Slide 5-1
Slide 5-2
Chapter 5
Accounting for Accounting for Merchandising Merchandising
OperationsOperations
Financial Accounting, IFRS EditionWeygandt Kimmel Kieso
Slide 5-3
1. Identify the differences between service and merchandising companies.
2. Explain the recording of purchases under a perpetual inventory system.
3. Explain the recording of sales revenues under a perpetual inventory system.
4. Explain the steps in the accounting cycle for a merchandising company.
5. Prepare an income statement for a merchandiser.
6. Explain the computation and importance of gross profit.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Slide 5-4
Forms of Forms of Financial Financial
StatementsStatements
Forms of Forms of Financial Financial
StatementsStatements
Accounting for Merchandising OperationsAccounting for Merchandising OperationsAccounting for Merchandising OperationsAccounting for Merchandising Operations
Freight costsFreight costs
Purchase Purchase returns and returns and allowancesallowances
Purchase Purchase discountsdiscounts
Summary of Summary of purchasing purchasing transactionstransactions
MerchandisingMerchandising
OperationsOperations
MerchandisingMerchandising
OperationsOperations
Recording Recording Purchases of Purchases of MerchandiseMerchandise
Recording Recording Purchases of Purchases of MerchandiseMerchandise
Recording Recording Sales of Sales of
MerchandiseMerchandise
Recording Recording Sales of Sales of
MerchandiseMerchandise
Completing Completing the the
Accounting Accounting CycleCycle
Completing Completing the the
Accounting Accounting CycleCycle
Operating Operating cyclescycles
Flow of costsFlow of costs—perpetual —perpetual and periodic and periodic inventory inventory systemssystems
Sales returns Sales returns and and allowancesallowances
Sales Sales discountsdiscounts
Adjusting Adjusting entriesentries
Closing entriesClosing entries
Summary of Summary of merchandising merchandising entriesentries
Income Income statementstatement
Classified Classified statement of statement of financial financial positionposition
Slide 5-5
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
SO 1 Identify the differences between service and merchandising companies.SO 1 Identify the differences between service and merchandising companies.
Merchandising CompaniesMerchandising Companies
Buy and Sell GoodsBuy and Sell Goods
Wholesaler Retailer Consumer
The primary source of revenues is referred to as sales revenue or sales.
Slide 5-6
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Income MeasurementIncome Measurement
Illustration 5-1
Cost of goods sold is the total cost of merchandise sold during
the period.
Not used in a Service business.
Net Income (Loss)
Less
Less=
=
SalesRevenue
Cost of Goods Sold
Gross Profit
Operating Expenses
SO 1 Identify the differences between service and merchandising companies.SO 1 Identify the differences between service and merchandising companies.
Slide 5-7
The operating cycle of a merchandising company ordinarily is longer than that of a service company.
Illustration 5-2
SO 1 Identify the differences between service and merchandising companies.SO 1 Identify the differences between service and merchandising companies.
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Operating Cycle
Slide 5-8 SO 1 Identify the differences between service and merchandising companies.SO 1 Identify the differences between service and merchandising companies.
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Flow of CostsIllustration 5-3
Slide 5-9
Perpetual System
1. Purchases increase Merchandise Inventory.
2. Freight costs, Purchase Returns and Allowances and
Purchase Discounts are included in Merchandise Inventory.
3. Cost of Goods Sold is increased and Merchandise Inventory
is decreased for each sale.
4. Physical count done to verify Merchandise Inventory balance.
The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold.
SO 1 Identify the differences between service and merchandising companies.SO 1 Identify the differences between service and merchandising companies.
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Flow of Costs
Slide 5-10
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:
Beginning inventory
$ 100,000
Add: Purchases, net
+ 800,000
Goods available for sale
900,000
Less: Ending inventory
- 125,000
Cost of goods sold
$ 775,000
SO 1 Identify the differences between service and merchandising companies.SO 1 Identify the differences between service and merchandising companies.
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Flow of Costs
Periodic System
Slide 5-11 Answers on notes page
Slide 5-12
Made using cash or credit (on account).
Normally recorded when goods are received.
Purchase invoice should support each credit purchase.
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Illustration 5-5
Slide 5-13
Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they intend to sell.
