Chapter
Three
Accounting for
Merchandising
Businesses
© 2015 McGraw-Hill Education.
Comparative Income Statements
3-2
Comparative Income Statements
3-3
Merchandising Businesses
Merchandising
businesses generate
revenue by selling
goods. The goods
purchased for resale
are called merchandise
inventory.
Sale
3-4
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.
3-5
Allocating 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)
3-6
Gross Margin (or Gross Profit)
Sales Revenue
- Cost of Goods Sold
Gross Margin
3-7
Comparative Income Statements
3-8
LO 1
LO 1
Record and report on
inventory
transactions using
the perpetual
system.
3-9
Perpetual Inventory System
Perpetual
Inventory
System
Inventory account is
adjusted perpetually
(continually)
throughout the
accounting period.
Inventory increased for
each item purchased
Inventory decreased
for each item sold
3-10
Event 1: JPS acquired $15,000 by issuing common stock.
1. Increase assets (cash).
2. Increase equity (common
stock).
Assets
Cash
15,000
+
+
Inventory
n/a
=
=
=
Liab.
n/a
Stockholders' Equity
Common
Retained
+ Stock
+ Earnings
+
15,000 +
n/a
Asset Source
Transaction
+
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash Flow
15,000 FA
Event 2: JPS purchased merchandise inventory for $14,000 cash.
1. Decrease assets (cash).
2. Increase assets (merchandise
inventory).
Assets
Cash
+
(14,000) +
Inventory
14,000
=
=
=
Liab.
n/a
Stockholders' Equity
Common
Retained
+
Stock
+ Earnings
+
+
n/a
n/a
Asset Exchange
Transaction
+
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash
Flow
(14,000) OA
3-11
Event 3a: JPS recognized sales revenue from selling inventory for $12,000.
1. Increase assets (cash).
2. Increase equity (sales
revenue).
Assets
Cash
12,000
+
+
Inventory
n/a
=
=
=
Liab.
n/a
Stockholders' Equity
Common
Retained
+
Stock
+ Earnings
+
+
n/a
12,000
Asset Source
Transaction
+
Revenue - Expenses =
12,000 n/a
=
Net
Income
12,000
Cash Flow
12,000 OA
Event 3b: JPS recognized $8,000 of cost of goods sold.
1. Decrease assets (merchandise
inventory).
2. Decrease equity (cost of goods
sold).
Assets
Cash
n/a
+
+
=
Inventory =
(8,000) =
Liab.
n/a
Stockholders' Equity
Common
Retained
+ Stock
+ Earnings
+
+
n/a
(8,000)
Asset Use
Transaction
+
Revenue - Expenses =
n/a
8,000 =
Net
Income
(8,000)
Cash
Flow
n/a
3-12
Event 4: JPS paid $1,000 cash for selling expenses.
1. Decrease assets (cash).
2. Decrease equity (selling
expenses).
Assets
Cash
+
(1,000) +
Inventory
n/a
=
Liab.
=
=
n/a
Stockholders' Equity
Common
Retained
+
Stock
+ Earnings
+
+
n/a
(1,000)
Asset Use
Transaction
+
Revenue - Expenses =
n/a
1,000 =
Net
Income
(1,000)
Cash Flow
(1,000) OA
Event 5: JPS paid $5,500 cash to purchase land to locate a future store.
1. Decrease assets (cash)
Asset Exchange
Transaction
2. Increase assets (land).
Assets
=
Cash + Inventory + Land =
(5,500) +
+ 5,500 =
n/a
Liab. +
n/a
Stockholders' Equity
Retained
Common
+ Stock + Earnings
+
+ n/a
n/a
Net
Revenue - Expenses = Income
=
n/a
n/a
n/a
Cash Flow
(5,500) IA
3-13
Financial Statements
3-14
LO 2
LO 1
Show how
transportation costs,
cash discounts,
returns and
allowances, and
inventory
shrinkage affect
financial statements.
3-15
Event 1: JPS borrowed $4,000 cash by issuing a note payable.
1. Increase assets (cash).
2. Increase liabilities ( notes
payable).
Assets
=
Liab.
+ Stockholders' Equity
Accts.
Accts.
Com.
Ret
Notes.
