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The McGraw-Hill Companies, Inc., 2010 McGraw-Hill/Irwin
Chapter 4
Reporting and Analyzing
Merchandising Operations
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Conceptual Learning Objectives
C1: Describe merchandising activities andidentify income components for amerchandising company
C2: Identify and explain the inventory asset of a merchandising company
C3: Describe both perpetual and periodicinventory systems
C4: Analyze and interpret cost flows andoperating activities of a merchandisingcompany
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Analytical Learning Objectives
A1: Compute the acid-test ratio and
explain its use to assess liquidity A2: Compute the gross margin ratio and
explain its use to assess profitability
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P rocedural Learning Objectives
P 1: Analyze and record transactions for merchandisepurchases using a perpetual system
P 2: Analyze and record transactions for merchandisesales using a perpetual system
P 3: P repare adjustments and close accounts for amerchandising company
P 4: Define and prepare multiple-step and single-step
income statementsP5 : Appendix 4A: Record and compare merchandising
transactions using both periodic and perpetualinventory systems
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Merchandising Activities
Examples: Accounting firms, law firms andExamples: Accounting firms, law firms andplumbing servicesplumbing services
Service organizationsService organizations sell timesell time totoearn revenue.earn revenue.
Examples: Accounting firms, law firms andExamples: Accounting firms, law firms andplumbing servicesplumbing services
Revenues ExpensesMinus Net
income
Equals
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Ma nuf a cturer Wholes a ler Ret a iler Customer
M erch a ndising Comp a niesM erch a ndising Comp a nies
Merchandising ActivitiesC 1
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Reporting Income of aMerchandiser
Merchandising companies sell productsproducts to earn revenue.Examples: sporting goods, clothing, and auto parts stores
Cost of Goods Sold
GrossProfit
Expenses NetIncome
NetSales
Minus Equals Minus Equals
M erch a ndising Comp a nyIncome St a tement
For Ye a r Ended December 31, 2010
Net s a les 150,000$Cost of goods sold 80,000 Gross profit 70,000$Oper a ting expenses 46,500 Net income 23,500$
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Operating Cycle for aMerchandiser
Begins with the purchase of merchandise and ends withthe collection of cash from the sale of merchandise.
P urchas e s
Me rchandis e
inv e nto ry
Cr e di t sal e s
Acco
unt
r e ce ivabl e
Cashco lle ct io n
P urchas e s
Me rchandis e
inven
tory
Cashsal e s
Ca sh S a leCa sh S a le Credit Sa
leCredit Sa
le
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Inventory Systems
+
+
Beginninginventory
Net cost of purchases
Merchandise
available for sale
Ending inventory Cost of goodssold
==
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T rade Discounts
Used by manufacturers and wholesalersUsed by manufacturers and wholesalersto offer better prices for greater to offer better prices for greater
quantities purchased.quantities purchased.
Ex a mpleEx a mpleMa
trix, Inc. offersa
30% tr a
deMa
trix, Inc. offersa
30% tr a
dediscount on orders of 1,000discount on orders of 1,000units or more of their popul a r units or more of their popul a r
product R a cer. E a chproduct R a cer. E a chRa cer h a s a list price of $5.25.Ra cer h a s a list price of $5.25.
Qu a ntity sold 1,000 Price per unit 5.25$Tot a l 5,250 Less 30% discount (1,575) Invoice price 3,675$
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M ain Source, Inc. Invoice614 Tech Avenue Da te Number Nashville, TN 37651 5/4/10 358-BI
Sold To
Na me: B a rbee, Inc.Attn: Tom BellAddress: One Willow Pl aza Cookeville, Tennessee38501
P.O. 167 S a les: 25 Terms 2/10,n/30 Ship: FedEx Prep a idItem Description Qu a nity Price AmountAC417 250 B a ckup System 500 54.00$ 27,000$
Sub Tot a l 27,000 We a ppreci a te your business! Ship Chg. -
Ta x - Tot a l 27,000$
Invoice
Seller Invoice d a tePurch a ser Order number Credit termsFreight termsGoodsInvoice a mount
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P urchase Discounts
A deduction from the invoice price granted to induceearly payment of the amount due.
