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Accounting for Merchandising
Operations
Chapter
88 100 Shares
$1 par value
Merchandising?
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Learning ObjectivesLearning Objectives Describe merchandising activities
and identify income components for a merchandising company.
Identify and explain the inventory asset of a merchandising company.
Describe both perpetual and periodic inventory systems.
Analyze and record transactions for merchandise purchases using
a perpetual system. Analyze and record transactions
for merchandise sales using a perpetual system.
Analyze and interpret cost flows and operating activities of a merchandising company.
Prepare adjustments and close accounts for a merchandising company.
Define and prepare multiple-step and single-step income statements.
Record and compare merchandising transactions using both periodic and perpetual inventory systems.
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Merchandising ActivitiesMerchandising Activities
Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.
Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services
Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.
Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services
RevenuesRevenues ExpensesExpensesMinus Net
incomeNet
incomeEquals
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Manufacturer Wholesaler Retailer Customer
Merchandising CompaniesMerchandising Companies
Merchandising ActivitiesMerchandising Activities
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Reporting Income for a MerchandiserReporting Income for a Merchandiser
Merchandising companies sell productsproducts to earn revenue.Examples: sporting goods, clothing, and auto parts
stores
Cost ofGoods Sold
GrossProfit
ExpensesNet
IncomeNet
SalesMinus Equals Minus Equals
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Operating Cycle for a MerchandiserOperating Cycle for a MerchandiserBegins with the purchase of merchandise and ends
with the collection of cash from the sale of merchandise.
Purchases
Merchandiseinventory
Credit sales
Accountreceivable
CashcollectionPurchases
Merchandiseinventory
Cashsales
Cash SaleCash SaleCash SaleCash Sale Credit SaleCredit SaleCredit SaleCredit Sale
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Inventory SystemsInventory Systems
+
+
BeginninginventoryBeginninginventory
Net cost ofpurchasesNet cost ofpurchases
Merchandiseavailable for sale Merchandiseavailable for sale
Ending InventoryEnding InventoryCost of Goods
SoldCost of Goods
Sold
==
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Inventory SystemsInventory Systems
PerpetualInventory
System
PeriodicInventory
System
Detailed records of the cost of each
item are maintained, and the cost
of each item sold is determined
from records when the sale occurs.
Cost of goods sold is determined
only at the end of an accounting
period.
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Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/07 358-BI
Sold To
Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx PrepaidItem Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$
Sub Total 27,000 We appreciate your business! Ship Chg. -
Tax - Total 27,000$
Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount
Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount
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Trade DiscountsTrade Discounts
Used by manufacturers and wholesalers to offer Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.better prices for greater quantities purchased.
ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000
units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each
Racer has a list price of $5.25.Racer has a list price of $5.25.
ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000
units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each
Racer has a list price of $5.25.Racer has a list price of $5.25.
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Purchase DiscountsPurchase Discounts
A deduction from the invoice price granted to induce early payment of the amount due.
A deduction from the invoice price granted to induce early payment of the amount due.
Terms
Time
Due
Discount Period
Full amountless discount
Credit Period
Full amount due
Purchase or SalePurchase or Sale
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2/10,n/302/10,n/30Purchase DiscountsPurchase Discounts
Discount Percent
Discount Percent
Number of Days
Discount Is Available
Number of Days
Discount Is Available
Otherwise, Net (or All)
Is Due
Otherwise, Net (or All)
Is Due CreditPeriod
CreditPeriod
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Purchase Returns and AllowancesPurchase Returns and Allowances
Purchase Return . . .
Merchandise returned by the purchaser to the supplier.
Purchase Allowance . . .
A reduction in the cost of defective 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 merchandise received by a purchaser from a supplier
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Transportation CostsTransportation Costs
FOB shipping point(buyer pays)
FOB destination(seller pays)
Merchandise
Seller Buyer
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Transportation CostsTransportation Costs
If buyer (purchaser) paid the transportation cost (FOB Shipping point):
Periodic Inventory System
Dr Transportation In/Freight-In
Cr Cash
Perpetual Inventory System
Dr Merchandise Inventory
Cr Cash
*Freight-In is a part of cost of good purchased
If the seller paid the transportation cost (FOB Destination):Periodic and Perpetual
Dr Delivery Expense/Freight-Out
Cr Cash
*Delivery expense/freight out is a part of selling expense
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RECORDING MERCHANDISE TRANSACTIONS:PURCHASESRECORDING MERCHANDISE TRANSACTIONS:PURCHASES
On 2 Nov, Z-Mart purchase the merchandise for RM1,200 on credit with terms of 2/10, n/30, FOB Shipping point.
