5-1
©2006 Prentice Hall, Inc.
ACCOUNTING FOR
MERCHANDISING OPS (1 of 2)
 Learning
objectives
 Merchandising firms
 Acquiring merchandise for sale
 Sale of merchandise
5-2
©2006 Prentice Hall, Inc.
ACCOUNTING FOR
MERCHANDISING OPS (2 of 2)
 Recording
inventory
 Multiple-step income statement
 Financial statement analysis
 Business risk, controls, and ethics
5-3
©2006 Prentice Hall, Inc.
Learning Objectives
(1 of 2)
1.
2.
3.
4.
Describe the differences between service
and merchandising firms
Explain how merchandise in acquired
and perform the related record-keeping
Explain how sales are made and perform
the related record-keeping
Explain the differences between a
periodic and perpetual inventory system
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©2006 Prentice Hall, Inc.
Learning Objectives
(2 of 2)
5.
6.
7.
Explain the difference between a singlestep income statement and a multiplestep income statement
Compute the gross profit ratio and
profit margin ratio to evaluate a firm’s
profitability
Recognize the special risks and controls
related to inventory
©2006 Prentice Hall, Inc.
5-5
Merchandising Firms
(1 of 3)
 Two
types of merchandising firms
Retailers
sell products to the final consumer
Wholesalers sell products to retailers or
other wholesalers
 Cost
of Goods Sold (CoGS)
Cost
of merchandise sold during the period
5-6
©2006 Prentice Hall, Inc.
Merchandising Firms
(2 of 2)
 Gross
profit (also called gross margin)
Sales
Revenue – CoGS
 Operating
cycle for merchandising firm
Purchase
inventory
Sell inventory, creating accounts receivable
(AR)
Collect cash from customers, reducing AR
5-7
©2006 Prentice Hall, Inc.
Acquiring Merchandise For Sale
(1 of 2)
 What
is merchandise inventory?
Where
on the balance sheet is it?
 Acquisition
process for inventory
 Periodic & perpetual inventory
5-8
©2006 Prentice Hall, Inc.
Acquiring Merchandise For Sale
(2 of 2)
 Recording
purchases: perpetual
Freight
costs
Purchase Returns and Allowances
Purchase Discounts
Goods available for sale
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©2006 Prentice Hall, Inc.
Acquisition Process for Inventory
(1 of 3)
manager sends purchase
requisition to purchase agent
 Purchase agent sends purchase order
(PO) to chosen vendor
 Inventory
Copies
to accounts payable (AP) and
receiving departments
No
quantity on receiving dept’s copy
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©2006 Prentice Hall, Inc.
Acquisition Process for Inventory
(2 of 3)
 Objectives
of purchase process
Quality
Purchase
from reliable vendors
Timeliness
Vendors
must have an adequate supply of
merchandise to avoid stock-outs
Accuracy
Receive
©2006 Prentice Hall, Inc.
only items ordered
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Acquisition Process for Inventory
(3 of 3)
 Receiving
dept notifies AP dept when
goods arrive
 AP pays for goods when it receives
invoice from vendor
Invoice
matched with purchase order
 How
does a computer change this
process?
©2006 Prentice Hall, Inc.
5-12
Periodic and Perpetual Inventory
 Perpetual
inventory system
Every
purchase of inventory is recorded
directly to inventory account
 Periodic
inventory system
Inventory
account only updated at the
end of the accounting period
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©2006 Prentice Hall, Inc.
Recording Purchases: Perpetual
Transaction 1
 Gravity
Power Sports (GPS) Purchase 20
skateboards on account for $150 each
Increase
inventory $3,000
Increase AP $3,000
 Record
Dr.
the journal entry
Cr.
Dr.
Cr.
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©2006 Prentice Hall, Inc.
Freight Costs
Transaction 2 (1 of 3)
 FOB
(free on board) shipping point
Shipping
