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Learning Objectives
Power Notes
1. Nature of Merchandising Business2a. Accounting for Purchases2b. Accounting for Sales2c. Transportation Costs2d. Merchandise Transactions3. Merchandising Chart of Accounts4. Merchandising Income Statement5. Merchandising Accounting Cycle6. Financial Analysis and Interpretation
Chapter F5
Accounting for Merchandising Businesses Accounting for Merchandising Businesses
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• Nature of Merchandising Businesses• Inventory Costs and Relationships• Perpetual Inventory Systems• Merchandising Transactions• Merchandising Chart of Accounts• Merchandising Financial Statements• Ratio of Net Sales to Assets
Slide # Power Note Topics
368
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Power NotesChapter F5
Accounting for Merchandising Businesses Accounting for Merchandising Businesses
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Merchandising and InventoryMerchandising and Inventory
Merchandising involves selling inventory
Inventory is usually an important asset
Inventory must be accounted for periodically or perpetually
Traditional periodic method is often being replaced by perpetual inventory accounting
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Income Statement ComparisonIncome Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse. sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
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Income Statement ComparisonIncome Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse. sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
75% of revenues
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LIABILITIES
OWNER’SEQUITY
REVENUES
ASSETS
COSTS &EXPENSES
Inventory Costs and RelationshipsInventory Costs and Relationships
MerchandiseMerchandiseInventoryInventory
Cost ofCost ofMdse. SoldMdse. Sold
If merchandise inventory is . . . . . . .
Cost of merchandise sold is . . . . . .
Gross profit and net income are . . .
Ending owner’s equity is . . . . . . . . .
If merchandise inventory is . . . . . . .
Cost of merchandise sold is . . . . . .
Gross profit and net income are . . .
Ending owner’s equity is . . . . . . . . .
overstated
understated
overstated
overstated
Net Income
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LIABILITIES
OWNER’SEQUITY
REVENUES
ASSETS
COSTS &EXPENSES
Inventory Costs and RelationshipsInventory Costs and Relationships
MerchandiseMerchandiseInventoryInventory
Cost ofCost ofMdse. SoldMdse. Sold
If merchandise inventory is . . . . . . .
Cost of merchandise sold is . . . . . .
Gross profit and net income are . . .
Ending owner’s equity is . . . . . . . . .
If merchandise inventory is . . . . . . .
Cost of merchandise sold is . . . . . .
Gross profit and net income are . . .
Ending owner’s equity is . . . . . . . . .
understated
overstated
understated
understated
Net Income
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Continuous determination of inventory value
Continuous determination of gross profit
Affordable with computers, scanners, and bar codes on most products
Perpetual inventory accounting provides management controls
Managers know which items are selling fastest and the profit margin on those items
Advantages of Using Perpetual InventoryAdvantages of Using Perpetual Inventory
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Cash 4,000Accts. Receivable 4,000
Accts. Receivable 12,500Sales 12,000Cash 500
Cost of Mdse. Sold 7,200Mdse. Inventory 7,200
Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Cash 12,260Sales Discounts 240
Accts. Receivable 12,500
Accts. Payable 4,000Cash 4,000
Mdse. Inventory 12,500
Accts. Payable 12,500
Accts. Payable 12,500Mdse. Inventory 240Cash 12,260
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).
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Perpetual Inventory SystemPerpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse. Inventory 5,000Accts. Payable 5,000
Mdse. Inventory
5,000AA
Cost of Mdse. Sold
AA
In a perpetual system, Mdse. Inventory is an active asset account.All changes are recorded as they occur.
Purchase on account
Return of merchandise
AABB
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NetSolutionsIncome Statement (Multiple-Step)
For Year Ended December 31, 2004
Continued
Revenue from sales:Sales $ 720,185Less:Sales returns and allow. $ 6,140
Sales discounts 5,790 11,930Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
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NetSolutionsMerchandising Chart of Accounts
Income Statement Accounts
600 Other Income610 Rent Revenue611 Interest Revenue
700 Other Expense710 Interest Expense
400 Revenue410410 SalesSales411411 Sales Returns and Sales Returns and
AllowancesAllowances412412 Sales DiscountsSales Discounts
500 Costs and Expenses510510 Cost of Merchandise SoldCost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—
Store Equipment523 Transportation Out523 Transportation Out529 Misc. Selling Expense530 Office Salaries Expense531 Rent Expense532 Depreciation Expense—
Office Equipment533 Insurance Expense534 Office Supplies Expense539 Misc. Admin. Expense
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Perpetual Inventory SystemPerpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse. Inventory 5,000Accts. Payable 5,000
Accts. Payable 1,000 Mdse. Inventory 1,000
Mdse. Inventory
5,000AA
Cost of Mdse. Sold
1,000AA BB
BB4,000BalBal
In a perpetual system, Mdse. Inventory is an active asset account.All changes are recorded as they occur.
