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Accounting for Accounting for

Merchandising Merchandising

BusinessesBusinesses

Chapter 6Chapter 6

Learning ObjectivesLearning Objectives

1.1. Distinguish between the activities and Distinguish between the activities and financial statements of service and financial statements of service and merchandising businesses.merchandising businesses.

2.2. Describe and illustrate the accounting for Describe and illustrate the accounting for merchandise transactions.merchandise transactions.

3.3. Describe and illustrate the financial Describe and illustrate the financial statements of a merchandising business.statements of a merchandising business.

4.4. Describe the adjusting and closing process Describe the adjusting and closing process for a merchandising business.for a merchandising business.

5.5. Describe and illustrate the use of the ratio of Describe and illustrate the use of the ratio of net sales to assets in evaluating a net sales to assets in evaluating a company’s operating performance.company’s operating performance.


Learning Learning Objective

ObjectiveDistinguish between the activities

Distinguish between the activities

and financial statements of

and financial statements of

service and merchandising

service and merchandising businesses.businesses.

11

Service Business

Fees earned

$XXXOperating expenses

–XXXNet income

$XXX

Nature of Merchandising Nature of Merchandising BusinessesBusinesses

Merchandising Business

Sales $XXXCost of Merchandise Sold –XXXGross Profit $XXXOperating Expenses –XXXNet Income $XXX

Nature of Merchandising Nature of Merchandising BusinessesBusinesses

Nature of Merchandising Nature of Merchandising BusinessesBusinesseso When merchandise is sold, the revenue is When merchandise is sold, the revenue is

reported as sales, and its cost is reported as sales, and its cost is recognized as an expense called recognized as an expense called cost of cost of merchandisemerchandise soldsold..

GrossProfit

GrossProfit

Nature of Merchandising BusinessesNature of Merchandising Businesses

o The cost of merchandise sold is subtracted The cost of merchandise sold is subtracted from sales to arrive at from sales to arrive at gross profitgross profit. It is the . It is the profit before deducting operating profit before deducting operating expenses.expenses.

Nature of Merchandising Nature of Merchandising BusinessesBusinesseso Merchandise on hand (not sold) at the end Merchandise on hand (not sold) at the end

of an accounting period is called of an accounting period is called merchandise inventorymerchandise inventory..

NATURE OF NATURE OF MERCHANDISINMERCHANDISING BUSINESSESG BUSINESSES



ObjectiveDescribe and illustrate the

Describe and illustrate the

accounting for merchandise

accounting for merchandise transactions.transactions.

22

Purchase Transactions Purchase Transactions o If merchandise inventory at the end of the If merchandise inventory at the end of the

period is determined by taking a physical period is determined by taking a physical count of inventory on hand, a count of inventory on hand, a periodicperiodic inventory systeminventory system is being used. is being used.

Purchase TransactionsPurchase Transactionso Under the Under the perpetual inventory systemperpetual inventory system, the , the

amounts of inventory purchased, available amounts of inventory purchased, available for sale, and sold are continuously for sale, and sold are continuously (perpetually) updated in the inventory (perpetually) updated in the inventory records.records.

*

Purchase TransactionsPurchase Transactions

o On January 3, NetSolutions purchased On January 3, NetSolutions purchased merchandise for cash.merchandise for cash.

NOTE: We will assume a perpetual NOTE: We will assume a perpetual inventory system is used.inventory system is used.


o On January 4, NetSolutions purchased On January 4, NetSolutions purchased merchandise on account from Thomas merchandise on account from Thomas Corporation.Corporation.

Credit TermsCredit Termso To encourage the buyer to pay before the To encourage the buyer to pay before the

end of the credit period, the seller may end of the credit period, the seller may offer a discount. Credit terms of 2/10, n/30 offer a discount. Credit terms of 2/10, n/30 are summarized in the next slide (are summarized in the next slide (Exhibit Exhibit 22).).

Purchases DiscountsPurchases Discountso A buyer may receive a discount from the A buyer may receive a discount from the

seller (sales discount) for early payment of seller (sales discount) for early payment of the amount owed. From the buyer’s the amount owed. From the buyer’s perspective, such discounts are called perspective, such discounts are called purchases discountspurchases discounts..


o Alpha Technologies issues an invoice for Alpha Technologies issues an invoice for $3,000 to NetSolutions dated January 5, $3,000 to NetSolutions dated January 5, with terms 2/10, n/30. NetSolutions is with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the trying to determine if it should pay the invoice within the discount period.invoice within the discount period.

