Accounting for Merchandising Operations

Chapter 4

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Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition

Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition

04-C1:Describe merchandising

activities and identify income components for a

merchandising company.

2

5- 3

Service organizations sell time to earn revenue.

Examples: Accounting firms and plumbing services

Service organizations sell time to earn revenue.

Examples: Accounting firms and plumbing services

Service Companies vs. Merchandising Companies

3

A merchandiser earns net income by buying and selling merchandise.

C 1

5- 4

Manufacturer Wholesaler Retailer Consumers

Merchandising Companies

Merchandiser

C 14

5- 5

C 1

Reporting Income for a Merchandiser

Merchandising companies sell products to earn revenue.

Examples: sporting goods, clothing, and auto parts stores

5

Exhibits 4.1 &

4.2

04-C2:Identify and explain the

inventory asset and cost flows of a merchandising company.

6

5- 7

Operating Cycle for a Merchandiser

Begins with the purchase of merchandise and ends with the collection of cash from the sale of

merchandise.

C 27

Exhibit 4.3

5- 8

Inventory Systems

C 28

Exhibit 4.4

5- 9

Perpetual systems continually update

accounting records for merchandising transactions

Periodic systemsaccounting records

relating to merchandise transactions are updated only at the end of the accounting period

C 2

Inventory Systems

9

04-P1:Analyze and record

transactions for merchandise purchases using a perpetual

system.

10

Merchandise Purchases

On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash.

P111

Trade Discounts

P112

Exhibit 4.5

5- 13

Purchase Discounts

A deduction from the invoice price granted to induce early payment of the amount due.

P113

Exhibit 4.6

5- 14

2/10, n/30Discount Percent

Number of Days

Discount Is Available

Otherwise, Net (or All) Is Due in 30

Days

CreditPeriod

Purchase Discounts

P114

5- 15

On November 2, Z-Mart purchased $1,200 of merchandise inventory on account,

credit terms are 2/10, n/30.

Purchase Discounts

P115

5- 16

On November 12, Z-Mart paid the amount due on the purchase of November 2.

Purchase Discounts

P116

Since payment was made within the discount period, a $24 discount ($1,200 x 2%) is taken.

5- 17

Purchase Discounts

After we post these entries, the accounts involved look like these:

P117

5- 18

Purchase Returns and Allowances

Purchase Return . . . Merchandise returned by the purchaser to the

supplier.

Purchase Allowance . . . A reduction in the cost of defective or

unacceptable merchandise received by a purchaser from a supplier.

Purchase Return . . . Merchandise returned by the purchaser to the

supplier.

Purchase Allowance . . . A reduction in the cost of defective or

unacceptable merchandise received by a purchaser from a supplier.

P118

5- 19

On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from

Trex for defective merchandise.

Purchase Returns and Allowances

P119

5- 20

Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes

the 2% discount only on the $900 remaining balance.

Purchase Returns and Allowances

P120

5- 21

Transportation Costs and Ownership Transfer

P121

Exhibit 4.7

5- 22

Transportation Costs

Z-Mart purchased merchandise on terms of FOB shipping point. The transportation

charge is $75.

P122

Since freight terms were FOB shipping point, Z-mart is responsible for the freight charges. We increase Merchandise Inventory for the cost of the freight.

5- 23

Accounting for Merchandise

P123

Exhibit 4.8

NEED-TO-KNOW (4-1)

Oct. 1

Oct. 3 Paid $30 cash for freight charges from UPS for the October 1 purchase.Oct. 7 Returned 50 defective units from the October 1 purchase and received full credit.Oct. 11 Paid the amount due from the October 1 purchase, less the return on October 7.Oct. 31

Prepare journal entries to record each of the following purchases transactions of a merchandising company. Assume a perpetual inventory system.

Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1.

Assume the October 11 payment was never made and, instead, payment of the amount due on the October 1 purchase, less the return on October 7, occurred on October 31.

P1

P124

NEED-TO-KNOW (4-1)Oct. 1

Oct. 3 Paid $30 cash for freight charges from UPS for the October 1 purchase.Oct. 7 Returned 50 defective units from the October 1 purchase and received full credit.Oct. 11 Paid the amount due from the October 1 purchase, less the return on October 7.

Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1.