Purchase on account
Return of merchandise
Sale of merchandise
AABB
CC
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NetSolutionsIncome Statement (Single-Step)
For Year Ended December 31, 2004
Revenues:Net sales $708,255Interest revenue 3,800Rent revenue 600
Total revenues $712,655Expenses:
Cost of merchandise sold $525,305Selling expenses 74,620Administrative expenses 34,890Interest expense 2,440
Total expenses 637,255
Net income $ 75,400
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NetSolutionsBalance Sheet
December 31, 2004
Continued
AssetsCurrent assets:
Cash $ 52,950Notes receivable 35,000Accounts receivable 55,880Interest receivable 200Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650
Total current assets $209,310
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NetSolutionsBalance Sheet
December 31, 2004
AssetsProperty, plant, and equipment:
Land $ 20,000Store equipment $ 27,100 Less accum. depreciation 5,700 21,400
Office equipment $ 15,570 Less accum. depreciation 4,720 10,850Total property, plant, and
equipment 52,250
Total assets $261,560
Continued
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NetSolutionsBalance Sheet
December 31, 2004
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 2001) 20,000
Total liabilities $ 50,360 Owner’s Equity
Capital stock $ 25,000Retained earnings 186,200 211,200
Total liabilities and owner’s equity $261,560
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Perpetual Inventory SystemPerpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse. Inventory 5,000Accts. Payable 5,000
Accts. Payable 1,000 Mdse. Inventory 1,000
Accts. Receivable 3,250Sales 3,250
Cost of Mdse. Sold 2,500Mdse. Inventory 2,500
Mdse. Inventory
5,000AA
Cost of Mdse. Sold
2,500
Purchase on account
Return of merchandise
Sale of merchandise
1,000AA BB
BB
CC
CC2,500
1,500
CC
BalBal
AABB
CC
In a perpetual system, Mdse. Inventory is an active asset account.All changes are recorded as they occur.
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Perpetual Inventory SystemPerpetual Inventory System
General Journal
Description Debit Credit
General Ledger
Mdse. Inventory
5,000AA
Cost of Mdse. Sold
2,500
Purchase on account
Return of merchandise
Sale of merchandise
1,000AA BB
BB
CC
CC2,500
1,500
CC
BalBal
AABB
CC
In a perpetual system, Mdse. Inventory is an active asset account.All changes are recorded as they occur.
Mdse. InventoryMdse. Inventory 5,0005,000Accts. Payable 5,000
Accts. Payable 1,000 Mdse. Inventory Mdse. Inventory 1,000 1,000
Accts. Receivable 3,250Sales 3,250
Cost of Mdse. Sold 2,500Mdse. InventoryMdse. Inventory 2,5002,500
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Credit Terms, Cash DiscountsCredit Terms, Cash Discounts
Credit Terms: 2/10, n/30Credit Terms: 2/10, n/30
Is invoice paid within 10
days of invoicedate?
Full amount is due within 30 days of
invoice date.NoNo
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2% of invoice amount is
allowed as a cash discount.
Credit Terms, Cash DiscountsCredit Terms, Cash Discounts
Credit Terms: 2/10, n/30Credit Terms: 2/10, n/30
Is invoice paid within 10
days of invoicedate?
YesYes
Full amount is due within 30 days of
invoice date.NoNo
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2% of invoice amount is
allowed as a cash discount.
Credit Terms, Cash DiscountsCredit Terms, Cash Discounts
Credit Terms: 2/10, n/30Credit Terms: 2/10, n/30
Is invoice paid within 10
days of invoicedate?
YesYes
Full amount is due within 30 days of
invoice date.NoNo
Example: Merchandise was purchased for $1,500 with credit terms of 2/10, n/30. Payment within 10 days is calculated as: Invoice $1,500 Less 2% discount 30 Net cost paid $1,470
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Selling and Buying Merchandise InventorySelling and Buying Merchandise Inventory
Description Debit Credit
Accts. Receivable 1,500Sales 1,500
Cost of Mdse. Sold 900Mdse. Inventory 900
Mdse. Inventory 1,470Accts. Payable 1,470
SellerSeller BuyerBuyerDescription Debit Credit
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Jan 22. Payment was made within the discount period.
