Accounting for

Merchandising Activities

C H A P T E R 5

Part 2

Learning Objectives1. Describe merchandising and identify and

explain the important income statement and balance sheet components for a merchandising company. (LO1)

2. Describe both periodic and perpetual merchandise inventory systems. (LO2)

3. Analyze and record transactions for merchandise purchases and sales using a perpetual system. (LO3)

5-2

Learning Objectives4. Prepare adjustments for a merchandising

company. (LO4)5. Define, prepare, and use merchandising

income statements. (LO5)6. Prepare closing entries for a

merchandising company. (LO6)

5-3

Learning Objectives7. Record and compare merchandising

transactions using both periodic and perpetual inventory systems.

(Appendix 5A) (LO7)8. Explain and record Provincial Sales Tax

(PST) , Goods and Services Tax (GST) and Harmonized Sales Tax (HST).

(Appendix 5B) (LO8)

5-4

Primary ObjectiveFinancial statements are intended to provide useful information for decision-making

Accurate Clear Timely

5-5

Income Statement Formats

Typical formats are:• Single-Step• Multiple-Step• Classified, Multiple-Step

LO 5

5-6

Revenues:Sales, Net 314,700$ Rent revenue 2,800 Total revenues 317,500

Expenses:Cost of goods sold 230,400$ Selling expense 42,100 General and administrative expense 29,300 Interest expense 360 Total expenses 302,160

Net income 15,340$

Z-MartIncome Statement

For Year Ended December 31, 2011

Single- step

Format

(for external reporting)

LO 5

Single Step: Revenues minus Expenses5-7

Sales, net 314,700$ Cost of goods sold 230,400 Gross profit 84,300 Operating expenses:

Sales salaries expense 43,800$ Advertising expense 11,300 Rent expense 9,000 Depreciation expense 3,700 Supplies expense 3,000 Insurance expense 600 Total operating expense 71,400

Income from operations 12,900$ Other revenues and expenses:

Rent revenue 2,800 Interest expense (360) 2,440

Net income 15,340$

Z-MartIncome Statement

For Year Ended December 31, 2011

Multi-step Format

(for external reporting)

LO 5

5-8

Gross Profit Ratio

• Expressed as a percentage of net sales• May be tracked over time and/or compared

to similar businesses• May be calculated for whole business,

departments, products

Gross profit

Net salesGross

profit ratio = X 100%

LO 5

5-9

Sales 321,000$ Less: Sales discounts 4,300$

Sales returns and allowances 2,000 6,300 Net sales 314,700 Cost of goods sold 230,400 Gross profit 84,300 Operating expenses: Selling expenses:

Sales salaries expense 18,500$ Advertising expense 11,300 Rent expense, selling space 8,100 Depreciation expense, store equipment 3,000 Store supplies expense 1,200

Total selling expenses 42,100$ General and administrative expenses:

Office salaries expense $25,300Office supplies expense 1,800 Rent expense,office space 900 Depreciation expense, office equipment 700 Insurance expense 600 Total general and administive expenses 29,300

Total operating expenses 71,400

Income from operations 12,900$ Other revenues and expenses:

Rent revenue 2,800$ Interest expense (360) 2,440

Net income 15,340$

Z-MartIncome Statement

For Year Ended December 31, 2011

Classified Multi-step

Format

(for internal reporting)

LO 5

Practice: QS 5-13

5-10

Operating expenses are classified into two categories: selling expenses and cost of goods sold.

A) TrueB) False

5-11

Adjustments: Perpetual Inventory

• Perpetual systems keep a running total of inventory levels by recording sales and purchase transactions.

• Occasional adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory).

LO 4

5-12

Merchandising Cost Flow

Beginning Merchandise

Inventory

Merchandise available for

sale

Ending Merchandise

inventory

Cost of goodssold

Net cost ofPurchases

LO 1

5-13

Inventory per accounting records: $21,250

Inventory per physical count: $21,000

Difference (shrinkage) $250

Adjustment required:

Perpetual System–Example

Dec.31 Cost of Goods Sold 250 Merchandise Inventory 250

To record inventory shrinkage revealed by physical count.

LO 4

5-14

• Similar for merchandising and service companies

• Merchandising companies have additional temporary accounts that must be closed

These include:• Sales• Sales Returns & Allowances• Sales Discounts• Cost of Goods Sold

Closing Entries - Perpetual System

LO 6

5-15

Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold are closed to Income Summary with debits.

A) TrueB) False

5-16

Perpetual systems

Merchandise Inventory is updated after each sale or purchase.

Periodic systems

Merchandise Inventory is updated at the end of the period based on a physical count.

Appendix 5A:Periodic and Perpetual Merchandise

Inventory Systems Compared

LO 7

5-17

Purchases 1,200 Merchandise Inv. 1,200

Accounts Payable 1,200 Accounts Payable 1,200

Purchase of Merchandise

Return of Merchandise

Accounts Payable 300 Accounts Payable 300

Purchase Returns 300 Merchandise Inv. 300

Periodic System Perpetual System

Appendix 5A - Example

LO 7

5-18

Accounts Payable 900 Accounts Payable 900

Purchase Discounts 18 Merchandise Inv. 18

Cash 882 Cash 882

Purchase Discount Taken (2/10, n30)

Transportation Charges

Transportation-in 75 Merchandise Inv. 75

Accounts Payable 75 Accounts Payable 75

Periodic System Perpetual System

Appendix 5A - Example

LO 7

5-19

Merchandising Cost Flow

Beginning Merchandise

Inventory

Merchandise available for

sale

Ending Merchandise

inventory

Cost of goodssold

Net cost ofPurchases

LO 1

5-20

Cost of Goods Sold

Beginning Inventory

Plus: Purchases

Plus: Transportation and other costs

Minus: Returns, Discounts and Allowances

Equals: Goods AVAILABLE for Sale

Minus: Ending Inventory

Equals: Cost of Goods Sold

Periodic System

5-21

Practice:QS 5-20

The periodic inventory system is superior to the perpetual inventory system in preventing shrinkage.

A) TrueB) False

5-22

Accounts Receivable 2,400 Accounts Receivable 2,400

Sales 2,400 Sales 2,400

Cost of Goods Sold 1,600

Merchandise Inv. 1,600

Sale of merchandise

Periodic System Perpetual System

Appendix 5A - Example

LO 7

Us Customer

5-23

Sales Returns 800 Sales Returns 800

Accounts Receivable 800 Accounts Receivable 800

Merchandise Inv. 600

Cost of Goods Sold 600

Sales Return

Periodic System Perpetual System

Appendix 5A - Example

LO 7

Us Customer

5-24

Doug's WholesaleIncome Statement

30-Apr-11

Sales (net) $ 125,000 Cost of Goods Sold:

Beginning Inventory $ 14,000 Purchases 78,000Freight charges 6,000Returns and allowances 1,250 Goods available for sale 96,750 Ending Inventory 16,500 Cost of Goods Sold 80,250

Gross Profit 44,750 Operating Expenses 37,900 Net Income $ 6,850

Practice:QS 5-16, 5-17

5-25

Practice:QS 5-16, 5-17