Oct. 1 500 Oct. 1 500Oct. 3 30 Oct. 7 200

Oct. 7 200 Oct. 11 300Oct. 11 6

Oct. 31 324

Date Debit CreditOct. 1 Merchandise inventory (125 units @ $4) 500

Accounts payable 500

Oct. 3 Merchandise inventory 30Cash 30

Oct. 7 Accounts payable (50 units @ $4) 200Merchandise inventory (50 units @ $4) 200

Oct. 11 Accounts payable 300Merchandise inventory ($300 x .02) 6Cash 294

General Journal

Merchandise inventory Accounts payable

P125

NEED-TO-KNOWOct. 1

Oct. 3 Paid $30 cash for freight charges from UPS for the October 1 purchase.Oct. 7 Returned 50 defective units from the October 1 purchase and received full credit.

Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1.

Oct. 31 Assume the October 11 payment was never made and, instead, payment of the amount due on the October 1 purchase, less the return on October 7, occurred on October 31.

Oct. 1 500 Oct. 1 500Oct. 3 30 Oct. 7 200

Oct. 7 200 Oct. 31 300

Oct. 31 330

Date Debit CreditOct. 1 Merchandise inventory (125 units @ $4) 500

Accounts payable 500

Oct. 3 Merchandise inventory 30Cash 30

Oct. 7 Accounts payable 200Merchandise inventory (50 units @ $4) 200

Oct. 31 Accounts payable 300Cash 300

General Journal

Merchandise inventory Accounts payable

P126

04-P2:Analyze and record

transactions for merchandise sales using a perpetual system.

27

5- 28

Accounting for Merchandise Sales

P228

Exhibit 4.9

5- 29

Sales of Merchandise

P2

Each sales transaction for a seller of merchandise involves two parts:

Revenue received in the form of an

asset from a customer.

Recognition of the cost of merchandise sold to a customer.

29

5- 30

Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of

$1,600.

Sales of Merchandise

P230

Two entries are required:1) Records the revenue 2) Records the cost

5- 31

Sales Discounts

P2

Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future

collection efforts.

31

5- 32

Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.

Sales Discounts

P2

Option 1: The account was paid in full within the 60-day period.

Option 2: The account was paid in full within the 10-day discount period.

32

5- 33

Sales Returns and Allowances

P2

Sales returns and allowances usually involve dissatisfied customers and the possibility of

lost future sales.

Sales returns refer to merchandise that customers return to

the seller after a sale.

Sales allowances refer to reductions in the selling price of

merchandise sold to customers.

33

5- 34

Recall Z-Mart’s sale for $2,400 that had a cost of $1,600. Assume the customer returns part of the merchandise. The

returned items sell for $800 and cost $600.

Sales Returns and Allowances

P234

Two entries are required:1) Records the reduction in revenue 2) Records the return of goods to

inventory

5- 35

Assume that $800 of the merchandise Z-Mart sold on November 3 is defective but the buyer decides to keep it

because Z-Mart offers a $100 price reduction.

Sales Allowances

P235

One entry is required:1) Records the reduction in revenue

Contra Revenue account

NEED-TO-KNOW (4-2)

Jun. 1

Jun. 7

Jun. 8

Jun. 11

The customer returns 20 units because those units did not fit the customer’s needs. The seller restores those units to its inventory.The customer discovers that 30 units are damaged but are still of some use and, therefore, keeps the units because the seller sends the buyer a credit memorandum for $90 to compensate for the damage.

Prepare journal entries to record each of the following sales transactions of a merchandising company. Assume a perpetual inventory system.

Sold 500 units of merchandise to a customer for $14 per unit under credit terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The merchandise had cost $10 per unit.

The customer discovers that 10 units are the wrong color, but keeps 8 of these units because the seller sends a $12 credit memorandum to compensate.The customer returns the remaining 2 units to the seller. The seller restores the 2 returned units to its inventory

P236

NEED-TO-KNOW (4-2)Jun. 1

Jun. 7

Date Debit CreditJun. 1 Accounts receivable 7,000

Sales (500 @ $14) 7,000

Jun. 1 Cost of goods sold (500 @ $10) 5,000Merchandise inventory 5,000

Jun. 7 Sales returns and allowances (20 @ $14) 280Accounts receivable 280

Jun. 7 Merchandise inventory (20 @ $10) 200Cost of goods sold 200

General Journal

The customer returns 20 units because those units did not fit the customer’s needs. The seller restores those units to its inventory.

Sold 500 units of merchandise to a customer for $14 per unit under credit terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The merchandise had cost $10 per unit.