Illustration:Illustration: From INVOICE NO. 731 (Illustration 5-5) record the journal entry Sauk Stereo would make to record its purchase from PW Audio Supply.
Merchandise inventory 3,800May 4
Accounts payable 3,800
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Slide 5-14
Illustration 5-6
Seller places goods Free On Board the carrier, and buyer
pays freight costs.
Seller places goods Free On Board to the buyer’s place
of business, and seller pays freight costs.
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
Freight Costs – Terms of Sale– Terms of Sale
Freight costs incurred by the seller are an operating expense. SO 2SO 2
Slide 5-15
Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Acme Freight Company €150 for freight charges, the entry on Sauk Stereo’s books is:
Merchandise inventory 150May 6
Cash 150
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would have been:
Freight-out (or Delivery Expense) 150May 4
Cash 150
Slide 5-16
Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.
Purchase Returns and Allowances
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
Return goods for credit if the sale was made on
credit, or for a cash refund if the purchase was for
cash.
May choose to keep the merchandise if the seller will grant an allowance
(deduction) from the purchase price.
Purchase Return Purchase Allowance
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Slide 5-17
In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Merchandise Inventory
QuestionQuestion
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Answer on notes page
In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Merchandise Inventory
Slide 5-18
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Illustration: Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing €300.
Accounts payable 300May 8
Merchandise inventory 300
Slide 5-19
Credit terms may permit buyer to claim a cash discount for prompt payment.
Advantages:
Purchaser saves money.
Seller shortens the operating cycle.
Purchase Discounts
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days.
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Slide 5-20
Purchase Discount Terms
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
2% discount if
paid within 10
days, otherwise
net amount due
within 30 days.
1% discount if
paid within first 10
days of next
month.
2/10, n/30 1/10 EOM
Net amount due
within the first 10
days of the next
month.
n/10 EOM
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Slide 5-21
Merchandise Inventory 70
Accounts payable 3,500May 14
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Illustration: Assume Sauk Stereo pays the balance due of €3,500 (gross invoice price of €3,800 less purchase returns and allowances of €300) on May 14, the last day of the discount period. Prepare the journal entry Sauk makes to record its May 14 payment.
Cash 3,430
Slide 5-22
Accounts payable 3,500June 3
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
Cash 3,500
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of €3,500 on June 3, the journal entry would be:
Slide 5-23
Should discounts be taken when offered?
Purchase Discounts
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
Example: 2% for 20 days = Annual rate of 36.5%
(365/20 = 18.25 twenty-day periods x 2% = 36.5%)
Passing up the discount offered equates to paying an interest rate of 2% on the use of $3,500 for 20 days.
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Slide 5-24
Merchandise Inventory
Debit Credit
€3,800 8th - Return€300
Balance
4th - Purchase
€3,5803,580
70 14th - Discount
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
Summary of Purchasing Transactions
1506th – Freight-in
IllustrationIllustration
SO 2 Explain the recording of purchases under a perpetual inventory system.SO 2 Explain the recording of purchases under a perpetual inventory system.
Slide 5-25
Made for cash or credit (on account).
Normally recorded when earned, usually when goods transfer from seller to buyer.
Sales invoice should support each credit sale.
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.
Illustration 5-5
Slide 5-26
Two Journal Entries to Record a Sale
Cash or Accounts receivable XXX
Sales XXX
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.
#1
Cost of goods sold XXX
Merchandise inventory XXX
#2
Selling Price
Cost
Slide 5-27
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.
Accounts receivable 3,800May 4
Sales 3,800
Illustration: Assume PW Audio Supply records its May 4 sale of €3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume the merchandise cost PW Audio Supply €2,400.
Cost of goods sold 2,4004
Merchandise inventory 2,400
Slide 5-28
“Flipside” of purchase returns and allowances.
Contra-revenue account (debit).
Sales not reduced (debited) because:
would obscure importance of sales returns and
allowances as a percentage of sales.
could distort comparisons between total sales in
different accounting periods.
Sales Returns and Allowances
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.
Slide 5-29
Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a €300 selling price (assume a €140 cost). Assume the goods were not defective.
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.