+
Cash + Rec. + Inventory + Land = Pay + Pay
Stk. + Earn
4,000 + n/a +
n/a
n/a
+ n/a = n/a
+ 4,000 + n/a +
Asset Source
Transaction
Net
Rev - Exp = Income
n/a - n/a =
n/a
Cash Flow
4,000 FA
Event 2: JPS purchased merchandise inventory on account with a list price of
$11,000.
1. Increase assets (inventory).
2. Increase liabilities (accounts
payable).
Assets
=
Liab.
Accts.
Accts.
Cash + Rec. + Inventory + Land = Pay +
n/a + n/a + 11,000 + n/a = 11,000 +
+ Stockholders' Equity
Notes Com.
Ret
pay Stk. + Earn
n/a +
n/a
n/a
Asset Source
Transaction
Net
Rev - Exp = Income
n/a - n/a =
n/a
Cash Flow
n/a
3-16
Cash Discounts
A deduction from the invoice price
granted to induce early payment of
the amount due.
Terms
Discount Period
Credit Period
Time
Due
Full amount
less discount
Full amount due
Purchase or Sale
3-17
Event 3: JPS returned some of the merchandise purchased in Event 2. The list
price of the returned merchandise was $1,000.
1. Decrease assets
(merchandise inventory).
2. Decrease liabilities (accounts
payable).
Assets
= Liab.
Accts.
Accts.
Cash + Rec. + Inventory + Land = Pay +
n/a + n/a + (1,000) + n/a = (1,000) +
+ Stockholders' Equity
Notes Com.
Ret
pay Stk. + Earn
n/a +
n/a
n/a
Asset Use
Transaction
Net
Rev - Exp = Income
n/a - n/a =
n/a
Cash Flow
n/a
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).
2. Decrease liabilities (accounts
payable).
Assets
= Liab.
Accts.
Accts.
Cash + Rec. + Inventory + Land = Pay +
n/a + n/a + (200)
+ n/a = (200) +
+ Stockholders' Equity
Notes Com.
Ret
pay Stk. + Earn
n/a +
n/a
n/a
Asset Use
Transaction
Net
Rev - Exp = Income
n/a - n/a =
n/a
Cash Flow
n/a
3-18
Transportation Costs
Buyer
Seller
FOB shipping point
(buyer pays)
Freight Terms
Account Title
Merchandise
FOB destination
(seller pays)
Responsible Party
Buyer
Seller
FOB Shipping Point
FOB Destination
Merchandise Inventory Transportation-out
FOB = Free on Board
3-19
Event 5: JPS paid the $9,800 balance due on the account payable.
1. Decrease assets (cash).
2. Decrease liabilities (accounts
payable).
Assets
=
Liab.
Accts.
Accts.
Cash + Rec. + Inventory + Land = Pay +
n/a
+ n/a = (9,800) +
(9,800) + n/a +
+ Stockholders' Equity
Notes Com.
Ret
Stk. + Earn
pay
n/a +
n/a
n/a
Asset Use
Transaction
Net
Rev - Exp = Income
n/a - n/a =
n/a
Cash Flow
(9,800) OA
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.
1. Decrease assets (cash)
2. Increase assets (inventory).
Assets
Accts.
Cash + Rec. + Inventory +
+
(300) + n/a +
300
=
Land
n/a
Liab.
Accts.
= Pay +
= n/a +
+ Stockholders' Equity
Notes Com.
Ret
Stk. + Earn
pay
+
n/a
n/a
n/a
Asset Exchange
Transaction
Net
Rev - Exp = Income
- n/a =
n/a
n/a
Cash Flow
(300) OA
3-20
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).
Assets
Accts.
Cash + Rec. + Inventory +
+
24,750 + n/a +
n/a
=
Land
n/a
Liab.
Accts.
= Pay +
= n/a +
+ Stockholders' Equity
Notes Com.
Ret
Stk. + Earn
pay
+ 24,750
n/a
n/a
Net
Rev - Exp = Income
24,750 - n/a =
24,750
Cash Flow
24,750 OA
Event 7b: JPS recognized $11,500 of cost of goods sold.
1. Decrease assets (merchandise
inventory).
2. Decrease equity (cost of goods
sold).
Assets
Accts.
Cash + Rec. + Inventory +
+
n/a + n/a + (11,500)
=
Land
n/a
Liab.
Accts.
= Pay +
= n/a +
+ Stockholders' Equity
Notes Com.