is free until it leaves the
seller’s loading dock
Buying firm pays freight
as freight-in
Included in cost of inventory
Recorded
Who
owns the goods while they are in
transit? Where does title pass?
©2006 Prentice Hall, Inc.
5-15
Freight Costs
Transaction 2 (2 of 3)
 FOB
destination
Shipping
is free until it arrives at the
buyer’s place of business
Selling firm pays the freight
No
freight-in charge
Not included in cost of inventory
Who
owns the goods while they are in
transit? Where does title pass?
©2006 Prentice Hall, Inc.
5-16
Freight Costs
Transaction 2 (3 of 3)
 Shipping
charges to GPS on skateboards
were $100 with terms FOB shipping point
What
accounts are affected?
Do
they increase or decrease?
Dr.
Cr.
Dr.
Cr.
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©2006 Prentice Hall, Inc.
Purchase Returns and Allowances
Transaction 3 (1 of 3)
 Amounts
that reduce $$ of inventory
purchases due to returned or
damaged inventory
Also
reduce accounts payable for
inventory purchased on account
Which
account is affected if the inventory
was purchased for cash?
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©2006 Prentice Hall, Inc.
Purchase Returns and Allowances
Transaction 3a (2 of 3)
 Purchase
return
Three
skateboards were defective
(3@$150) and returned to the vendor
Dr.
Cr.
Dr.
Cr.
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©2006 Prentice Hall, Inc.
Purchase Returns and Allowances
Transaction 3b (3 of 3)
 Purchase
allowance
decks had graphics for Bores of Hogtown
movie instead of Lords of Dogtown movie
GPS received a $250 purchase allowance
The
Dr.
Cr.
Dr.
Cr.
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©2006 Prentice Hall, Inc.
Purchase Discounts
Transaction 4 (1 of 4)
3/10, n/45
3% discount
If received
w/in 10 days
Or full
amount
Due w/in
45 days
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©2006 Prentice Hall, Inc.
Purchase Discounts
Transaction 4 (2 of 4)
 Annual
rate of return if taking
advantage of discount
# of days
Discount ÷ paid early x 360 =
(or 365)
Annual
rate of
return
 Calculate
the annual rate of return if
you pay early with terms 3/10, n/45
©2006 Prentice Hall, Inc.
5-22
Purchase Discounts
Transaction 4a (3 of 4)
 GPS
pays the balance due within the
discount period with terms 3/10, n/45
Discount
calculated on balance due
Inventory
Dr.
Cr.
Dr. Cr.
3,000 450
100 250
Accts. Payable
Dr. Cr.
450 3,000
250
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©2006 Prentice Hall, Inc.
Purchase Discounts
Transaction 4b (4 of 4)
 How
would the transaction change if GPS
paid outside of the discount period?
Inventory
Dr.
Cr.
Dr. Cr.
3,000 450
100 250
Accts. Payable
Dr. Cr.
450 3,000
250
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©2006 Prentice Hall, Inc.
Goods Available for Sale
Beginning inventory
+ Net purchases (total purchases less
returns and allowances and discounts)
+ Shipping costs (freight in) _
Goods available for sale
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©2006 Prentice Hall, Inc.
Sale of Merchandise
 Sales
are the mirror image of purchases
What
the vendor records when you make
an inventory purchase
 Sales process for
 Recording sales
merchandise inventory
Sales
Returns and Allowances
Sales Discounts
Net sales
Credit card sales and sales taxes
©2006 Prentice Hall, Inc.
5-26
Sales Process for Merchandise
Inventory
 Steps
in the sales process
1. Customer
places an order
2.Company approves the order
3.Warehouse selects goods for shipment
4.Company ships goods
5.Company bills customer for goods
6.Company receives payment for the goods
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©2006 Prentice Hall, Inc.
Recording Sales
Transaction 5: Revenue (1 of 3)