Sales returns and allowances 300May 8
Accounts receivable300
Merchandise inventory 1408
Cost of goods sold140
Slide 5-30
Illustration: Assume the returned goods were defective and had a scrap value of €50, PW Audio would make the following entries:
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.
Sales returns and allowances 300May 8
Accounts receivable300
Merchandise inventory 508
Cost of goods sold50
Slide 5-31
The cost of goods sold is determined and recorded each time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory system.
Review QuestionReview Question
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.
Answer on notes page
The cost of goods sold is determined and recorded each time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory system.
Slide 5-32 Answers on notes page
Slide 5-33
Offered to customers to promote prompt payment.
“Flipside” of purchase discount.
Contra-revenue account (debit).
Sales Discount
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.
Slide 5-34
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.
Cash 3,430May 14
Accounts receivable3,500
Sales discounts 70
* [(€3,800 – €300) X 2%]
*
Illustration: Assume Sauk Stereo pays the balance due of €3,500 (gross invoice price of €3,800 less purchase returns and allowances of €300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14.
Slide 5-35
Generally the same as a service company.
One additional adjustment to make the records agree
with the actual inventory on hand.
Involves adjusting Merchandise Inventory and Cost of Goods Sold.
Adjusting Entries
Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle
SO 4 Explain the steps in the accounting cycle for a merchandising company.SO 4 Explain the steps in the accounting cycle for a merchandising company.
Slide 5-36
Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle
SO 4 Explain the steps in the accounting cycle for a merchandising company.SO 4 Explain the steps in the accounting cycle for a merchandising company.
Illustration: Suppose that PW Audio Supply has an unadjusted balance of €40,500 in Merchandise Inventory. Through a physical count, PW Audio determines that its actual merchandise inventory at year-end is €40,000. The company would make an adjusting entry as follows.
Cost of goods sold 500
Merchandise inventory500
Slide 5-37
Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle
Closing Entries
Slide 5-38
Primary source for evaluating a company’s
performance.
Format designed to differentiate between the various
sources of income and expense.
Income Statement
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
SO 5 Prepare an income statement for a merchandiser.SO 5 Prepare an income statement for a merchandiser.
Slide 5-39
Illustration 5-13
Income Statement Presentation of Sales
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
SO 5 Prepare an income statement for a merchandiser.SO 5 Prepare an income statement for a merchandiser.
Slide 5-40 SO 6 Explain the computation and importance of gross profit.SO 6 Explain the computation and importance of gross profit.
Illustration 5-13
Illustration 5-10
Gross Profit
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
Slide 5-41
Forms of Forms of Financial Financial StatementsStatements
Forms of Forms of Financial Financial StatementsStatements
SO 5 Distinguish between a multiple-step and a single-step income statement.SO 5 Distinguish between a multiple-step and a single-step income statement.
Illustration 5-13
Operating Expenses
IFRS allows presentation by nature and presentation by function.
Slide 5-42
Forms of Forms of Financial Financial StatementsStatements
Forms of Forms of Financial Financial StatementsStatements
Other Income Other Income and Expenseand Expense
SO 5SO 5Illustration 5-13
Various revenues and gains and expenses andlosses that are unrelated to the company’s main line of operations.
Slide 5-43
Forms of Forms of Financial Financial StatementsStatements
Forms of Forms of Financial Financial StatementsStatements
Interest Interest ExpenseExpense
SO 5SO 5Illustration 5-13
Interest expense, if material, must be disclosed on the face of the income statement.
Slide 5-44 SO 6 Explain the computation and importance of gross profit.SO 6 Explain the computation and importance of gross profit.
Comprehensive IncomeComprehensive Income
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
Includes certain adjustments to pension plan assets, gains and losses on foreign currency translation, and unrealized gains and losses on certain types of investments.
Reported in a combined statement of net income and comprehensive income, or in a separate schedule that reports only comprehensive income.
Illustration 5-14
Slide 5-45
The multiple-step income statement for a merchandiser shows each of the following features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.
Review QuestionReview Question
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
SO 5 Distinguish between a multiple-step and a single-step income statement.SO 5 Distinguish between a multiple-step and a single-step income statement.
The multiple-step income statement for a merchandiser shows each of the following features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.