Ret
Stk. + Earn
pay
+ (11,500)
n/a
n/a
Asset Use
Transaction
Net
Rev - Exp = Income
- 11,500 = (11,500)
n/a
Cash Flow
n/a
3-21
Event 8: JPS incurred $450 of freight costs on inventory delivered to
customers, FOB Destination.
1. Decrease assets (cash).
Asset Use
Transaction
2. Decrease equity
(transportation-out).
Responsible Party
Buyer
Seller
FOB Shipping Point
FOB Destination
Transportation-in
Transportation-out
Freight Terms
Cost Title
Assets
Accts.
Cash + Rec. + Inventory +
n/a
+
(450) + n/a +
=
Land
n/a
Liab.
Accts.
= Pay +
= n/a +
+ Stockholders' Equity
Notes Com.
Ret
Stk. + Earn
pay
n/a + (450)
n/a
Net
Rev - Exp = Income
- 450 = (450)
n/a
Cash Flow
(450) OA
3-22
Event 9: JPS paid $5,000 for selling and administration expenses.
1. Decrease assets (cash).
2. Decrease equity (selling and
administration exp.).
Assets
Accts.
Cash + Rec. + Inventory +
n/a
+
(5,000) + n/a +
=
Land
n/a
Liab.
Accts.
= Pay +
= n/a +
+ Stockholders' Equity
Notes Com.
Ret
Stk. + Earn
pay
n/a + (5,000)
n/a
Asset Use
Transaction
Net
Rev - Exp = Income
- 5,000 = (5,000)
n/a
Cash Flow
(5,000) OA
Event 10: JPS paid $360 for interest expense.
1. Decrease assets (cash).
Asset Use
Transaction
2. Decrease equity (interest
expense).
Assets
Accts.
Cash + Rec. + Inventory +
n/a
+
(360) + n/a +
=
Land
n/a
Liab.
Accts.
= Pay +
= n/a +
+ Stockholders' Equity
Notes Com.
Ret
Stk. + Earn
pay
n/a + (360)
n/a
Net
Rev - Exp = Income
- 360 = (360)
n/a
Cash Flow
(360) OA
3-23
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.
3-24
Event 11: JPS took a physical count of its inventory and found $4,100 of
inventory on hand.
1. Decrease assets (inventory)
Asset Use Transaction
2. Decrease equity (loss on inventory
shrinkage).
Assets
=
Liab.
+
(500)
=
n/a
+
Stockholders' Equity
Revenue
-
Expenses
=
Net
Income
(500)
n/a
-
500
=
(500)
Cash
Flow
n/a
3-25
LO 3
LO 1
Explain how gains,
losses, and other
items are shown on
a multistep income
statement.
3-26
Event 12 : JPS sold the land that cost $5,500 for $6,200.
1. Decrease assets (land)
2. Increase assets (cash)
Assets
=
Liab.
Accts.
Accts.
Cash + Rec. + Inventory + Land = Pay +
n/a
+ (5,500) = n/a +
6,200 + n/a +
Asset Exchange
Transaction
+ Stockholders' Equity
Notes Com.
Ret
Stk. + Earn
pay
n/a +
700
n/a
Net
Gain - Exp = Income
700 - n/a =
700
Cash Flow
6,200 IA
3-27
Multi-Step Income Statement
3-28
Multi-Step/Single Step Income
Statement
3-29
Balance Sheet
3-30
Statement of Cash Flows
3-31
LO 4
LO 1
Determine the
amount of net sales.
3-32
Events Affecting Sales
Sales of inventory often involves:
• Inventory returns
• Purchase allowances
• Cash discounts
Let’s look at these
transactions for JPS.
3-33
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 +
+
n/a
Assets
=
Accts.
Rec. + Inventory =
=
n/a
8,500 +
Liab.
Notes
Pay
n/a
+
Stockholders' Equity
+
+
Com.
Retained
Stk. + Earnings
+ 8,500
n/a
Net
Revenue - Expenses = Income
8,500 -
n/a
=
8,500
Cash Flow
n/a
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).
Assets
= Liab. +
Accts.
Notes
Cash + Rec. + Inventory = Pay +
n/a + (4,000) =
+
n/a +
n/a
Stockholders' Equity
Com.