GPS sells 11 skateboards on account for
$250 each


Increase Sales $2,750
Increase AR $2,750
Dr.
Cr.
Dr.
Cr.
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©2006 Prentice Hall, Inc.
Recording Sales
Transaction 5: Expense (2 of 3)

How much did GPS pay for the 17
(20 – 3 returned) skateboards assuming
they paid w/in the discount period?
$3,000 purchase price
+
100 freight-in
450 purchase return
200 purchase allowance
$2,400 for 17 skateboards

How much did each skateboard cost? 5-29
©2006 Prentice Hall, Inc.
Recording Sales
Transaction 5: Expense (3 of 3)

GPS sells 11 skateboards on account for
$250 each 1/15, n/30


Increase or decrease merchandise inventory?
Increase CoGS $2,750

On which fin. stmt. will you find CoGS?
Dr.
Cr.
Dr.
Cr.
5-30
©2006 Prentice Hall, Inc.
Sales Returns and Allowances
Transaction 6 (1 of 5)
 Contra-revenue
Used
 Net
account
to reduces a firm’s revenue
revenue
Revenue
 Sales
less contra-revenue
Returns and Allowances
Decrease
revenue because you reduce a
customer’s AR account or give a cash
5-31
refund (if the customer paid cash)
©2006 Prentice Hall, Inc.
Sales Returns and Allowances
Transaction 6 (2 of 5)
 Customer
returned one skateboard
because it was defective
First,
undo the revenue side of the
transaction
What
was the sale price of the merchandise?
Second,
undo the expense side of the
transaction
How
©2006 Prentice Hall, Inc.
much did the merchandise sold cost? 5-32
Sales Returns and Allowances
Transaction 6: Reverse Revenue (3 of 5)
 The
sales price was $250
Increase
If
Sales Returns and Allowances
revenues increase with credits, how would
you increase a contra-revenue?
Decrease
Dr.
Cr.
AR
Dr.
Cr.
5-33
©2006 Prentice Hall, Inc.
Sales Returns and Allowances
Transaction 6: Reverse Expense (4 of 5)
 Cost
of the merchandise sold was $150
Reduce
CoGS by $150
What happens to the inventory account?
Dr.
Cr.
Dr.
Cr.
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©2006 Prentice Hall, Inc.
Sales Returns and Allowances
Transaction 6: Reverse Expense (5 of 5)
 How
would the transaction change if
GPS granted a Sales Allowance?
Would
the revenue side of the sale
need to be reversed?
Would the expense side of the sale
need to be reversed?
 Why
would a business record SR&A
in a separate account?
©2006 Prentice Hall, Inc.
5-35
Sales Discounts
Transaction 7 (1 of 4)
 Sales
discount
Reduction
in sales price offered for
prompt payment
Contra-revenue
Reduces
net sales
Based
on customer’s outstanding
balance from sales
Sales
©2006 Prentice Hall, Inc.
price less SR&A
5-36
Sales Discounts
Transaction 7 (2 of 4)
 Amount
to be received if payment is
received w/in discount period
Cash
collected
Sales
discount – increases contra revenue
($2,750
– $250) x (1 – 1%)
($2,750
– $250) x 1%
Accounts
receivable decreases by full
amount owed
Customers
balance completely satisfied for
5-37
99% of the amount due
©2006 Prentice Hall, Inc.
Sales Discounts
Transaction 7 (3 of 4)
 Make
the journal entry if payment
received w/in discount period
Increase
Cash
Increase Sales Discounts
Decrease AR
Dr.
Cr.
Dr.
Cr.
Accts. Rec.
Dr. Cr.
2,750 250
5-38
©2006 Prentice Hall, Inc.
Sales Discounts
Transaction 7 (4 of 4)
 How
would the journal entry change
if the customer paid outside the
discount period?
How
Dr.
Cr.
much cash is received?
Dr.
Cr.
Accts. Rec.
Dr. Cr.
2,750 250
5-39
©2006 Prentice Hall, Inc.
Net Sales
Sales
- Allowances given
- Sales Discounts _
Net sales
5-40
©2006 Prentice Hall, Inc.
Credit Card Sales and Sales Taxes
(1 of 4)