Discount of 2% on $3,000 $60.00Interest for 20 days at the rate

of 6% on $2,940 – 9.80Savings from borrowing $50.20

YESYES


o If NetSolutions can borrow cash at an If NetSolutions can borrow cash at an annual interest rate of 6%, should the firm annual interest rate of 6%, should the firm borrow cash to pay the invoice within the borrow cash to pay the invoice within the discount period?discount period?

Purchase Transactions Purchase Transactions

o Alpha Technologies issued an invoice for Alpha Technologies issued an invoice for $3,000 to NetSolutions dated January 5, $3,000 to NetSolutions dated January 5, with terms 2/10, n/30. Based on the with terms 2/10, n/30. Based on the calculation in the previous slide, calculation in the previous slide, NetSolutions pays the amount due, less NetSolutions pays the amount due, less the discount, on January 15.the discount, on January 15.

Discount Not TakenDiscount Not Taken

o Assume that, instead of paying the invoice Assume that, instead of paying the invoice within the discount period, NetSolutions within the discount period, NetSolutions pays the invoice on February 4.pays the invoice on February 4.

Purchases Returns and AllowancesPurchases Returns and Allowances

o A A purchases returnpurchases return involves actually involves actually returning merchandise that is damaged or returning merchandise that is damaged or does not meet the specifications of the does not meet the specifications of the order. From a buyer’s perspective, suchorder. From a buyer’s perspective, such returns are calledreturns are called purchases purchases returns and returns and allowancesallowances..

Debit MemoDebit Memo

o A A debit memorandumdebit memorandum, often called a , often called a debitdebit memomemo, informs the seller of the amount , informs the seller of the amount the buyer proposes to debit to the account the buyer proposes to debit to the account payable due the seller.payable due the seller.

Debit MemoDebit Memo

o NetSolutions records the return of the NetSolutions records the return of the merchandise indicated in the debit memo merchandise indicated in the debit memo in in Exhibit 3Exhibit 3 as follows: as follows:

Merchandise PurchasedMerchandise Purchased

o On May 2, NetSolutions purchased $5,000 On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta of merchandise on account from Delta Data Link, terms 2/10, n/30.Data Link, terms 2/10, n/30.

Merchandise ReturnedMerchandise Returned

o On May 4 , NetSolutions returned $3,000 On May 4 , NetSolutions returned $3,000 of the merchandise purchased from Delta of the merchandise purchased from Delta Data Link.Data Link.

Invoice PaidInvoice Paid

o On May 12, NetSolutions paid for the On May 12, NetSolutions paid for the purchase of May 2 less the return and purchase of May 2 less the return and discount.discount.

Cash SalesCash Sales

o On March 3, NetSolutions sold $1,800 of On March 3, NetSolutions sold $1,800 of merchandise for cash.merchandise for cash.


o Using the perpetual inventory system, the Using the perpetual inventory system, the cost of merchandise sold and the decrease cost of merchandise sold and the decrease in merchandise inventory are also in merchandise inventory are also recorded. The cost of merchandise sold on recorded. The cost of merchandise sold on March 3 is $1,200.March 3 is $1,200.


o Sales made to customers using credit Sales made to customers using credit cards are recorded as cash sales. Assume cards are recorded as cash sales. Assume that NetSolutions paid credit card that NetSolutions paid credit card processing fees of $4,150 on March 31.processing fees of $4,150 on March 31.

Sales on AccountSales on Account

o On March 10, NetSolutions sold On March 10, NetSolutions sold merchandise on account for $18,000. The merchandise on account for $18,000. The cost of merchandise sold was $10,800.cost of merchandise sold was $10,800.

Sales DiscountsSales Discounts

o The terms for when payments for The terms for when payments for merchandise are to be made are called merchandise are to be made are called creditcredit termsterms. If payment is required on . If payment is required on delivery, the terms are cash or net cash. delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount Otherwise, the buyer is allowed an amount of time, known as the of time, known as the creditcredit periodperiod, in , in which to pay.which to pay.

Receipts on AccountReceipts on Account

o On March 19, NetSolutions receives the On March 19, NetSolutions receives the amount due within ten days, so the buyer amount due within ten days, so the buyer deducted $360 ($18,000 x 2%) from the deducted $360 ($18,000 x 2%) from the invoice amount.invoice amount.

