ACCOUNTING FOR MERCHANDISING
OPERATIONS
Chapter 5
© 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved
SERVICE COMPANIES
Service organizations sell time to
earn revenue.
Examples: Accounting firms, law firms and
plumbing services
Revenues
McGraw-Hill/Irwin
Minus
Expenses
Equals
Net
income
Slide 2
C1
MERCHANDISING ACTIVITIES
Merchandising Companies
Manufacturer
McGraw-Hill/Irwin
Wholesaler
Retailer
Customer
Slide 3
REPORTING INCOME FOR A
MERCHANDISER
C1
Merchandising companies sell products
to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
Net
Sales
Minus
Cost of
Equals
Goods
Sold
Gross
Profit
Minus
Expenses
Equals
Net
Income
Merchandising Company
Income Statement
For Year Ended December 31, 2009
Net sales
Cost of goods sold
Gross profit
Operating expenses
Net income
McGraw-Hill/Irwin
$ 150,000
80,000
$ 70,000
46,500
$ 23,500
Slide 4
OPERATING CYCLE FOR A
MERCHANDISER
C2
Begins with the purchase of merchandise
and ends with the collection of cash from the
sale of merchandise.
Credit Sale
Cash Sale
Purchases
Purchases
Merchandise
inventory
Account
receivable
Cash
sales
Merchandise
inventory
McGraw-Hill/Irwin
Cash
collection
Credit sales
Slide 5
C3
INVENTORY SYSTEMS
Beginning
inventory
Net cost of
purchases
+
= Merchandise
available for sale
Ending
inventory
McGraw-Hill/Irwin
+
Cost of goods
sold
Slide 6
PERPETUAL AND PERIODIC
INVENTORY SYSTEMS
C3
 Perpetual systems
 continually update
accounting records for
merchandising
transactions
McGraw-Hill/Irwin
 Periodic systems
 accounting records
relating to merchandise
transactions are updated
only at the end of the
accounting period
Slide 7
P1
MERCHANDISE PURCHASES
On November 2, Z-Mart purchased $1,200 of
merchandise inventory for cash.
Dr.
Nov 2
Merchandise Inventory
Cash
Cr.
1,200
1,200
Purchase merchandise for cash
McGraw-Hill/Irwin
Slide 8
P1
TRADE DISCOUNTS
Used by manufacturers and wholesalers
to offer better prices for greater
quantities purchased.
Example
Z-Mart offers a 30% trade
discount on orders of 1,000
units or more of their popular
product Racer. Each
Racer has a list price of $5.25.
McGraw-Hill/Irwin
Quantity sold
Price per unit
Total
Less 30% discount
Invoice price
1,000
$ 5.25
5,250
(1,575)
$ 3,675
Slide 9
P1
Invoice

Main Source, Inc.
Invoice
614 Tech Avenue
Nashville, TN 37651
S
o
l
d

T
o


Name: Barbee, Inc.
Attn: Tom Bell
Address: One Willow Plaza
Cookeville, Tennessee
38501

P.O. Date Salesperson
Terms
4/25/2009
#25
2/10,n/30
Item
Description
AC417
250 Backup System

We appreciate your business!
McGraw-Hill/Irwin
Date
5/4/09
Number
358-BI

Freight
FOB Destination
Quanity
Price
500 $ 54.00 $
Sub Total
Ship Chg.
Tax
Total
$
Seller
Invoice date
Purchaser
Order date
Credit terms
Freight terms
Ship
Via FedExGoods
Amount
Total invoice
27,000
27,000
27,000

