Session 6 Merchandising 1

8/8/2019 Session 6 Merchandising 1

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Session 6

Merchandising 1


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Merchandising Operations


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Comparison of Income Statements

Operating Cycle of a Merchandising Business

Purchase Transaction

Terms of Transactions

Inventory Systems

Sales Transactions Net Sales/Gross Sales

Cost of Goods Sold

Net Purchases

Operating Cost


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Comparison of Income

Statement Net sales arise from the sale of goods

Cost of goods sold represents the cost of

inventory, the entity has sold to customers

Gross margin from sales (gross profit)

Difference between net sales and cost of goods sold

Operating expenses other that cost of goods

sold, which are incurred to generate sales


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Operating Cycle of a

Merchandising Business Purchases inventory, sells the inventory

and uses the cash to purchase more

inventory The faster the sale of inventory and the

collection of cash, the higher the profits


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Source Documents

Sales invoice

Bill of landing

Statement of account

Official receipt Deposit slip

Check

Purchase requisition

Purchase order Receiving report

Credit memorandum


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Steps in purchase transaction

1. Fills a purchase requisition form and sends topurchasing department

2. Purchasing department prepares a purchase orderafter checking descriptions

3. Seller forwards an invoice to the purchaser uponshipment of the merchandise

4. The purchasers receiving department sees to it thatthe terms in the purchase order are complied with and

prepares a receiving report5. Before approval of invoice payment, the AP

department compares copies to the previousdocuments


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Terms of Transactions

Merchandise may be purchased and sold eitheron credit terms or for cash on delivery

When goods are sold on account, a period of

time called credit period is allowed for payment If the credit period is 30 days, then payment is

expected within 30 days from the invoice date

Described as the net credit period on net tems

30 days is noted as n/30 10 days after the end of the month n/10 eom


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Cash Discounts

For prompt payment (called cash discount)

This practice improves the sellers cash positionby reducing the amount of money is accountsreceivable

Designed by such notation as 2/10 The buyer may avail of two percent discount if the

invoice is paid within ten days from the invoice date

10 days (discount period) covered by the discount

Cash discounts are called purchase discountfrom the buyers view point and sales discountfrom the sellers point of view.


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example

Cash Discount of 2% on P150,000 3,000

Interest for 20 days at an annual rate of

18% on the amount due within the

discount period:

P147,000 * 18% * 20/360

Savings effected by barrowing 1,470

Amount due = 150,000 invoice price

3,000 cash discounts

1,530


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Trade Discount

Encourage the buyers to purchase products

because of markdown from the list price

Enables the suppliers to vary prices periodically

without the inconvenience of revising price listsand catalogs

There is no trade discount account, instead, all

accounting entries are based on the invoiceprice which is obtained by subtracting the trade

discount from the list price


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Transportation Cost

Freight bill designates which partyshoulders the costs, and whether theshipment is freight prepaid or freight

collect FOB (free on board)

Shipping point: the buyer shoulders theshipping costs; ownership over the goodspasses from seller to the buyer.

Buyer already owns the goods while still intransit and therefore, shoulders thetransportation cost


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FOB Destination

The seller bears the shipping cost

Title passes only when the goods arereceived by the buyer at the point of

destination; while in transit

The seller is still the owner of the goods so

the seller shoulders the transportation costs


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Freight prepaid

The seller pays the transportation costsbefore shipping the goods sold

Freight collect The freight company collects from the buyer

Payments by either party will not dictatewho should ultimately shoulder the costs


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Freight terms

Who

shoulders

the Tc?

Who Pays

the Shipper?

FOB Destination, Freight Prepaid Seller Seller

FOB Shipping Point, Freight Collect Buyer Buyer

FOB Destination, Freight Collect Seller Buyer

FOB Shipping Point, Freight Prepaid Buyer Seller


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Shipping cost borne by the buyer using the

periodic inventory system are debited to

transportation in account

Shipping cost borne by the seller are

debited to transportation out account, also

called delivery expense, an operating

expense in the income statement


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Inventory Systems

Key factor in determining cost of goods

sold

Merchandising inventory represents goodsavailable for sale, there must be method

of determining both the quantity and the

cost of these goods.

Periodic Inventory orPerpetual Inventory


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Periodic Inventory System

Primarily used by businesses that sell relativelyinexpensive goods and that are not yet usingcomputerized scanning system to analyze goodsold

No entries are made to the inventory account asthe merchandise is bought and sold

When goods are purchased, a separate set ofaccounts is used to accumulate information on

the net cost of the purchases Only at the end of the period, when the inventory

is counted, will entries be made to the inventoryaccount to establish its proper balance


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Perpetual Inventory System

Inventory account is continuously updated

Perpetually updating the inventory accountrequires that at the time of purchase,merchandise acquisitions be recorded as debitto the inventory account.

At the time of sale, the cost of goods sold isdetermined and recorded by a debit to the costof goods sold account and a credit to the

inventory account Both the inventory and cost of goods soldaccounts receive entries throughout theaccounting period.