Recorded at net costRecorded at net cost$1,500 - $30 (discount)$1,500 - $30 (discount)
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Selling and Buying Merchandise InventorySelling and Buying Merchandise Inventory
Description Debit Credit
Accts. Receivable 1,500Sales 1,500
Cost of Mdse. Sold 900Mdse. Inventory 900
Cash 1,470Sales Discounts 30
Accts. Receivable 1,500
Mdse. Inventory 1,470Accts. Payable 1,470
Accts. Payable 1,470Cash 1,470
SellerSeller BuyerBuyerDescription Debit Credit
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Jan 22. Payment was made within the discount period.
Recorded at net costRecorded at net cost$1,500 - $30 (discount)$1,500 - $30 (discount)
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Selling and Buying Merchandise InventorySelling and Buying Merchandise Inventory
Description Debit Credit
Accts. Receivable 1,500Sales 1,500
Cost of Mdse. Sold 900Mdse. Inventory 900
Cash 1,470Sales Discounts 30
Accts. Receivable 1,500
Mdse. Inventory 1,500Accts. Payable 1,500
Accts. Payable 1,500Mdse. Inventory 30Cash 1,470
SellerSeller BuyerBuyerDescription Debit Credit
Jan 12. Merchandise was sold with credit terms of 2/10, n/30.
Jan 22. Payment was made within the discount period.
Recorded at full costRecorded at full cost
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Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Accts. Receivable 5,000Sales 5,000
Cost of Mdse. Sold 3,500Mdse. Inventory 3,500
Mdse. Inventory 5,000Accts. Payable 5,000
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.
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Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Transportation Out 250Cash 250
Mdse. Inventory 5,000Accts. Payable 5,000
No entry.
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 7. Scully Company paid transportation costs of $250, for delivery of merchandise sold to Burton Co.
Accts. Receivable 5,000Sales 5,000
Cost of Mdse. Sold 3,500Mdse. Inventory 3,500
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Accts. Receivable 5,000Sales 5,000
Cost of Mdse. Sold 3,500Mdse. Inventory 3,500
Transportation Out 250Cash 250
Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Sales Ret. & Allow. 1,000Accts Receivable 1,000
Mdse. Inventory 700Cost of Mdse. Sold 700
Mdse. Inventory 5,000Accts. Payable 5,000
No entry.
Accts. Payable 1,000Mdse. Inventory 1,000
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.
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Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Cash 4,000Accts. Receivable 4,000
Accts. Payable 4,000Cash 4,000
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 15. Scully Company received payment from Burton Co. for purchase of July 1.
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Cash 4,000Accts. Receivable 4,000
Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Accts. Receivable 12,500Sales 12,000Cash 500
Cost of Mdse. Sold 7,200Mdse. Inventory 7,200
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200.
Accts. Payable 4,000Cash 4,000
Mdse. Inventory 12,500
Accts. Payable 12,500
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NetSolutionsMerchandising Chart of Accounts
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 Cash111 Notes Receivable112 Accounts Receivable113 Interest Receivable115115 Merchandise InventoryMerchandise Inventory116 Office Supplies117 Prepaid Insurance120 Land123 Store Equipment124 Accumulated Depreciation—
Store Equipment125 Office Equipment126 Accumulated Depreciation—
Office Equipment
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Operating expenses:Selling expenses:
Sales salaries expense $60,030Advertising expense 10,860Depr. expense–store equip. 3,100Miscellaneous selling expense 630 Total selling expenses $ 74,620
Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equip. 2,490Insurance expense 1,910Office supplies expense 610Misc. admin. expenses 760 Total admin. expenses 34,890
Total operating expenses 109,510
Income from operations $ 73,440
Continued
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Other income:Interest revenue $ 3,800Rent revenue 600
Total other income $ 4,400Other expense:
Interest expense 2,440 1,960
Net income $75,400
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Profitability AnalysisProfitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.
Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.
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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 Assets
2003 1992Net sales $1,498,000 $1,200,000Total assets:
Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
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Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets
Use: To assess the effectiveness in the use of assets.
Use: To assess the effectiveness in the use of assets.
Net sales $1,498,000 $1,200,000Total assets:
Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
Ratio of net sales to assetsRatio of net sales to assets 1.4 1.4 1.2 1.2
Profitability Measures — Effective Use of AssetsProfitability Measures — Effective Use of Assets
2003 2002
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This is the last slide in Chapter F5. This is the last slide in Chapter F5.
Power NotesChapter F5
Accounting for Merchandising Businesses Accounting for Merchandising Businesses