Slide 5-46
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
Illustration 5-15
Classified Statement of Financial Position
SO 5 Distinguish between a multiple-step and a single-step income statement.SO 5 Distinguish between a multiple-step and a single-step income statement.
Slide 5-47
Indicate in which financial statement (IncomeStatement, IS; Statement of Financial Position, SFP;
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
SO 5 Distinguish between a multiple-step and a single-step income statement.SO 5 Distinguish between a multiple-step and a single-step income statement.
or Retained Earnings Statement, RES) and under what classification each of the following would be reported.
Accounts Payable SFP Current liabilities
Accounts Receivable SFP Current assets
Accumulated Depreciation SFP Property, plant, and equipment
Advertising Expense IS Operating expenses
Depreciation Expense IS Operating expenses
Dividends RES Deduction section
Cash SFP Current assets
Accounts Payable
Accounts Receivable
Accumulated Depreciation
Advertising Expense
Depreciation Expense
Dividends
Cash
Slide 5-48
Indicate in which financial statement (IncomeStatement, IS; Statement of Financial Position, SFP;
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
SO 5 Distinguish between a multiple-step and a single-step income statement.SO 5 Distinguish between a multiple-step and a single-step income statement.
or Retained Earnings Statement, RES) and under what classification each of the following would be reported.
Freight-out IS Operating expenses
Gain on Sale of Equipment IS Other income and expense
Insurance Expense IS Operating expenses
Interest Expense IS Interest expense
Interest Payable SFP Current liabilities
Land SFP Property, plant, and equipment
Merchandise Inventory SFP Current assets
Freight-out
Gain on Sale of Equipment
Insurance Expense
Interest Expense
Interest Payable
Land
Merchandise Inventory
Slide 5-49
Indicate in which financial statement (IncomeStatement, IS; Statement of Financial Position, SFP;
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
SO 5 Distinguish between a multiple-step and a single-step income statement.SO 5 Distinguish between a multiple-step and a single-step income statement.
or Retained Earnings Statement, RES) and under what classification each of the following would be reported.
Notes Payable SFP Non-current liabilities
Office Building SFP Property, plant, and equipment
Property Tax Payable SFP Current liabilities
Salaries Expense IS Operating expenses
Salaries Payable SFP Current liabilities
Sales Returns and Allowances IS Sales revenues
Share Capital—Ordinary SFP Equity
Notes Payable
Office Building
Property Tax Payable
Salaries Expense
Salaries Payable
Sales Returns and Allowances
Share Capital—Ordinary
Slide 5-50
Indicate in which financial statement (IncomeStatement, IS; Statement of Financial Position, SFP;
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
SO 5 Distinguish between a multiple-step and a single-step income statement.SO 5 Distinguish between a multiple-step and a single-step income statement.
or Retained Earnings Statement, RES) and under what classification each of the following would be reported.
Store Equipment SFP Property, plant, and equipment
Sales Revenue IS Sales revenues
Utilities Expense IS Operating expenses
Store Equipment
Sales Revenue
Utilities Expense
Slide 5-51
Under both GAAP and IFRS, a company can choose to use
either a perpetual or a periodic system.
Inventories are defined in IAS 2 as held for sale in the
ordinary course of business, in the process of production
for such sale, or in the form of materials or supplies to be
consumed in the production process or in the rendering of
services. The definition under GAAP is essentially the same.
Accounting for Merchandising Operations
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences
Slide 5-52
As noted in the chapter, under IFRS companies must
classify expenses by either nature or by function.
Classification by nature leads to descriptions such as the
following: salaries, depreciation expense, and utilities
expense. If a company uses the functional expense method
on the income statement, disclosure by nature is required in
the notes to the financial statements. In contrast, under
GAAP, companies generally classify income statement
items by function. Classification by function leads to
descriptions such as administration, distribution, and
manufacturing.
Accounting for Merchandising Operations
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences
Slide 5-53
Presentation of the income statement under GAAP follows
either a single-step or multiple-step format. IFRS does not
mention a single-step or multiple-step approach although
the approach used is similar to that referred to as a multiple-
step statement under GAAP.
IFRS requires that two years of income statement
information be presented, whereas GAAP requires three
years.