P237

NEED-TO-KNOW (4-2)Jun. 8

Jun. 11

The customer discovers that 30 units are damaged but are still of some use and, therefore, keeps the units because the seller sends the buyer a credit memorandum for $90 to compensate for the damage.The customer discovers that 10 units are the wrong color, but keeps 8 of these units because the seller sends a $12 credit memorandum to compensate.The customer returns the remaining 2 units to the seller. The seller restores the 2 returned units to its inventory

Date Debit CreditJun. 1 Accounts receivable 7,000

Sales (500 @ $14) 7,000

Jun. 01 Cost of goods sold (500 @ $10) 5,000Merchandise inventory 5,000

Jun. 07 Sales returns and allowances (20 @ $14) 280Accounts receivable 280

Jun. 07 Merchandise inventory (20 @ $10) 200Cost of goods sold 200

Jun. 08 Sales returns and allowances 90Accounts receivable 90

Jun. 11 40Accounts receivable 40

Jun. 11 Merchandise inventory (2 @ $10) 20Cost of goods sold 20

General Journal

Sales returns and allowances ($12 + (2 @ $14))

P238

NEED-TO-KNOW (4-2)

Date Debit CreditJun. 1 Accounts receivable 7,000

Sales (500 @ $14) 7,000

Jun. 01 Cost of goods sold (500 @ $10) 5,000Merchandise inventory 5,000

Jun. 07 Sales returns and allowances (20 @ $14) 280Accounts receivable 280

Jun. 07 Merchandise inventory (20 @ $10) 200Cost of goods sold 200

Jun. 08 Sales returns and allowances 90Accounts receivable 90

Jun. 11 40Accounts receivable 40

Jun. 11 Merchandise inventory (2 @ $10) 20Cost of goods sold 20

General Journal

Sales $7,000Sales returns and allowances $410Sales discounts 0 (410)Net sales 6,590Cost of goods sold 4,780Gross profit on sales $1,810

Partial income statement

Sales returns and allowances ($12 + (2 @ $14))

P239

04-P3:Prepare adjustments and close accounts for a merchandising

company.

40

Merchandising Cost Flow in the Accounting Cycle

P341

Exhibit 4.10

5- 42

Adjusting Entries for Merchandisers

P3

A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of

merchandise, including theft and deterioration.

42

5- 43

Closing Entries for Merchandisers

P343

Exhibit 4.11

NEED-TO-KNOW (4-3)

Merchandise inventory $756 Sales returns and allowances $130Retained Earnings 2,306 Cost of goods sold 2,100Dividends 140 Depreciation expense 206Sales 3,204 Salaries expense 650Sales discounts 94 Other operating expenses 100

Debit CreditMerchandise inventory $756Retained Earnings $2,306Dividends 140Sales 3,204Sales discounts 94Sales returns and allowances 130Cost of goods sold 2,100Depreciation expense 206Salaries expense 650Other operating expenses 100

A merchandising company’s ledger on May 31, its fiscal year-end, includes the following selected accounts that have normal balances (it uses the perpetual inventory system). A physical count of its May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a) Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in temporary revenue and expense accounts.

P344

NEED-TO-KNOW (4-3)

Debit CreditMerchandise inventory $756Retained Earnings $2,306Dividends 140Sales 3,204Sales discounts 94Sales returns and allowances 130Cost of goods sold 2,100Depreciation expense 206Salaries expense 650Other operating expenses 100

A merchandising company’s ledger on May 31, its fiscal year-end, includes the following selected accounts that have normal balances (it uses the perpetual inventory system). A physical count of its May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a) Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in temporary revenue and expense accounts.

Date Debit CreditMay 31 Cost of Goods Sold 38

Merchandise inventory ($756 - $718) 38

General Journal

$718

2,138

P345

To adjust for inventory shrinkage.

NEED-TO-KNOW (4-3)Debit Credit

Merchandise inventory $756Retained Earnings $2,306Dividends 140Sales 3,204Sales discounts 94Sales returns and allowances 130Cost of goods sold 2,100Depreciation expense 206Salaries expense 650Other operating expenses 100

$718

2,138

Date Debit CreditMay 31 Sales 3,204

Income Summary 3,204

May 31 Income Summary 3,318Sales discounts 94Sales returns and allowances 130Cost of Goods Sold ($2,100 + $38) 2,138Depreciation expense 206Salaries expense 650Other operating expenses 100

General Journal

P346

04-P4:Define and prepare multiple-step and single-step income

statements.

