Acct 2210:
Chp 4
(Omit pg 227 &
the Appendix)
Accounting for
Merchandising
Businesses
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 1
Record and report
on inventory
transactions using
a “perpetual”
inventory system.
4-1
Merchandising Businesses
Merchandising
businesses
generate revenue
by selling goods.
The goods
purchased for
resale are called
merchandise
inventory.
Sale
4-2
Product Costs Versus Selling
and Administrative Costs
Product
Costs
Selling &
Admin.
Costs
Costs that are
included in
inventory.
Costs that are not
included in
inventory. They
are sometimes
called period
costs.
4-3
Allocation of Inventory Cost Between
Asset and Expense Accounts
Beginning
Inventory
Balance
Cost of Goods
Available for Sale
Inventory
Cost of
Purchased
Goods
+
=
During the
Available
Period
for Sale
Merchandise Inventory
(Balance Sheet)
Cost of Goods Sold
(Income Statement)
4-4
Gross Margin (or Gross Profit)
Sales Revenue
- Cost of Goods Sold
Gross Margin
4-5
Perpetual Inventory System
Perpetual
Inventory
System
Inventory account
is adjusted
perpetually
(continually)
throughout the
accounting period.
4-6
Perpetual Inventory System
Let’s see how a
perpetual
inventory system
works by looking
at transactions for
June’s Plant Shop
(JPS).
4-7
Event 1: JPS acquired $15,000 by issuing
common stock.
1. Increase assets
(cash).
2. Increase equity
(common stock).
Common Retained
Cash + Inventory = Stock + Earnings
15,000 + n/a = 15,000 + n/a
Asset Source
Transaction
Net
Revenue - Expenses = Income
n/a - n/a = n/a
Cash Flow
15,000 FA
4-8
Event 2: JPS purchased merchandise
inventory for $14,000 cash.
1. Decrease assets (cash).
2. Increase assets
(merchandise
inventory).
Common Retained
Cash + Inventory = Stock + Earnings
(14,000) + 14,000 = n/a + n/a
Asset
Exchange
Transaction
Net
Revenue - Expenses = Income
n/a - n/a = n/a
Cash Flow
(14,000) OA
4-9
Event 3a: JPS recognized sales revenue
from selling inventory for $12,000.
1. Increase assets (cash).
2. Increase equity (sales
revenue).
Common Retained
Cash + Inventory = Stock + Earnings
12,000 + n/a = n/a + 12,000
Asset Source
Transaction
Net
Revenue - Expenses = Income
12,000 - n/a
= 12,000
Cash Flow
12,000 OA
4-10
Event 3b: JPS recognized $8,000 of cost of
goods sold.
1. Decrease assets
(merchandise
inventory).
2. Decrease equity (cost of
goods sold).
Common Retained
Cash + Inventory = Stock + Earnings
n/a + (8,000) = n/a + (8,000)
Asset Use
Transaction
Net
Revenue - Expenses = Income
n/a 8,000 = (8,000)
Cash Flow
n/a
4-11
Event 4: JPS paid $1,000 cash for selling
expenses.
1. Decrease assets (cash).
2. Decrease equity (selling
expenses).
Common Retained
Cash + Inventory = Stock + Earnings
n/a
= n/a
+ (1,000)
(1,000) +
Asset Use
Transaction
Net
Revenue - Expenses = Income
n/a
1,000 = (1,000)
Cash Flow
(1,000) OA
4-12
Event 5: JPS paid $5,500 cash to purchase
land for a place to locate a future store.
Asset
Exchange
Transaction
1. Decrease assets (cash).
2. Increase assets (land).
Cash
+
Inv.
+
(5,500) +
n/a
+
Rev. - Exp.
n/a
-
n/a
Land
Comm.
=
+
Stk.
5,500 =
n/a
= Net Inc.
Cash Flow
=
(5,500) IA
n/a
+
Ret.
Earn.
n/a
4-13
4-14
4-15
LO 2
Explain the
meaning of terms
used to describe
transportation
costs, cash
discounts, returns
or allowances, and
financing costs.
4-16
Other Topics
Purchasing inventory often
involves:
•Transportation costs
•Inventory returns
•Purchase allowances
•Cash discounts
Let’s look at these
transactions for JPS.
4-17
Event 1: JPS borrowed $4,000 cash by issuing a
note payable.
1. Increase assets (cash).
Asset Source
Transaction
2. Increase liabilities
(notes payable).
Accts.
Cash + Rec.
4,000 + n/a
+
+
Inv.
n/a
+
+
Land
n/a
Rev. - Exp.
n/a
-
n/a
Accts.