Periodic
Dr Purchase 1,200
Cr Accounts Payable 1,200
Perpetual
Dr Merchandise Inventory 1,200
Cr Accounts Payable 1,200
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RECORDING MERCHANDISE TRANSACTIONS:PURCHASES RETURNS AND ALLOWANCESRECORDING MERCHANDISE TRANSACTIONS:PURCHASES RETURNS AND ALLOWANCES
On 5 Nov Z-Mart returned RM300 merchandise purchased on 2 Nov because of defects.
Periodic
Dr Accounts Payable 300
Cr Purchase Returns & Allowance 300
Perpetual
Dr Accounts Payable 300
Cr Merchandise Inventory 300
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RECORDING MERCHANDISE TRANSACTIONS:PURCHASES DISCOUNTSRECORDING MERCHANDISE TRANSACTIONS:PURCHASES DISCOUNTS On 10 Nov Z-Mart pays the supplier for the purchase on 2
Nov.
Periodic
Dr Accounts Payable 900
Cr Purchase Discounts 18
Cr Cash (900-18) 882 (1,200-300=900 * 2/100 =18)* 1,200-300 (return)=900
@
Perpetual
Dr Accounts Payable 900
Cr Merchandise Inventory 18
Cr Cash (1,200-24) 882
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RECORDING MERCHANDISE TRANSACTION:TRANSPORTATION INRECORDING MERCHANDISE TRANSACTION:TRANSPORTATION IN
Z-Mart paid RM75 freight charge to transport merchandise to its store.
Periodic
Dr Transportation-In / Freight-In 75
Cr Cash 75
Perpetual
Dr Merchandise Inventory 75
Cr Cash 75
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RECORDING MERCHANDISE TRANSACTION:SALE OF MERCHANDISERECORDING MERCHANDISE TRANSACTION:SALE OF MERCHANDISE
On Nov 16, Z-Mart sold merchandise on credit to ANN Enterprise, terms 1/12, n/30, FOB destination, RM24,000. The merchandise cost RM12,000.
Periodic
Dr Accounts Receivable 24,000
Cr Sales 24,000
Perpetual
Dr Accounts Receivable 24,000
Cr Sales 24,000
Dr Cost of Sales 12,000
Cr Merchandise Inventory 12,000
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RECORDING MERCHANDISE TRANSACTION:RETURN OF MERCHANDISE SOLDRECORDING MERCHANDISE TRANSACTION:RETURN OF MERCHANDISE SOLD
On Nov 18, Z-Mart accepted for full credit the return of merchandise sold to ANN Enterprise on Nov 16, the cost of which was RM500.
Periodic
Dr Sales Return & Allowance 1,000
Cr Accounts Receivable 1,000
Perpetual
Dr Sales Return & Allowance 1,000
Cr Accounts Receivable 1,000
Dr Merchandise Inventory 500
Cr Cost of Goods Sold 500
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RECORDING MERCHANDISE TRANSACTION:SALES DISCOUNTSRECORDING MERCHANDISE TRANSACTION:SALES DISCOUNTS
On Nov 26, Z-Marts received payment in full of the account from ANN Enterprise
PeriodicDr Cash 22,770 (23,000-230)
Sales Discounts 230 Cr Accounts Receivable 23,000 (24,000-1,000)
24000-1000(return & allowance) = 23,000 * 1/100 = 230
Perpetual
Dr Cash 22,770
Sales Discounts 230
Cr Accounts Receivable 23,000
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Perpetual Inventory System:Let’s complete the accounting cycle by preparing theclosing entriesclosing entries for
Barton.
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Closing Entries: Perpetual Inventory SystemClosing Entries: Perpetual Inventory System
Dec. 31 Sales . . . . . . . . . . . . . . . . . . . . 323,800 Income summary . . . . . . 323,800
To close credit balance in temporary accounts
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Closing Entries: Perpetual Inventory SystemClosing Entries: Perpetual Inventory System
Dec. 31 Income Summary 310,900
Sales Discounts 4,300
Sales Return & Allowance 2,000
Cost of Sales 233,200
Adm. Salaries Expense 18,200
Sales Salaries Expense 29,600
Insurance Expense 1,200
Rent Expense 8,100
Supplies Expense 1,000
Advertising Expense 13,300
To close debit balances in temporary accounts
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Closing Entries: Perpetual Inventory SystemClosing Entries: Perpetual Inventory System
Dec. 31 Income Summary 12,900 Barton, Capital 12,900
To close Income Summary account
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Closing Entries: Perpetual Inventory System.
Closing Entries: Perpetual Inventory System.