47

5- 48

P448

Exhibit 4.13

5- 49

Single-Step Income Statement

P449

Exhibit 4.14

5- 50

Classified Balance Sheet

HighlyLiquid

LessLiquid

P450

Exhibit 4.15

5- 51

51

Merchandise inventory 820$ Other (noninventory) assets 2608total liabilities 500$ Common stock 400Retained earnings 1691Dividends 160Sales 4512Sales discounts 45Sales returns and allowances 240Cost of goods sold 1490Sales salaries expense 640Rent expense--Selling space 160Store supplies expense 30Advertising expense 260Office salaries expense 570Rent expense--Office space 72Office supplies expense 8Totals 7,103$ 7,103$

Debit Credit

Prepare a multiple-step income statement that includes separate categories for selling expenses and for general and administrative expenses. (b) Prepare a single-step income statement that includes these expense categories: cost of goods sold, selling expenses, and general and administrative expenses.

NEED-TO-KNOW

P4

Assume Target’s adjusted trial balance on April 30, 2015, its fiscal year-end, appears below.

NEED-TO-KNOW

Sales $4,512Less: Sales discounts $45

Sales returns and allowances 240 285Net sales 4,227Cost of goods sold 1,490Gross profit 2,737ExpensesSelling expensesSales salaries expense 640Rent expense - Selling space 160Store supplies expense 30Advertising expense 260Total selling expenses 1,090

General and administrative expensesOffice salaries expense 570Rent expense - Office space 72Office supplies expense 8Total general and administrative expenses 650

Total expenses 1,740Net income $997

TARGET

For Year Ended April 30, 2015Income Statement

P452

Merchandise inventory 820$ Other (noninventory) assets 2608total liabilities 500$ Common stock 400Retained earnings 1691Dividends 160Sales 4512Sales discounts 45Sales returns and allowances 240Cost of goods sold 1490Sales salaries expense 640Rent expense--Selling space 160Store supplies expense 30Advertising expense 260Office salaries expense 570Rent expense--Office space 72Office supplies expense 8Totals 7,103$ 7,103$

Debit Credit

NEED-TO-KNOW

Sales $4,512 Net sales $4,227Less: Sales discounts $45 Expenses

Sales returns and allowances 240 285 Cost of goods sold 1,490Net sales 4,227 Selling expenses 1,090Cost of goods sold 1,490 General and administrative expenses 650Gross profit 2,737 Total expenses 3,230Expenses Net income $997Selling expensesSales salaries expense 640Rent expense - Selling space 160Store supplies expense 30Advertising expense 260Total selling expenses 1,090

General and administrative expensesOffice salaries expense 570Rent expense - Office space 72Office supplies expense 8Total general and administrative expenses 650

Total expenses 1,740Net income $997

TARGET

For Year Ended April 30, 2015Income Statement

TARGETIncome Statement

For Year Ended April 30, 2015

P453

5- 54

Global ViewAccounting for Merchandise Purchases and Sales

Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales.

Income Statement PresentationBoth U.S. GAAP and IFRS income statements begin with the net sales or net revenues (top line) item. For merchandisers and manufacturers, this

is followed by cost of goods sold. The presentation is similar for the remaining items with the following differences.

1. Order of expenses2. Separate disclosures3. Presentation of expenses4. Operating Income5. Alternative income

54

04-A1:Compute the acid-test ratio and explain its use to assess

liquidity.

55

5- 56

A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to

face liquidity problems in the near future.

A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to

face liquidity problems in the near future.

= Quick assets

Current liabilitiesAcid-test

ratio

Acid-testratio

= Cash + short term investments+ Receivables

Current liabilities

Acid-Test (Quick) Ratio

A156

Exhibit 4.16

5- 57

JCPenney’sAcid Test and Current Ratios

A157

Exhibit 4.17

04-A2:Compute the gross margin ratio and explain its use to

assess profitability.

58

5- 59

Percentage of dollar sales available to

cover expenses and provide a profit.

Grossmarginratio

Net sales - Cost of goods sold Net sales

=

Gross Margin Ratio

A259

Exhibit 4.18

JC Penny’sGross Margin Ratio

60

Exhibit 4.19

A2

04-P5: (Appendix 4A)Record and compare

merchandising transactions using both periodic and

perpetual inventory systems.

61

5- 62

Appendix 4A: Periodic Inventory System

P5

A periodic inventory

system requires updating the

inventory account only at

the end of a period to reflect the quantity and cost of both the goods available and the goods

sold.

(a)

(b)

(c)

(d)

(e)

(f)

(g)

62

5- 63

Appendix 4A: Comparison of Adjusting and Closing Entries--Periodic vs. Perpetual Inventory System

P563

Exhibit 4A.1

5- 64

04-P5: (Appendix 4B)The worksheet--perpetual

inventory systems.

64

5- 65

Appendix 4B: Work Sheet—Perpetual System

P565

Exhibit 4B.1

5- 66

End of Chapter 4

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