= Pay. +
= n/a +
= Net Inc.
=
n/a
Notes
Comm.
Ret.
+ Stk. + Earn.
Pay.
4,000 +
n/a + n/a
Cash Flow
4,000
FA
4-18
Event 2: JPS purchased on account merchandise
inventory with a list price of $11,000.
1. Increase assets
(merchandise
inventory).
Asset Source
Transaction
2. Increase liabilities
(accounts payable).
Cash
+
n/a
+
Accts.
Rec. +
n/a
+
Inv.
+
Land
=
n/a
=
11,000 +
Rev.
n/a
Accts.
Pay.
- Exp.
= Net Inc.
-
=
n/a
n/a
Notes
+ Pay.
11,000 +
n/a
Comm.
+ Stk.
+
+
n/a
+
Ret.
Earn.
n/a
Cash Flow
n/a
4-19
Event 3: JPS returned some of the inventory
purchased in Event 2. The list price of the returned
merchandise was $1,000.
1. Decrease assets
(merchandise inventory).
Asset Use
Transaction
2. Decrease liabilities
(accounts payable).
Cash
+
Accts.
Rec.
n/a
+
n/a
+
Inv.
+
+
(1,000) +
Land
n/a
Accts.
= Pay.
=
Rev. - Exp. = Net Inc.
n/a
-
n/a
=
n/a
+
Notes
Pay.
(1,000) +
n/a
Comm. Ret.
+ Stk. + Earn.
+
n/a
+ n/a
Cash Flow
n/a
4-20
Event 4: JPS received a cash discount on goods
purchased in Event 2. The credit terms were 2/10,
n/30.
Before
analyzing this
transaction,
let’s learn a
little about cash
discounts.
4-21
Cash Discounts
A deduction from the invoice price
granted to induce early payment of
the amount due.
Terms
Discount Period
Credit Period
Full amount
less discount
Full amount due
Time
Due
Purchase or Sale
4-22
Cash Discounts
2/10, n/30
Percentage of
Discount
# of Days
Discount Is
Available
Otherwise,
the Full
Amount Is
Due
# of Days
when Full
Amount Is
Due
4-23
Event 4: JPS received a cash discount on goods
purchased in Event 2. The credit terms were
2/10, n/30.
1. Decrease assets
(merchandise inventory).
Asset Use
Transaction
2. Decrease liabilities
(accounts payable).
Cash
+
n/a
+
Accts.
Rec. +
n/a
Inv.
+
+
(200) +
Accts.
= Pay.
Land
n/a
=
Rev. - Exp. = Net Inc.
n/a
-
n/a
=
n/a
+
(200) +
Notes
Pay.
n/a
Comm. Ret.
+ Stk. + Earn.
+
n/a
+ n/a
Cash Flow
n/a
4-24
Event 5: JPS paid the $9,800 balance due
on the account payable.
1. Decrease assets
(merchandise inventory).
Asset Use
Transaction
2. Decrease liabilities
(accounts payable).
Cash
+
(9,800) +
Accts.
Rec. +
n/a
+
List Price Discount
Accts.Balance
NotesDue Comm. Ret.
=
Pay.
$ Inv.
10,000+ -Land $200
= $ + Pay.
9,800+ Stk. +Earn.
n/a
+
n/a
=
Rev. - Exp. = Net Inc.
n/a
-
n/a
=
n/a
(9,800) +
n/a
+
n/a
+ n/a
Cash Flow
n/a
4-25
Event 6: The shipping terms for the inventory purchased in Event 2
were FOB shipping point. JPS paid the freight company $300 cash for
delivering the merchandise.
Before
analyzing this
transaction,
let’s learn a
little about
transportation
costs.
4-26
Transportation Costs
Buyer
Seller
FOB shipping point
(buyer pays)
Freight Terms
Cost Title
Merchandise
FOB
destination
(seller pays)
Responsible Party
Buyer
Seller
FOB Shipping Point
FOB Destination
Merchandise Inventory Transportation-out
FOB = Free on Board
4-27
Event 6: The shipping terms for the inventory purchased in Event 1
were FOB shipping point. JPS paid the freight company $300 cash
for delivering the merchandise.
Asset
Exchange
Transaction
1. Decrease assets (cash).
2. Increase assets
(merchandise inventory).
Cash
+
(300) +
Accts.
Rec. +
n/a
Inv.
+
+
300 +
Land
n/a
Accts.
= Pay.
+
Notes
Pay.
=
+
n/a
Rev. - Exp. = Net Inc.
n/a
-
n/a
=
n/a
n/a
Comm. Ret.