Accounting for Merchandising Operations
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences
Slide 5-54
Looking to the FutureLooking to the Future
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
The IASB and FASB are working on a project that would rework the
structure of financial statements. Specifically, this project will
address the issue of how to classify various items in the income
statement. A main goal of this new approach is to provide
information that better represents how businesses are run. In
addition, this approach draws attention away from just one number
—net income. It will adopt major groupings similar to those
currently used by the statement of cash flows (operating,
investing, and financing), so that numbers can be more readily
traced across statements. Finally, this approach would also
provide detail, beyond that currently seen in most statements
(either GAAP or IFRS), by requiring that line items be presented
both by function and by nature.
Accounting for Merchandising Operations
Slide 5-55
Periodic System
Separate accounts used to record purchases, freight costs, returns, and discounts.
Company does not maintain a running account of changes in inventory.
Ending inventory determined by physical count.
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Periodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory System
Slide 5-56
Calculation of Cost of Goods SoldIllustration 5A-1
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Periodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory System
Slide 5-57
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Illustration:Illustration: On the basis of the sales invoice (Illustration 5-5) and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the €3,800 purchase as follows.
Purchases 3,800May 4
Accounts payable 3,800
Recording Purchases under Periodic SystemRecording Purchases under Periodic SystemRecording Purchases under Periodic SystemRecording Purchases under Periodic System
Slide 5-58
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Illustration:Illustration: If Sauk pays Acme Freight Company €150for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauk’s books is:
Freight-in (Transportation-in) 150May 6
Cash 150
Freight CostsFreight Costs
Recording Purchases under Periodic SystemRecording Purchases under Periodic SystemRecording Purchases under Periodic SystemRecording Purchases under Periodic System
Slide 5-59
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Illustration:Illustration: Sauk Stereo returns €300 of goods to PW Audio Supply and prepares the following entry to recognize the return.
Accounts payable 300May 8
Purchase returns and allowances 300
Purchase Returns and AllowancesPurchase Returns and Allowances
Recording Purchases under Periodic SystemRecording Purchases under Periodic SystemRecording Purchases under Periodic SystemRecording Purchases under Periodic System
Slide 5-60
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Illustration:Illustration: On May 14 Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2% cash discount allowed by PW Audio for payment within 10 days. SaukStereo records the payment and discount as follows.
Accounts payable 3,500May 14
Purchase discounts 70
Purchase DiscountsPurchase Discounts
Cash 3,430
Recording Purchases under Periodic SystemRecording Purchases under Periodic SystemRecording Purchases under Periodic SystemRecording Purchases under Periodic System
Slide 5-61
No entry is recorded for cost of goods sold at the time of the sale under a periodic system.
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Illustration:Illustration: PW Audio Supply, records the sale of €3,800 of merchandise to Sauk Stereo on May 4 (sales invoice No. 731, Illustration 5-5) as follows.
Accounts receivable 3,800May 4
Sales 3,800
Recording Sales under Periodic SystemRecording Sales under Periodic SystemRecording Sales under Periodic SystemRecording Sales under Periodic System
Slide 5-62
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Illustration:Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the €300 sales return as follows.
Sales returns and allowances 300May 4
Accounts receivable 300
Sales Returns and AllowancesSales Returns and Allowances
Recording Sales under Periodic SystemRecording Sales under Periodic SystemRecording Sales under Periodic SystemRecording Sales under Periodic System
Slide 5-63
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Illustration:Illustration: On May 14, PW Audio Supply receives payment of €3,430 on account from Sauk Stereo. PW Audio honors the 2% cash discount and records the payment of Sauk’s account receivable in full as follows.
Sales DiscountsSales Discounts
Cash 3,430May 14
Accounts receivable3,500
Sales discounts 70
Recording Sales under Periodic SystemRecording Sales under Periodic SystemRecording Sales under Periodic SystemRecording Sales under Periodic System
Slide 5-64
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Illustration 5A-2
Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic
Slide 5-65
SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.
Illustration 5A-2
Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic
Slide 5-66
Illustration 5B-1
SO 8SO 8
Worksheet for a Merchandising Company Worksheet for a Merchandising Company Worksheet for a Merchandising Company Worksheet for a Merchandising Company
Slide 5-67
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