Credit MemoCredit Memo

o A A creditcredit memorandummemorandum, often called a , often called a creditcredit memomemo, authorizes a credit to , authorizes a credit to (decreases) the buyer’s account (decreases) the buyer’s account receivable. An example of a credit memo receivable. An example of a credit memo issued by NetSolutions is shown in issued by NetSolutions is shown in Exhibit Exhibit 44 (next slide). (next slide).

Credit MemoCredit Memo

o On April 13, issued Credit Memo No. 321 On April 13, issued Credit Memo No. 321 to Krier Company for merchandise to Krier Company for merchandise returned to NetSolutions. Selling price, returned to NetSolutions. Selling price, $2,250; cost to NetSolutions, $1,600.$2,250; cost to NetSolutions, $1,600.

FreightFreighto If ownership of the merchandise passes to If ownership of the merchandise passes to

the buyer when the seller delivers the the buyer when the seller delivers the merchandise to the freight carrier, the merchandise to the freight carrier, the terms are said to be terms are said to be FOB (free on board) FOB (free on board) shipping pointshipping point..

FreightFreight

o On June 10, NetSolutions buys On June 10, NetSolutions buys merchandise from Magna Data on merchandise from Magna Data on account, $900, terms FOB shipping point account, $900, terms FOB shipping point and pays the shipping cost of $50.and pays the shipping cost of $50.

FreightFreighto If ownership of the merchandise passes to If ownership of the merchandise passes to

the buyer when the buyer receives the the buyer when the buyer receives the merchandise, the terms are said to be merchandise, the terms are said to be FOBFOB (free on board) destination(free on board) destination..

Sale Plus Freight CostSale Plus Freight Cost

o On June 15, NetSolutions sells On June 15, NetSolutions sells merchandise to Kranz Company on merchandise to Kranz Company on account, $700, terms FOB destination. account, $700, terms FOB destination. The cost of the merchandise sold is $480.The cost of the merchandise sold is $480.

Sale Plus Freight CostSale Plus Freight Cost

o On June 15, NetSolutions pays freight of On June 15, NetSolutions pays freight of $40 on the sale of June 15.$40 on the sale of June 15.

Seller Prepays FreightSeller Prepays Freight

o On June 20, NetSolutions sells On June 20, NetSolutions sells merchandise to Planter Company on merchandise to Planter Company on account, $800, terms FOB shipping point. account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which NetSolutions paid freight of $45, which was added to the invoice. The cost of the was added to the invoice. The cost of the merchandise sold is $360. merchandise sold is $360.

Seller Prepays FreightSeller Prepays Freight

FREIGHT FREIGHT TERMSTERMS

FREIGHT FREIGHT TERMSTERMS

SUMMARY: SUMMARY: RECORDING RECORDING

MERCHANDISE MERCHANDISE INVENTORYINVENTORY

DUAL NATURE DUAL NATURE OF OF

MERCHANDISE MERCHANDISE TRANSACTIONS TRANSACTIONS















CHART OF CHART OF ACCOUNTSACCOUNTS

Sales TaxesSales Taxes

o On August 12, merchandise is sold on On August 12, merchandise is sold on account to Lemon Company, $100. The account to Lemon Company, $100. The state has a 6% sales tax.state has a 6% sales tax.

Sales TaxesSales Taxes

o On a regular basis, the seller pays to the On a regular basis, the seller pays to the taxing authority (state) the amount of the taxing authority (state) the amount of the sales taxes collected.sales taxes collected.

Trade DiscountsTrade Discountso When wholesalers offer special discounts When wholesalers offer special discounts

to certain classes of buyers who order to certain classes of buyers who order large quantities, these discounts are called large quantities, these discounts are called tradetrade discountsdiscounts..



ObjectiveDescribe and illustrate the

Describe and illustrate the financial statements of a

financial statements of a merchandising business.

merchandising business.

33

Multiple-Step Income Statement Multiple-Step Income Statement o The The multiple-step income statementmultiple-step income statement

contains several sections, subsections, contains several sections, subsections, and subtotals.and subtotals.

REVENUE FROM REVENUE FROM SALESSALES

Revenue from SalesRevenue from Saleso SalesSales is the total amount charged is the total amount charged

customers for merchandise sold, including customers for merchandise sold, including cash sales and sales on account.cash sales and sales on account.