Terms
Time
Due
Discount Period
Due: Invoiceprice minus
discount
CreditPeriod
Due: Full Invoice Price
Date of Date of InvoiceInvoice
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2/10,n/30
P urchase Discounts
DiscountPercent
Number of Da ys
Discount IsAva ila ble
Otherwise,Net (or All)
Is Due in 30Da ys
CreditPeriod
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P urchase Discounts
On May 7, Jason, Inc. purchased $27,000 of merchandise inventory on account, creditterms are 2/10, n/30.
Dr. Cr.M erch a ndise Inventory 27,000
Accounts P a y a ble 27,000 Purchase merchandise on account
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P urchase Discounts
On May 1 5 , Jason, Inc. paid the amount dueon the purchase of May 7.
Dr. Cr.Ma y 15 Accounts P a y a ble 27,000
C a sh 26,460 M erch a ndise Inventory* 540
Pa id a ccounts paya ble in ful l
*$27,000 2% = $540 discount
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P urchase Discounts
After we post these entries, theaccounts involved look like this:
Merchandise Inventory Accounts P ayable5/7 27,000 5/7 27,0005/15 540 5/15 27,000
Ba l. 26,460 Ba l. 0
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W hen Discount is Not T aken
If we fail to take a 2/10, n/30discount, is it really expensive?
365 days 20 days 2% = 36.5% a nnu a l r a te
Da ysin aye a r
Number of a ddition a ld a ys before
p a yment
Percentp a id to
keepmoney
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P urchase Returns and Allowances
P urchase Return . . .
Merchandise returned by the purchaser to thesupplier.
P urchase Allowance . . . A reduction in the cost of defective merchandise
received by a purchaser from a supplier.
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P urchase Returns and Allowances
On May 9, Matrix, Inc. purchased $20,000of merchandise inventory on account,
credit terms are 2/10, n/30.
Ma y 9 M erch a ndise Inventory 20,000 Accounts P a ya ble 20,000
Purchased merchandise on account
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P urchase Returns and Allowances
On May 10, Matrix, Inc. returned $ 5 00 of defectivemerchandise to the supplier.
Dr. Cr.Ma y 10 Accounts P a ya ble 500
Merch a ndise Inventory 500 Returned defective merchandise
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P urchase Returns and Allowances
On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9.
Purch a se 20,000$Returns (500) Amount Due 19,500 Discount (390) Ca sh P a id 19,110$
Dr. Cr.Ma y 18 Accounts P a y a ble 19,500 C a sh 19,110 M erch a ndise Inventory 390
Pa i d account i n full
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T ransportation Costs
FOB shipping point(buyer p a ys)
FOB destin a tion(seller p a ys)Merchandise
Seller Buyer
Terms
Ownership tr a nsfers
to buyer when goodsa re pa ssed to
Tr a nsporta tioncosts pa id by
FOB shipping point Ca rrier Buyer FOB destina tion Buyer Seller
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T ransportation Costs
On May 12, Jason, Inc. purchased $8,000 of merchandise inventory for cash and also
paid $100 transportation costs.Dr. Cr.
Ma y 12 Merch a ndise Inventory 8,100 Ca sh 8,100
Paid for merchandise and transportation
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Q uick Check
On July 6, 2010, Seller Co. sold $7, 5 00 of merchandise to Buyer,Co. on account; terms of 2/10,n/30. T he shipping terms were FOBshipping point. T he shipping cost was $100. W hich of thefollowing will be part of Buyers July 6 journal entry?
a. Credit Sales $7, 5 00b. Credit P urchase Discounts $1 5 0c. Debit Merchandise Inventory $7,600d. Debit Accounts P ayable $7,4 5 0
FOB shipping point indic a tes the buyer ultim a tely p a ys the freight. This is recorded with
a debit to M erch a ndise Inventory.