Slide 10
P1
PURCHASE DISCOUNTS
A deduction from the invoice price granted to
induce early payment of the amount due.
Credit
Terms
Discount Period
Credit
Period
Time
Amount
Due
Due: Invoice
price minus
discount
Due: Full Invoice Price
Date of
Invoice
McGraw-Hill/Irwin
Slide 11
P1
PURCHASE DISCOUNTS
2/10,n/30
Discount
Percent
McGraw-Hill/Irwin
Number of
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due in 30
Days
Credit
Period
Slide 12
P1
PURCHASE DISCOUNTS
On November 2nd, Z-Mart purchased $1,200
of merchandise inventory on account, credit
terms are 2/10, n/30.
Dr.
Merchandise Inventory
Accounts Payable
Cr.
1,200
1,200
Purchase merchandise on account
McGraw-Hill/Irwin
Slide 13
P1
PURCHASE DISCOUNTS
On November 12th, Z-Mart paid the amount
due on the purchase of November 2nd .
Dr.
Accounts Payable
Cr.
1,200
Cash
Merchandise Inventory
1,176
24
Paid accounts payable in full
$1,200 × 2% = $24 discount
McGraw-Hill/Irwin
Slide 14
P1
PURCHASE DISCOUNTS
After we post these entries, the accounts
involved look like this:
Merchandise Inventory
11/2
Bal.
McGraw-Hill/Irwin
1,200 11/12
1,176
24
Accounts Payable
11/12 1,200 11/2 1,200
Bal.
0
Slide 15
PURCHASE RETURNS AND
ALLOWANCES
P1
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.
McGraw-Hill/Irwin
Slide 16
P1
PURCHASE RETURNS AND
ALLOWANCES
On November 2nd, Z-Mart purchased
$1,200 of merchandise inventory on
account, credit terms are 2/10, n/30.
Dr.
Merchandise Inventory
Accounts Payable
Cr.
1,200
1,200
Purchase merchandise on account
McGraw-Hill/Irwin
Slide 17
PURCHASE RETURNS AND
ALLOWANCES
P1
On November 5th , Z-Mart returned $300 of
defective merchandise to the supplier.
Dr.
Accounts Payable
Merchandise Inventory
Cr.
300
300
Returned defective merchandise
McGraw-Hill/Irwin
Slide 18
PURCHASE RETURNS AND
ALLOWANCES
P1
On November 12th, Z-Mart paid the amount
owed for the purchase of November 2nd.
Dr.
Accounts Payable
Cr.
900
Cash
882
Merchandise Inventory
18
Paid accounts payable in full
Purchase
Returns
Amount Due
Discount
Cash Paid
McGraw-Hill/Irwin
$
$
1,200
(300)
900
(18)
882
Slide 19
TRANSPORTATION COSTS AND
OWNERSHIP TRANSFER
P1
Seller
FOB shipping point
(buyer pays)
Terms
FOB shipping point
FOB destination
McGraw-Hill/Irwin
Buyer
Carrier
Merchandise
FOB destination
(seller pays)
Ownership transfers
to buyer when goods
are passed to
Transportation
costs paid by
Carrier
Buyer
Buyer
Seller
Slide 20
P1
TRANSPORTATION COSTS
On November 2nd , Z-Mart purchased $1,200 of
merchandise inventory for cash and also paid
$75 transportation costs.
Dr.
Merchandise Inventory
Cash
Cr.
1,275
1,275
Paid for merchandise and transportation
McGraw-Hill/Irwin
Slide 21
P1
ACCOUNTING FOR MERCHANDISE
Invoice cost of merchandise purchases
Less:
Less: Purchase discounts
Less: Purchase returns and allowances
Add: Costs of transportation-in
Total cost of merchandise purchased
McGraw-Hill/Irwin
$ 235,800
$ (4,200)
(1,500)
2,300
$ 232,400
Slide 22
P2
ACCOUNTING FOR MERCHANDISE SALES
Z-MART
Computation of Gross Profit
For Year Ended December 31, 2009
Sales
Less:
Sales discounts
Sales returns and allowances
Net sales
Cost of goods sold
Gross profit
McGraw-Hill/Irwin
$ 321,000
$ 4,300
2,000
6,300
314,700
230,400
$ 84,300
Slide 23
P2
ACCOUNTING FOR MERCHANDISE SALES
On November 3rd , Z-Mart sold $2,400 of
merchandise on credit. The merchandise has a
cost basis to Z-Mart of $1,600.