Revenue from SalesRevenue from Saleso Sales returns and allowancesSales returns and allowances are granted are granted

by the seller to customers for damaged or by the seller to customers for damaged or defective merchandise.defective merchandise.

Revenue from SalesRevenue from Saleso Sales discounts Sales discounts are granted by the seller are granted by the seller

to customers for early payment of to customers for early payment of amounts owed.amounts owed.

Revenue from SalesRevenue from Saleso Net salesNet sales is determined by subtracting is determined by subtracting

sales returns and allowances and sales sales returns and allowances and sales discounts from sales.discounts from sales.

Cost of Merchandise SoldCost of Merchandise Soldo The The cost of merchandise soldcost of merchandise sold is the cost of is the cost of

the merchandise sold to customers. the merchandise sold to customers. Merchandise costs consist of all the costs Merchandise costs consist of all the costs of acquiring the merchandise and readying of acquiring the merchandise and readying it for sale, such as purchase and freight it for sale, such as purchase and freight costs.costs.

MULTIPLE-STEP MULTIPLE-STEP INCOME INCOME

STATEMENTSTATEMENT


STATEMENTSTATEMENT

INCOME FROM OPERATIONSINCOME FROM OPERATIONS

Selling expenses Selling expenses are are incurred directly in incurred directly in the selling of the selling of merchandise.merchandise.

Sales salariesSales salaries Store supplies usedStore supplies used Depreciation of Depreciation of

store equipmentstore equipment Delivery expenseDelivery expense Advertising expenseAdvertising expense

INCOME FROM OPERATIONSINCOME FROM OPERATIONS

AdministrativeAdministrative expensesexpenses, sometimes , sometimes called called generalgeneral expensesexpenses, are , are incurred in the incurred in the administration or administration or general operations of general operations of the business.the business.

Office salariesOffice salaries Depreciation of Depreciation of

office equipmentoffice equipment Office supplies usedOffice supplies used


STATEMENTSTATEMENT

Multiple-Step Income StatementMultiple-Step Income Statement

o Income from operationsIncome from operations, sometimes called , sometimes called operating income, is determined by operating income, is determined by subtracting operating expenses from gross subtracting operating expenses from gross profit.profit.


STATEMENTSTATEMENT

Other Income and ExpenseOther Income and Expenseo Other incomeOther income is revenue from sources is revenue from sources

other than the primary operating activity other than the primary operating activity of a business.of a business.

o Other expense Other expense is an expense that cannot is an expense that cannot be traced directly to the normal operations be traced directly to the normal operations of the business.of the business.


STATEMENTSTATEMENT

Single-Step Income StatementSingle-Step Income Statemento An alternative form of income statement is An alternative form of income statement is

the the single-step income statementsingle-step income statement. As . As shown in the next slide, the income shown in the next slide, the income statement for NetSolutions deducts the statement for NetSolutions deducts the total of all expenses total of all expenses in one stepin one step from the from the total of all revenues.total of all revenues.

SINGLE-STEP SINGLE-STEP INCOME INCOME

STATEMENTSTATEMENT

STATEMENT OF STATEMENT OF OWNER’S OWNER’S EQUITYEQUITY

Balance SheetBalance Sheeto The form of balance sheet with the assets The form of balance sheet with the assets

on the left-hand side and the liabilities and on the left-hand side and the liabilities and owner’s equity on the right-hand side is owner’s equity on the right-hand side is called the called the account formaccount form..

Balance SheetBalance Sheet

o When the balance sheet is presented in a When the balance sheet is presented in a downward sequence in three sections, it downward sequence in three sections, it has been prepared using the report form. has been prepared using the report form. This is the form used in the next two This is the form used in the next two slides.slides.

BALANCE BALANCE SHEETSHEET

(continued)

BALANCE BALANCE SHEETSHEET



ObjectiveDescribe the adjusting and

Describe the adjusting and closing process for a

closing process for a merchandising business.

merchandising business.

44

Adjusting Entry for Inventory Adjusting Entry for Inventory ShrinkageShrinkageo Merchandising businesses may experience Merchandising businesses may experience

some loss of inventory due to shoplifting, some loss of inventory due to shoplifting, employee theft, or errors in recording or employee theft, or errors in recording or counting inventory. counting inventory.