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Cost of Merchandise P urchased
Invoice cost of merch a ndise purch a ses 692,500$Less:
Purch a se discounts (10,388) Purch a se returns a nd a llow a nces (4,275)
Add:Cost of tr a nsport a tion-in 4,895 Tot a l cost of merch a ndise purch a ses 682,732$
Ma trix, Inc.Tot a l Cost of M erch a ndise Purch a ses
For Ye a r Ended Ma y 31, 2011
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Accounting for Merchandise Sales
Ma trix, Inc.Comput a tion of Gross Profit
For Ye a r Ended Ma y 31, 2011
S a les 2,451,000$Less:
S a les discounts 29,412$S a les returns a nd a llow a nces 18,500 47,912
Net s a les 2,403,088$Cost of goods sold (1,928,600) Gross profit 474,488$
S a les discounts a nd returns a nd a llow a nces a re Contr a Revenue a ccounts.
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Sales of Merchandise
On March 18, Diamond Store sold $2 5 ,000 of merchandise on account. T he merchandise was carriedin inventory at a cost of $18,000.
Dr. Cr.Ma r. 18 Accounts Receiv a ble 25,000
S a les 25,000 Sales of merchandi se on credi t
Cost of Goods Sold 18,000 M erch a ndise Inventory 18,000
To record cost of sales
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Sales Discounts
On June 8, Barton Co. sold merchandise costing $3, 5 00On June 8, Barton Co. sold merchandise costing $3, 5 00for $6,000 on account. Credit terms were 2/10, n/30. Letsfor $6,000 on account. Credit terms were 2/10, n/30. Letsprepare the journal entries.prepare the journal entries.
Dr. Cr.Jun. 8 Accounts Receiv a ble 6,000
S a les 6,000 Sales of mercha ndi se on credit
Cost of Goods Sold 3,500 M erch a ndise Inventory 3,500
To r ecord cost of sa les
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Sales Discounts
On June 17, Barton Co. received a check for $ 5 ,880in full payment of the June 8 sale.
Ca sh 5,880 Sa les Discount 120
Accounts Receiv a ble 6,000
Received payment less discount
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Sales Returns and Allowances
On June 12, Barton Co. sold merchandisecosting $4,000 for $7, 5 00 on account. T hecredit terms were 2/10, n/30.
Dr. Cr.Jun. 12 Accounts Receiv a ble 7,500
S a les 7,500 Sales of merchandise on credit
Cost of Goods Sold 4,000 M erch a ndise Inventory 4,000
To record cost of sal es
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Sales Returns and Allowances On June 14, merchandise with a sales price of $800 and
a cost of $470 was returned to Barton. T he return isrelated to the June 12 sale.
Dr. Cr.Jun. 14 S a les Returns a nd Allow a nces 800
Accounts Receiv a ble 800 Customer returned merchandise
M erch a ndise Inventory 470 Cost of Goods Sold 470
Returned goods placed in inventory
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Sales Returns and Allowances
On June 20, Barton received the amount owed to it fromthe sale of June 12.
S a le 7,500$Return (800) Amount due 6,700$Discount (134) Ca sh received 6,566$
Dr. Cr.
Jun. 20 C a sh 6,566 S a les Discount 134
Accounts Receiv a ble 6,700 Recei ved payment l ess di scount
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L ets complete theaccounting cycleby preparing the
closing entriesclosing entries forBarton.
Ba rton Comp a nyAdjusted Tri a l Ba la nce
December 31, 2011
Ca sh 7,700$Accounts receiv a ble 11,200 M erch a ndise inventory 14,300 Supplies 1,300 Equipment 41,200 Accum. depr.- Equip. 7,000$Accounts p a ya ble 16,400 S a la ries p a ya ble 1,000 Common Stock 42,400 Ret a ined E a rningsDividends 4,000 S a les 323,800 S a les discounts 4,300
Sa
les returns 2,000 Cost of goods sold 233,200 Admin. s a la ries expense 18,200 S a les s a la ries expense 29,600 Insur a nce expense 1,200 Rent expense 8,100 Supplies expense 1,000 Advertising expense 13,300
390,600$ 390,600$
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Step 1:Step 1: Close Credit Balances inT emporary Accounts to Income
Summary.
