Chapter Four
Accounting for
Merchandising
Businesses
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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
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 OA
4-7
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
4-8
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
+
(1,000) +
Notes
Pay.
n/a
Comm. Ret.
+ Stk. + Earn.
+
n/a
+ n/a
Cash Flow
n/a
4-9
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
4-10
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
4-11
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
4-12
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
Transportation-in
Transportation-out
FOB = Free on Board
4-13
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
4-14
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.
4-15
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.
4-16