Adjusting Entry for Inventory Adjusting Entry for Inventory ShrinkageShrinkageo If the balance of the Merchandise If the balance of the Merchandise

Inventory account is larger than the total Inventory account is larger than the total amount of the merchandise count, the amount of the merchandise count, the difference is often called difference is often called inventory inventory shrinkageshrinkage or or inventoryinventory shortageshortage..

Dec. 31, 2015Dec. 31, 2015Account balance of Merchandise Inventory $63,950Physical merchandise inventory on hand 62,150Inventory shrinkage $ 1,800

Inventory ShrinkageInventory Shrinkage

o NetSolutions’ inventory records indicate NetSolutions’ inventory records indicate the following on December 31, 2015:the following on December 31, 2015:

Inventory ShrinkageInventory Shrinkage

o At the end of the accounting period, At the end of the accounting period, inventory shrinkage is recorded by the inventory shrinkage is recorded by the following adjusting entry:following adjusting entry:

Step 1: Closing EntriesStep 1: Closing Entries

o Debit each temporary account with a Debit each temporary account with a credit balance, such as Sales, for its credit balance, such as Sales, for its balance and credit Income Summary.balance and credit Income Summary.


o Credit each temporary account with a Credit each temporary account with a debit balance, such as an expense, for its debit balance, such as an expense, for its balance and debit Income Summary.balance and debit Income Summary.


o Debit Income Summary for the amount of Debit Income Summary for the amount of its balance (net income) and credit the its balance (net income) and credit the owner’s capital account. owner’s capital account.


o Debit the owner’s capital account for the Debit the owner’s capital account for the balance of the drawing account and credit balance of the drawing account and credit the drawing account.the drawing account.

Closing EntriesClosing Entries

o NetSolutions’ Income Summary account NetSolutions’ Income Summary account after the closing entries have been posted after the closing entries have been posted is as follows:is as follows:



ObjectiveDescribe and illustrate the use of

Describe and illustrate the use of

the ratio of net sales to assets in

the ratio of net sales to assets in evaluating a company’s

evaluating a company’s operating performance.

operating performance.

55

Ratio of Net Sales to AssetsRatio of Net Sales to Assetso The The ratio of net sales to assetsratio of net sales to assets measures measures

how effectively a business is using its how effectively a business is using its assets to generate sales.assets to generate sales.

Ratio of Net Sales to

Assets

Net SalesAverage Total Assets

=

Ratio of Net Sales to AssetsRatio of Net Sales to Assets

o The following data (in millions) were taken The following data (in millions) were taken from the annual reports of Dollar Tree, from the annual reports of Dollar Tree, Inc.:Inc.:

Ratio of Net Sales to AssetsRatio of Net Sales to Assets

o The ratio of net sales to assets for each The ratio of net sales to assets for each year are as follows:year are as follows:


AppendixAppendix

The Periodic The Periodic

Inventory Inventory

SystemSystem

PERIODIC PERIODIC INVENTORY INVENTORY

SYSTEMSYSTEM

Recording Merchandise TransactionsRecording Merchandise Transactions

o PurchasesPurchases. Purchases of inventory are . Purchases of inventory are recorded in a purchases account rather recorded in a purchases account rather than in the merchandise inventory than in the merchandise inventory account.account.


o PurchasesPurchases DiscountsDiscounts. Purchases discounts . Purchases discounts are normally recorded in a separate are normally recorded in a separate purchases discounts account. The balance purchases discounts account. The balance of the purchases discounts account is of the purchases discounts account is reported as a deduction from Purchases reported as a deduction from Purchases for the period.for the period.


o PurchasesPurchases ReturnsReturns andand AllowancesAllowances. . Purchases returns and allowances are Purchases returns and allowances are recorded in a similar manner as purchase recorded in a similar manner as purchase discounts.discounts.


o FreightFreight InIn. When merchandise is . When merchandise is purchased FOB shipping point, the buyer purchased FOB shipping point, the buyer pays for the freight. Under the periodic pays for the freight. Under the periodic inventory system, freight paid when inventory system, freight paid when purchasing merchandise FOB shipping purchasing merchandise FOB shipping point is debited to point is debited to FreightFreight InIn..

(continued)

(concluded)

CLOSING CLOSING ENTRIESENTRIES

(continued)

(continued)


(concluded)



Accounting for Accounting for

Merchandising Merchandising

BusinessesBusinesses

The EndThe End

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