+ Stk. + Earn.
+
n/a
+ n/a
Cash Flow
(300) OA
4-28
Event 7a: JPS recognized $24,750 of revenue on
the cash sale of merchandise that cost $11,500.
1. Increase assets (cash).
Asset Source
Transaction
2. Increase equity (sales
revenue).
Cash
+
24,750 +
Accts.
Rec. +
Inv.
+
Land
+
n/a
+
n/a
n/a
Rev.
- Exp.
24,750 -
n/a
Accts.
= Pay.
=
n/a
= Net Inc.
=
24,750
+
Notes
Pay.
+
+
n/a
+
Comm.
Stk.
+ Ret. Earn.
n/a
+
24,750
Cash Flow
24,750 OA
4-29
Event 7b: JPS recognized $11,500 of cost of goods
sold.
1. Decrease assets
(merchandise
inventory).
Asset Use
Transaction
2. Decrease equity (cost of
goods sold).
Cash
+
n/a
+
Accts.
Rec. +
n/a
+
Inv.
+
(11,500) +
Rev.
n/a
-
Land
n/a
Exp.
11,500
Accts.
= Pay.
=
=
=
n/a
+
Notes
Pay.
+
+
n/a
+
Net Inc.
(11,500)
Comm.
Stk.
+ Ret. Earn.
n/a
+
(11,500)
Cash Flow
n/a
4-30
Event 8: JPS paid $450 cash for freight
costs on inventory delivered to customers.
1. Decrease assets (cash).
2. Decrease equity
(transportation-out).
Freight Terms
Cost Title
Asset Use
Transaction
Responsible Party
Buyer
Seller
FOB Shipping Point
FOB Destination
Merchandise Inventory Transportation-out
4-31
Event 8: JPS paid $450 cash for freight
costs on inventory delivered to customers.
1. Decrease assets (cash).
Asset Use
Transaction
2. Decrease equity
(transportation-out).
Cash
+
(450) +
Accts.
Rec. +
Inv.
+
Land
+
n/a
+
n/a
n/a
Rev.
n/a
-
Exp.
Accts.
= Pay.
=
=
450 =
n/a
+
Notes
Pay.
+
+
n/a
+
Net Inc.
(450)
Comm.
Stk.
+ Ret. Earn.
n/a
+
(450)
Cash Flow
(450) OA
4-32
Event 9: JPS paid $5,000 cash for selling
and administrative expenses.
1. Decrease assets (cash).
Asset Use
Transaction
2. Decrease equity (selling
and admin. expense).
Cash
Accts.
+ Rec. +
(5,000) +
n/a
+
Inv.
+
Land
n/a
+
n/a
Rev.
n/a
- Exp.
-
=
5,000 =
Accts.
= Pay.
=
n/a
Net Inc.
(5,000)
+
Notes
Pay.
+
+
n/a
+
Comm.
Stk.
+ Ret. Earn.
n/a
+
(5,000)
Cash Flow
(5,000) OA
4-33
Event 10: JPS paid $360 cash for interest expense
on the note payable described in Event 1.
1. Decrease assets (cash).
Asset Use
Transaction
2. Decrease equity
(interest expense).
Cash
+
(360) +
Accts.
Rec. +
Inv.
+
Land
=
Accts.
Pay.
+
n/a
+
n/a
=
n/a
=
Net Inc.
n/a
Rev.
n/a
- Exp.
-
360 =
(360)
Notes
+ Pay.
Comm.
+ Stk.
+
+
+
n/a
n/a
+
Ret.
Earn.
(360)
Cash Flow
(360) OA
4-34
LO 3
Explain how
gains and losses
differ from
revenues and
expenses.
4-35
Event 11: JPS sold the land that had cost
$5,500 for $6,200 cash.
Before
analyzing this
transaction,
let’s learn a
little about
gains and
losses.
4-36
Gains and Losses
Gains and
Losses
Sales Price of Land
- Cost of Land
Gain or Loss
Gross
margin
Sales Revenue
-Cost of Goods Sold
Gross Margin
4-37
Event 11: JPS sold the land that had cost
$5,500 for $6,200 cash.
1. Increase assets (cash).
Asset Source
Transaction
2. Decrease assets (land).
3. Increase equity (gain on
sale of land).
Cash
+
6,200 +
Accts.
+
Rec.
Inv.
+
Land
+
n/a
+
(5,500) =
n/a
Gain
700
-
Exp.
n/a
=
Accts.
Pay.
+
Notes
Pay.
n/a
+
n/a
=
Net Inc.