Dec. 31 Barton, Capital 4,000 Barton, Withdrawals 4,000
To close the withdrawals account
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Multiple-Step Income Statement (perpetual)
Multiple-Step Income Statement (perpetual)
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Single-Step Income Statement (Perpetual)
Single-Step Income Statement (Perpetual)
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Classified Balance Sheet(periodic & perpetual inv. system)
Classified Balance Sheet(periodic & perpetual inv. system)
ASSETSNon-current Assets Equipment $16,000
Current Assets Cash 10,200$ Merchandise Inventory 1,200 11,400
Total Assets 27,400$
EQUITY AND LIABILITIES Equity 22,200$
Long-term Liabilities Notes payable $4,000
Current Liabilities Accounts payable 1,200$
Total Equity and Liabilities 27,400$
MERCHANDISING COMPANYBALANCE SHEET
31 DECEMBER 2007ASSETSNon-current Assets Equipment $16,000
Current Assets Cash 10,200$ Merchandise Inventory 1,200 11,400
Total Assets 27,400$
EQUITY AND LIABILITIES Equity 22,200$
Long-term Liabilities Notes payable $4,000
Current Liabilities Accounts payable 1,200$
Total Equity and Liabilities 27,400$
MERCHANDISING COMPANYBALANCE SHEET
31 DECEMBER 2007
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DEBIT CREDITCash 9,500Accounts receivable 16,100Merchandise Inventory 36,000Prepaid Insurance 3,800Store Equipment 80,000Accumulated depreciation – Store Equipment
16,000
Accounts Payable 20,400RA Capital 83,000RA, Drawing 15,000Sales 480,000Sales Return & Allowance 12,000Sales Discounts 8,000Purchases 325,000Purchase Return & Allowances 10,400Purchase Discounts 6,800Freight-in 12,200Freight-out/delivery expense 7,000Advertising Expense 16,000Rent Expense 19,000Store Salaries Expense 40,000Utilities expense 17,000
616,600 616,600
PERIODIC INVENTORY SYSTEM –TRIAL BALANCE
Other information: Merchandise Inventory on hand at December 31, RM40,000
HighPoint ElectronicTrial Balance
As At 31 December 2007
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CLOSING ENTRIES: PERIODIC INV. SYSTEMCLOSING ENTRIES: PERIODIC INV. SYSTEMDr Merchandise Inventory (ending inventory) 40,000
Sales 480,000
Purchase Returns & Allowances 10,400
Purchase Discounts 6,800
Cr Income Summary 537,200
( To record ending inventory and close accounts with credit balances)
Dr Income Summary 492,200
Cr Merchandise inventory (beginning inventory) 36,000
Sales Returns and Allowances 12,000
Sales Discounts 8,000
Purchases 325,000
Freight-in 12,200
Store Salaries Expense 40,000
Rent Expense 19,000
Freight-out/delivery expense 7,000
Advertising Expense 16,000
Utilities Expense 17,000
(To close beginning inventory and other income statement accounts with debit balances)
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CLOSING ENTRIES: PERIODIC INV. SYSTEMCLOSING ENTRIES: PERIODIC INV. SYSTEM
Dr Income Summary 45,000 Cr RA Capital 45,000 (To transfer net income to capital (537,200-
492,200)
Dr RA, Capital 15,000 Cr RA Drawing 15,000 (To close drawings to capital)
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Sales Revenue: Sales Less: Sales returns & allowances Sales discounts Net sales
12,000 8,000
480,000
(20,000) 460,000
Cost of Goods Sold: Inventory, Dec 1 Purchase Less:Purchase Returns & allowances 10,400 Purchase discounts 6,800 Net Purchase Add: Freight-in Cost of goods purchased Cost of goods available for sale Inventory, December 31 Cost of goods sold Gross Profit
325,000
(17,200)307,800 12,200
36,000
320,000356,000
(40,000)(316,000)
144,000
Operating expenses:Advertising expenseFreight-out/Delivery ExpenseRent expenseUtility expenseStore salaries expense
16,000 7,00019,00017,00040,000 (99,000)
Net Income 45,000
MULTIPLE-STEP INCOME STATEMENT – PERIODIC INVENTORY SYSTEMHighPoint ElectronicIncome Statement
For the Year Ended December 31, 2007
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Single-Step income Statement- Periodic Inventory SystemSingle-Step income Statement- Periodic Inventory System
HighPoint ElectronicIncome Statement
For the Year Ended December 31, 2007Revenue:Net sales 460,000
Expenses:Cost of good sold 316,000Advertising expense 16,000Freight-in/delivery expense 7,000Rent expense 19,000Utilities expense 17,000Store Salaries expense 40,000 (415,000) 45,000
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End of Chapter 8End of Chapter 8