 Bank
cards
Cash
sale
Credit card company pays seller full
amount less a service fee (2% - 4%)
Service
E.g,
fee is an expense
Visa, MasterCard, American Express
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©2006 Prentice Hall, Inc.
Credit Card Sales and Sales Taxes
(2 of 4)
 Sales
tax
Seller
collects sales tax from customer
and remits to state/local government
Liability
Sales
tax payable
5-42
©2006 Prentice Hall, Inc.
Credit Card Sales and Sales Taxes
(3 of 4)
 Sell
$100 of merchandise to customer
Sales
tax rate is 5%
Customer pays with bank card with a
3% service fee
 Cash
collected
$100
 Service
©2006 Prentice Hall, Inc.
– (3% x $100) + (5% x $100)
Revenue = $100
5-43
Credit Card Sales and Sales Taxes
(4 of 4)
 Journal
entry
Increase
Cash
Increase Service Fee (expense)
Increase Sales
Increase Sales Tax Payable
Dr.
Cr.
Dr.
Cr.
5-44
©2006 Prentice Hall, Inc.
Recording Inventory
(1 of 2)
 Perpetual
inventory system
Inventory
records updated every time a
purchase, sale, or return is made
 Periodic
inventory system
Inventory
records only updated at end
of accounting period
 Both
systems require an actual
inventory count at end of period
©2006 Prentice Hall, Inc.
5-45
Recording Inventory
(2 of 2)
 Perpetual
inventory system can
detect shrinkage
Shrinkage
= Inventory account balance
less actual inventory $$ amount based
on physical count of merchandise
5-46
©2006 Prentice Hall, Inc.
Multistep Income Statement
(1 of 2)
 Single-step
income statement
All
revenues presented first
All expense subtracted to arrive at net
income
5-47
©2006 Prentice Hall, Inc.
Multistep Income Statement
(2 of 2)
 Multiple-step
Gross
income statement
profit
Sales
– CoGS
Operating
Gross
income
profit – operating expenses
Other
revenues and expenses not
directly related to firm’s day-to-day
operations
©2006 Prentice Hall, Inc.
5-48
Financial Statement Analysis
Profitability Measures (1 of 4)
 Gross
profit ratio
Gross
Profit ÷ Sales
Portion of each sales $ a company has
left after paying for goods it sold
Amount left over to cover operating
and non-operating expenses and
generate a profit
5-49
©2006 Prentice Hall, Inc.
Financial Statement Analysis
Profitability Measures (2 of 4)
 Profit
margin ratio
Net
Income ÷ Sales
Measures % of each sales $ that results
in net income
A measure of how well a company is
controlling its operating expenses
5-50
©2006 Prentice Hall, Inc.
Financial Statement Analysis
Profitability Measures (3 of 4)
 Example:
GPS’s results for 2008 & 2009
Year
2008
2009
Sales
$500,000
$600,000
CoGS
$300,000
$400,000
Net Income
$ 50,000
$ 80,000
Gross Profit Ratio
$200K/$500K=40% $200K/$600K=33%
Profit Margin Ratio $50K/$500K=10%
$80K/$600K=13%
5-51
©2006 Prentice Hall, Inc.
Financial Statement Analysis
Profitability Measures (4 of 4)
 Explain
the trend in GPS’s gross profit
ratio
 Explain the trend in GPS’s profit
margin ratio
 What can you say about GPS’s
profitability based on these ratios?
5-52
©2006 Prentice Hall, Inc.
Business Risk, Control, and Ethics
 Segregation
of duties
Person
with physical control over
merchandise should NOT also do the
record-keeping on the merchandise
under her control
However, this control can be defeated
if both people get together to commit
fraud
See
©2006 Prentice Hall, Inc.
In the News—Risks and Controls
5-53
Comments or questions about PowerPoint Slides?
Contact Dr. Richard Newmark at
University of Northern Colorado’s
Kenneth W. Monfort College of Business
richard.newmark@PhDuh.com
©2006 Prentice Hall, Inc.
5-54