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POS scanners built into checkout counters

to collect transactional data for the cash

register and to update their perpetual

inventory system

Is more advisable for forms that sell low-

volume, high-priced goods


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The ending inventory should reconcile withthe actual physical count at the end of theperiod assuming that no theft, spoilage, or

error has occurred account is adjusted for any inaccuracies

discovered

The count provides as independent checkon the amount of inventory that should bereported at the end of the period


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Net Sales

Net sales is the first part of the merchandisingincome statement as presented below

Net Sales

Gross Sales 2,463,500

Less: Sales Returns and

Allowances

27,500

Sales Discount 42,750 70,250

Net Sales 2,393,250


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Gross Sales

Under accrual accounting, revenues form the

sale of merchandise are considered to be

earned in the accounting period in which the title

of goods passes-usually at the point of delivery from the seller to the buyer

Gross sales consist of total sales for cash and

on credit during an accounting period

Cash for sale is uncollected, the revenue is

recognized as earned at the time of sale


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As an income account, the sales account

is credited whenever sales on account or

cash are made.

Only sales of merchandise held for resale

are recorded in the sales account

If the firm sold one of its delivery trucks,

the credit would be made to the delivery

equipment account, not to sales account


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9-16 Cash 25,000

Sales 25,000

To record sale of merchandise for

cash

9-16 Accounts Receivable 25,000

Sales 25,000To record sale of merchandise on

credit


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Sales Discount

Assume that Corleto delights sold merchandise

on 9-20 forP30,000; terms 2/10, n/60. at the

time of sale, the entry

9-20 Account Receivable 3,000

Sales 3,000

To record sales on credit; terms2/10, n/60


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The customer may take advantage of the sales

discount any time on or before 9-30, which is 10

days after the date of the invoice

9-30 Cash 2,940

Sales Discounts 60

Accounts Receivable 3,000To record collection on the 9-20

sale, discounts taken.

At the end of the accounting period, the sales discountsaccount has accumulated all the sales discount for the

period.

The account is considered a contra-income account and

deducted from gross sales in the income statement.


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Sales Returns and Allowances

The buyer may return the goods to the seller for

credit if the sale was made on account or for

cash refund if the sale was for cash

The seller may just grant an allowance ordeduction from the selling price

A high sales returns and allowances figure is not

commendable because it may signal poor

quality of goods and thus may result to

dissatisfied customers


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Each return or allowance is recorded as a debit to an

account called sales returns and allowances.

9-17 Sales Returns andAllowances

760

Accounts Receivable (or

Cash)760

To record return or allowanceon unsatisfactory merchandise

The seller usually issues the customer a credit

memorandum, which is a formal acknowledgement that the

seller has reduced the amount owned by the customer.

Sales returns and allowances is a contra-income account

and is accordingly deducted from gross sales in the income

statement


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Transportation Out

When the freight term is FOB destination,

the seller shoulders the transportation

costs; when the term is FOB shipping

point, the buyer bears the shipping costs


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11-25 Accounts Receivable 17,000Transportation Out 1,900

Sales 17,000

Cash 1,900

Sales on account; terms 2/10,

n/30; FOB destination, freight

prepaid,P1,900

Case1: Assume that an entity sold merchandise

totaling P17,000 FOB destination, freightprepaid; terms 2/10, n/30. the transportation cost

amounted to P1,900


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12-5 Cash 16,600Sales Discount 340

Accounts Receivable 17,000

If the invoice is collected on Dec 5, the sales

discount will be P340 (P17,000 * 2%).Transportation out is an operating expense.


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11-25 Accounts Receivable 17,000Sales 17,000

Sold merchandise on account;

terms 2/10, n/30; FOB shipping

point, freight collect.


totaling P17,000 FOB shipping point, freightcollect; terms 2/10, n/30. the transportation cost

amounted to P1,900


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12-5 Cash 16,600Sales Discount 340



discount will be P340 (P17,000 * 2%).


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11-25 Accounts Receivable 15,100Transportation out 1,900

Sales 17,000


n/30; FOB destination, freightcollect,P1,900


totaling P17,000 FOB destination, freight collect;terms 2/10, n/30. the transportation cost

amounted to P1,900


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12-5 Cash 14,760Sales Discounts 340



discount will be P340 (P17,000 * 2%) since thediscount applies to total sales


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11-25 Accounts Receivable 18,900Sales 17,000

Cash 1,900


n/30; FOB shipping point,freight prepaid,P1,900


totaling P17,000 FOB shipping point, freightperpaid; terms 2/10, n/30. the transportation cost

amounted to P1,900


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12-5 Cash 18,560

Sales Discounts 340



discount will be P340 (P17,000 * 2%) since thediscount applies to total sales


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Cost of Goods Sold

Or cost of sales is the largest single

expense of the merchandising business

Cost of inventory that the entity has sold tocustomers

Goods available for sale during the year =

merchandise inventory at the beginning of

the year + net purchases during the period


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Entity sold all goods available for sale

during a given acctg period, cost of goods

sold = goods that had been available for

sale

Actual cost of goods sold = goods

available for sale - merchandise inventory

at the end of the period


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Corleto Delights

Partial Income Statement

For the Year Ended Dec. 31, 2000Cost of Goods Sold

Merchandise Inventory, 1/1/00 528,000

Purchases 1,264,000

Less: Purchases Returns and Allowances 56,400Purchases Discounts 21,360 77,760

1,186,240

Transportation In 82,360

Net Purchases 1,268,600Goods Available for Sale 1,796,600

Less: Merchandise Inventory, 12/31/00 483,000

Cost of Goods Sold 1,313,600


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Merchandise inventory

Consists of goods purchased for resale.