Stk. +
n/a +
Retained
Earnings
(4,000)
Net
Revenue - Expenses = Income
n/a 4,000 = (4,000)
Cash Flow
n/a
3-34
Event 2a: The customer in Event 1a returned inventory with a $1,000 list price
that JPS had sold. The merchandise had cost JPS $450.
1. Decrease assets (accounts
receivable).
Asset Use
Transaction
2. Decrease equity (retained
earnings).
Cash
n/a
+
+
Assets
Accts.
Rec.
(1,000)
=
+
+
Inventory
n/a
=
=
Liab.
Note
Pay
n/a
+
+
+
Stockholders' Equity
Com.
Retained
Stk.
+ Earnings
+
n/a
(1,000)
Revenue
(1,000)
- Expenses =
n/a
=
Net
Income
(1,000)
Cash
Flow
n/a
Event 2b: The $450 cost of goods sold is returned to inventory.
1. Increase assets (inventory).
Asset Source
Transaction
2. Increase equity (retained
earnings).
Cash
n/a
+
+
Assets
Accts.
Rec.
n/a
=
+
+
Inventory
450
=
=
Liab.
Note
Pay
n/a
+
+
+
Stockholders' Equity
Com.
Retained
Stk.
+ Earnings
+
n/a
450
Revenue
n/a
- Expenses =
(450)
=
Net
Income
450
Cash
Flow
n/a
3-35
Event 3: JPS collected the balance of the account receivable from the
customer that purchased the goods in Event 1a. The discount was 1/10, net
30. Payment is received within the discount period.
1. Decrease assets (accounts
receivable).
Asset Use
Transaction
2. Decrease equity (retained
earnings).
Assets
= Liab. +
Accts.
Notes
Cash + Rec. + Inventory = Pay +
+
=
+
n/a
n/a
n/a + (75)
Stockholders' Equity
Com.
Stk. +
n/a +
Retained
Earnings
(75)
Net
Revenue - Expenses = Income
(75) -
n/a
=
(75)
Cash Flow
n/a
Event 3 ALT1: The collection occurs before the discount period has expired (within 10
days from the date of the sale).
1. Decrease assets (accounts
receivable)
Asset Exchange
Transaction
2. Increase assets (cash).
Assets
=
Accts.
Cash + Rec. + Inventory =
=
7,425 + (7,425) +
n/a
Liab. +
Accts.
Pay +
+
n/a
Stockholders' Equity
Com.
Stk. +
n/a +
Retained
Earnings
n/a
Net
Income
Revenue - Expenses
n/a
-
n/a
=
n/a
Cash Flow
7,425 OA
3-36
Event 3 ALT2: The collection occurs after the discount period has expired (after
10 days from the date of the sale).
1. Increase assets (cash).
Asset Exchange
2. Decrease assets (accounts
receivable).
Assets
=
Accts.
Cash + Rec. + Inventory =
=
7,500 + (7,500) +
n/a
Liab. +
Accts.
Pay
+
+
n/a
Stockholders' Equity
Com.
Retained
Earnings
Stk. +
+
n/a
n/a
Net
Revenue - Expenses = Income
n/a
=
n/a n/a
Cash Flow
7,500 OA
3-37
LO 5
LO 1
Use common size
financial statements
to evaluate
managerial
performance.
3-38
Common Size Income Statements
* Since JPS did not offer sales discounts or have sales returns and allowances during 2014 or 2015, the
amount of sales revenue is equal to the amount of net sales. We use the term net sales here because it is
more commonly used in business practice. Percentages do not add exactly because they have been
rounded.
3-39
LO 6
LO 1
Identify the primary
features of the
periodic inventory
system. (Appendix)
3-40
Periodic Inventory System
Offers practical solution for recording
inventory in low-tech, high-volume
environments
3-41
Periodic Inventory System
Inventory costs
Purchase
returns &
allowances
Purchases account
Purchase return
account
Purchase
allowances account
Transportation
costs
Transportation-in
account
3-42
Periodic Inventory System
No entries made in Inventory account during
period
Cost of goods sold determined at end of
period
3-43
Periodic Inventory Systems
Advantage
• Recording
efficiency
Disadvantage
•Less control of
inventory
•Does not separate
cost of lost,
damaged or stolen
merchandise from
cost of goods sold
3-44
End of Chapter Three
3-45