=
700
Comm.
+
+
Stk.
+
n/a
+
Ret.
Earn.
700
Cash Flow
6,200
IA
4-38
4-39
4-40
LO 4
Compare and
contrast single
and multistep
income
statements.
4-41
4-42
LO 5
Show the effect
of lost, damaged,
or stolen
inventory on
financial
statements.
4-43
Lost, Damaged, or Stolen Inventory
Most merchandise
companies
experience some
level of inventory
shrinkage, a term
that reflects
decreases in
inventory for reasons
other than sales to
customers.
4-44
Lost, Damaged, or Stolen Inventory
Assume a company determined that $500 of
inventory was lost through shrinkage. Here is
how it would affect the statements:
Assets =
(500) =
Liab.
n/a
+
+
Equity
(500)
Revenue - Expenses =
n/a
500 =
Net
Income
(500)
Cash Flow
n/a
In general journal form, the entry is as follows:
Account Title
Inventory Loss (or Cost of Goods Sold)
Inventory
Debit
500
Credit
500
4-45
LO 6
Determine the
amount of “net”
sales.
4-46
Events Affecting Sales
Sales of inventory often involves:
•Inventory returns
•Purchase allowances
•Cash discounts
Let’s look at these
transactions for JPS.
4-47
Event 1a: JPS sold on account merchandise with a
list price of $8,500. Payment terms were 1/10,
n/30. The merchandise had cost JPS $4,000.
1. Increase assets
(accounts receivable).
Asset Source
Transaction
2. Increase equity (sales
revenue).
Cash
+
Accts.
Rec. +
n/a
+
8,500 +
Inv.
+
Land
n/a
+
n/a
Rev.
8,500
-
Exp.
n/a
=
Accts.
Pay.
+
Notes
Pay.
=
n/a
+
n/a
=
Net Inc.
=
8,500
Comm.
+
+
Stk.
+
n/a
+
Ret.
Earn.
8,500
Cash Flow
n/a
4-48
Event 1b: JPS recognized $4,000 of cost of
goods sold.
1. Decrease assets
(merchandise
inventory).
Asset Use
Transaction
2. Decrease equity (cost of
goods sold).
Cash
+
Accts.
Rec.
n/a
+
n/a
+
Inv.
+
(4,000) +
Rev.
n/a
+
-
Land
=
Accts.
Pay.
n/a
=
n/a
Exp.
4,000
=
=
Net Inc.
(4,000)
+
Notes
Pay.
+
+
n/a
+
Comm.
+ Ret. Earn.
Stk.
n/a
+
(4,000)
Cash Flow
n/a
4-49
Event 2a: A customer from Event 1a returned
inventory with a $1,000 list price. The merchandise
had cost JPS $450.
1. Decrease assets
(accounts receivable).
Asset Use
Transaction
2. Decrease equity
(retained earnings).
Cash
+
n/a
+
Accts.
Rec.
+
Inv.
+
Land
=
Accts.
Pay.
(1,000) +
n/a
+
n/a
=
n/a
Rev.
-
(1,000) -
Exp.
n/a
=
=
Net Inc.
(1,000)
Notes
+ Pay.
Comm.
+ Stk.
+
Ret.
Earn.
+
+
(1,000)
n/a
n/a
+
Cash Flow
n/a
4-50
Event 2b: The cost of the goods ($450) is
returned to the inventory account.
1. Increase assets
(merchandise
inventory).
Asset Source
Transaction
2. Increase equity (reduce
cost of goods sold).
Cash
+
n/a
+
Accts.
+
Rec.
n/a
Inv.
+
+
Land
=
Accts.
Pay.
n/a
=
n/a
450 +
Rev.
n/a
-
Exp.
=
Net Inc.
(450) =
450
+
Notes
Pay.
+
n/a
Comm.
+
+
Stk.
+
n/a
+
Ret.
Earn.
450
Cash Flow
n/a
4-51
LO 7
Use “common size”
financial statements
and ratio analysis to
evaluate managerial
performance.
4-52
4-53
Gross Margin Percentage
This measure indicates how much
of each sales dollar is left after deducting the cost of
goods sold to cover expenses and provide a profit.
Gross Margin
Net Sales
Other things being equal, the
company with the higher gross
margin percentage is pricing its
products higher.
4-54
Return on Sales
Net income expressed as a percentage of sales
provides insight as to how much of each sales
dollar is left as net income after all expenses
are paid.
Net Income
Net Sales
Other things being equal, the company
with the higher return on sales
percentage is doing a better job of
controlling costs.
4-55
End of Chapter Four
4-56