323,800 Income Summary
Dr. Cr.Dec. 31 S a les 323,800
Income summ a ry 323,800 To close credit balancesin temporary accounts
Ba rton Comp a nyAdjusted Tri a l B a la nce
December 31, 2011
S a la ries p a ya ble 1,000 Owner's C a pit a l 42,400 Withdr a w a ls 4,000 S a les 323,800 S a les discounts 4,300 S a les returns 2,000 Cost of goods sold 233,200 Admin. s a la ries expense 18,200 S a les s a la ries expense 29,600 Insur a nce expense 1,200 Rent expense 8,100
Supplies expense 1,000 Advertising expense 13,300
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Step 2:Step 2: Close Debit Balances inT emporary Accounts to Income
Summary.
310,900 323,800
12,900
Income Summary
Dr. Cr.
De c. 31 Incom e Sum m a ry 310,900
S a les Discounts 4,300
S a les Returns 2,000
Cost of Goods Sold 233,200 Adm. S a l a ries Expense 18,200
S a les S a l a ries Expense 29,600
Insur a nce Expense 1,200
Rent Expense 8,100
Supplies Expense 1,000
Advertis ing Expense 13,300 To close debit balances in temporary accounts
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Step 3:Step 3: Close Income Summary toOwners Capital
310,900 323,800 12,900
-0-
Income S ummary
Dr. Cr.Dec. 31 Income Summ a ry 12,900
Owner's C a pit a l 12,900 To close Income Summary account
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Step 4:Step 4: Close W ithdrawals to OwnersCapital
Dr. Cr.Dec. 31 Owner's C a pit a l 4,000
Withdr a w a ls 4,000 To cl ose the wi thdr a wa l s a ccount
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Income Statement Formats
MultipleMultiple- -StepStep
SingleSingle- -StepStep
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Multiple-Step Income Statement
Ba rton Comp a nyIncome St a tement
For Ye a r Ended December 31, 2011
S a les 323,800$Less: S a les discounts 4,300$
S a les returns 2,000 6,300
Net s a les 317,500$Cost of Goods Sold 233,200 Gross profit from s a les 84,300$Oper a ting expenses:
Selling expenses:S a la ries expense 29,600$Advertising expense 13,300 42,900$
Gener a l a nd a dministr a tive expenses:Adm. s a la ries expense 18,200$Insur a nce expense 1,200 Rent expense 8,100 Supplies expense 1,000 28,500
Tot a l oper a ting expenses 71,400 Net income 12,900$
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Single-Step Income Statement
Ba rton Comp a nyIncome St a tement
For Ye a r Ended December 31, 2011Net s a les 317,500$Cost of goods sold 233,200$Oper a ting expenses 71,400
Tot a l expense 304,600 Net income 12,900$
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Balance Sheet
Ca sh 10,200$ Accounts p a ya ble 1,200$M erchandise Inventory 1,200 Notes p a ya ble 4,000 Equipment 16,000 Tot a l l ia bilities 5,200
EquityOwner's C a pit a l 22,200 Tot a l a ssets 27,400$ Tot a l l ia bilities a nd equity 27,400$
Assets Li a bilities
M erch a ndising Comp a ny
Ba
la
nce SheetDecember 31, 2011
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Acid-T est Ratio
A common rule of thumb is the acid-test ratio should have avalue of at least 1.0 to conclude a company is unlikely toface liquidity problems in the near future.
=Quick AssetsQuick Assets
Current LiabilitiesCurrent LiabilitiesAcidAcid--TestTest
RatioRatio
AcidAcid--TestTestRatioRatio ==
Cash + SCash + S--T Investments + ReceivablesT Investments + ReceivablesCurrent LiabilitiesCurrent Liabilities
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G ross Margin Ratio
Percent a ge of
dolla
r sa
lesa va ila ble to cover expenses a ndprovide a profit.
Ye a r Percent2005 30.2%2004 28.8%2003 27.7%2002 29.8%2001 30.7%
26.0%
27.0%
28.0%
29.0%
30.0%
31.0%
200 5 2004 2003 2002 2001
GrossMarginRatio
Net Sales - Cost of Goods SoldNet Sales
=
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End of Chapter 4