Beginning inventory = merchandise

inventory at the start of the acctg period Ending inventory = inventories at the end

Merchandise inventory to be reported in the

balance sheet

Beginning inventory of the next acctg period


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Net Purchases

Under periodic inventory method

Net purchases = GP (Pdra) + Tc

GP: gross purchases

Pdra: purchases discounts, returns, allowances

Tc: transportation costs


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Purchases

Purchases account, a temporary account, is

used only for merchandise purchased for

resale

Purpose: accumulate the total cost of

merchandising purchased during an

accounting period

At invoice price is known as the gross price

method of recording purchases


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11-12 Purchases 15,000

Accounts Payable 15,000

To record purchases of

merchandise; term 2/10, n/30.

All purchases of merchandise are debited to the purchases

account as shown below


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Purchases Returns and Allowances

Is a contra account and is accordingly

deducted from purchases in the income

statement

Cost that cannot be recovered, or lost sales

resulting from poor ordering or unsaleable

goods


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11-14 Accounts Payable 2,000

Purchases R&A 2,000

Return of damaged

merchandise purchased on Nov

12.

Sales R&A in the sellers books are recorded as purchases

returns and allowances in the books of the buyer


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Purchases Discounts

Purchases are usually made on credit and

commonly involve purchases discounts for

early payment

Is a contra account that is deducted from

purchases on the income statement

Does not apply to transportation or othercharges that might appear on the invoice


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Purchases discount 260

Cash 12,740

Record Purchases discount of

(P13,000 * 2%)

In relation with the purchase last Nov 12, discount terms

2/10, n/30, and Nov 14 Purchases R&A


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Account Payable 17,000

Purchased merchandise on

account; terms 2/10, n/30; FOBdestination, freight prepaid

Case1: Assume that an entity made purchasestotaling P17,000 FOB destination, freight

prepaid; terms 2/10, n/30. the transportation cost

amounted to P1,900

Transportation IN


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Purchase Discount 340

Cash 16,600

No debit to transportation in account since the

shipping term provided that the seller should

shoulder the transportation cost.

If the invoice is paid on Dec 5, the purchases

discount will be P340 (P17,000 * 2%).


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Cash 1,900

Purchase merchandise on

account; terms 2/10, n/30; FOB

shipping point, freight collect.

Case2: Assume that an entity purchases

merchandise totaling P17,000 FOB shipping

point, freight collect; terms 2/10, n/30. the

transportation cost amounted to P1,900


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Purchases Discounts 340

Cash 16,660

If the invoice is paid on Dec 5, the purchasesdiscount will be P340 (P17,000 * 2%).

Transportation in will form part of net purchases.


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Account Payable 15,100

Cash 1,900

Purchases on account; terms

2/10, n/30; FOB destination,freight collect,P1,900

Case3: Assume that an entity made purchases

totaling P17,000 FOB destination, freight collect;

terms 2/10, n/30. the transportation cost

amounted to P1,900


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Cash 14,760

Accounts payable is decreased by the

transportation charges paid by the buyer for the

benefit of the seller


discount will be P340 (P17,000 * 2%) since the

discount applies to total purchases


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Purchased merchandise on

account; terms 2/10, n/30; FOBshipping point, freight prepaid,

P1,900

Case4: Assume that an entity purchases

merchandise totaling P17,000 FOB shipping

point, freight prepaid; terms 2/10, n/30. the

transportation cost amounted to P1,900


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Cash 18,560


discount will be P340 (P17,000 * 2%) since the

discount applies to total sales

Buyer not entitled to discounts on the

transportation costs.

Discounts apply only to total purchases.


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Operating Expenses

Make up the third major part of the income

statement for a merchandising entity

Expenses other than the cost of goods

sold, which are incurred to generate

income from the entitys ,major line of

business-merchandising

Categories: Selling, Administrative, Otheroperating expenses


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Selling: related directly to the entitys effortsto generates sales

Payroll accounts, advertising, traveling, store

supplies used, depreciation, transportation out Administrative: related to the general

administration of the business

Officers and office salaries, office supplies,depreciation, business taxes, professionalservices, uncollectible accounts and othergeneral office expenses


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Other operating: are not related to the

central operations of the business

Expenses and loses from peripheral or

incidental transactions of the enterprise; for

example, loss on sale of investments or loss

on sale of property and equipment

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