Inventory ShrinkageInventory Shrinkage

o NetSolutions’ inventory records indicate the NetSolutions’ inventory records indicate the following on December 31, 2015:following on December 31, 2015:

Inventory ShrinkageInventory Shrinkage

o At the end of the accounting period, inventory At the end of the accounting period, inventory shrinkage is recorded by the following shrinkage is recorded by the following adjusting entry:adjusting entry:

Step 1: Closing EntriesStep 1: Closing Entries

o Debit each temporary account with a credit Debit each temporary account with a credit balance, such as Sales, for its balance and balance, such as Sales, for its balance and credit Income Summary.credit Income Summary.

o Credit each temporary account with a debit Credit each temporary account with a debit balance, such as an expense, for its balance balance, such as an expense, for its balance and debit Income Summary.and debit Income Summary.

o Debit Income Summary for the amount of its Debit Income Summary for the amount of its balance (net income) and credit the owner’s balance (net income) and credit the owner’s capital account. capital account.

o Debit the owner’s capital account for the Debit the owner’s capital account for the balance of the drawing account and credit the balance of the drawing account and credit the drawing account.drawing account.

Closing EntriesClosing Entries

o NetSolutions’ Income Summary account after NetSolutions’ Income Summary account after the closing entries have been posted is as the closing entries have been posted is as follows:follows:

Learning Objective

Learning ObjectiveDescribe and illustrate the use of

Describe and illustrate the use of

the ratio of net sales to assets in

evaluating a company’s operating

evaluating a company’s operating performance.

performance.

Ratio of Net Sales to AssetsRatio of Net Sales to Assets

o The The ratio of net sales to assetsratio of net sales to assets measures how measures how effectively a business is using its assets to effectively a business is using its assets to generate sales.generate sales.

Ratio of Net Sales to Assets

Net Sales

Average Total Assets=

o The following data (in millions) were taken The following data (in millions) were taken from the annual reports of Dollar Tree, Inc.:from the annual reports of Dollar Tree, Inc.:

o The ratio of net sales to assets for each year are The ratio of net sales to assets for each year are as follows:as follows:

AppendixAppendix

The Periodic The Periodic

Inventory System

PERIODIC PERIODIC INVENTORY INVENTORY

SYSTEMSYSTEM

Recording Merchandise TransactionsRecording Merchandise Transactions

o PurchasesPurchases. Purchases of inventory are . Purchases of inventory are recorded in a purchases account rather than in recorded in a purchases account rather than in the merchandise inventory account.the merchandise inventory account.

o PurchasesPurchases DiscountsDiscounts. Purchases discounts are . Purchases discounts are normally recorded in a separate purchases normally recorded in a separate purchases discounts account. The balance of the discounts account. The balance of the purchases discounts account is reported as a purchases discounts account is reported as a deduction from Purchases for the period.deduction from Purchases for the period.

o PurchasesPurchases ReturnsReturns andand AllowancesAllowances. Purchases . Purchases returns and allowances are recorded in a returns and allowances are recorded in a similar manner as purchase discounts.similar manner as purchase discounts.

o FreightFreight InIn. When merchandise is purchased . When merchandise is purchased FOB shipping point, the buyer pays for the FOB shipping point, the buyer pays for the freight. Under the periodic inventory system, freight. Under the periodic inventory system, freight paid when purchasing merchandise freight paid when purchasing merchandise FOB shipping point is debited to FOB shipping point is debited to FreightFreight InIn..

(continued)

(concluded)

CLOSING CLOSING ENTRIESENTRIES

(continued)

(concluded)

Accounting for

Merchandising

BusinessesBusinesses

The EndThe End

ch06 wrd25e instructor

merchandise inventory

merchandise transactions

discount period

amounts of inventory

inventory records

perpetual inventory

purchase transactionson

periodic inventory system

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