Dr.
Cr.
Accounts Receivable
2,400
Sales
Sold merchandise on credit
2,400
Cost of Goods Sold
1,600
Merchandise Inventory
1,600
To record the cost of merchansdise sold
McGraw-Hill/Irwin
Slide 24
P2
SALES DISCOUNTS
Z-Mart completes a credit sale for $1,000 on November 12th,
the merchandise cost $800. Terms of 2/10, n/60, and the
account was paid in full within the discount period.
McGraw-Hill/Irwin
Dr.
Cr.
Accounts Receivable
1,000
Sales
Sold merchandise on credit
1,000
Cost of Goods Sold
800
Merchandise Inventory
To record cost of merchandise sold
Cash
980
Sales Discounts
20
Accounts Receivable
Collected cash on account
800
1,000
Slide 25
P2
SALES RETURNS AND ALLOWANCES
Recall Z-Mart’s sale for $2,400 that had a cost
of $1,600. Assume the customer returns part of
the merchandise. The returned items sell for
$800 and cost $600.
Dr.
Sales Returns and Allowances
Cr.
800
Accounts Receivable
800
Customer retuns merchandies of June 12 slae
Merchandise Inventory
Cost of Goods Sold
600
600
Returned goods added to inventory
McGraw-Hill/Irwin
Slide 26
P2
SALES ALLOWANCES
Recall the $800 of merchandise sold by ZMart to a customer. The merchandise was
defective but the customer agreed to keep it
because Z-Mart offers a $100 price reduction.
Dr.
Sales Returns and Allowances
Accounts Receivable
Cr.
100
100
To record sales allowance
McGraw-Hill/Irwin
Slide 27
MERCHANDISING COST FLOW IN
THE ACCOUNTING CYCLE
C4
Period 1
Beginning
inventory
Net
purchases
Merchandise
available for sale
Cost of
goods sold
Beginning
inventory
Net
purchases
Period 2
Ending
inventory
To Income Statement
To Balance Sheet
Merchandise
available for sale
Ending
inventory
Cost of
goods sold
To Income Statement
To Balance Sheet
McGraw-Hill/Irwin
Slide 28
ADJUSTING ENTRIES FOR
MERCHANDISERS
P3
Z-Mart’s Merchandise Inventory account at the end
of 2009 has a balance of $21,250, but a physical
count reveals that only $21,000 of inventory exists.
Z-Mart suffered a $250 shrinkage.
Dr.
Cost of Goods Sold
Merchandise Inventory
Cr.
250
250
To adjust for $250 shrinkage revealed
by a physical count of inventory
McGraw-Hill/Irwin
Slide 29
CLOSING ENTRIES FOR
MERCHANDISERS
P3
Dr.
Sales
Cr.
321,000
Income Summary
321,000
To close credit balances in temporary
accounts
Income Summary
321,000
McGraw-Hill/Irwin
Slide 30
P3
CLOSING ENTRIES FOR
MERCHANDISERS
Dr.
308,100
Income Summary
Sales Discounts
Sales Returns and Allowances
Cost of Goods Sold
Depreciation Expense
Sales Salaries Expense
Insurance Expense
Rent Expense
Supplies Expense
Advertising Expense
Cr.
4,300
2,000
230,400
3,700
43,800
600
9,000
3,000
11,300
To close debit balances in temporary accounts
Income Summary
308,100
321,000
12,900
McGraw-Hill/Irwin
Slide 31
CLOSING ENTRIES FOR
MERCHANDISERS
P3
Income Summary
K. Marty, Capital
Dr.
12,900
Cr.
12,900
To close Income Summary account
Income Summary
310,900
323,800
12,900
-0-
McGraw-Hill/Irwin
Slide 32
CLOSING ENTRIES FOR
MERCHANDISERS
P3
Dec. 31 K. Marty, Capital
K. Marty, Withdrawals
Dr.
4,000
Cr.
4,000
To close the withdrawals account
McGraw-Hill/Irwin
Slide 33
P4
INCOME STATEMENT FORMATS
Multiple-Step
Single-Step
McGraw-Hill/Irwin
Slide 34
P4
MULTIPLE-STEP INCOME STATEMENT
Z-MART
Income Statement
For Year Ended December 31, 2009
Sales
Less: Sales discounts
Sales returns and allowances
Net sales
Cost of Goods Sold
Gross profit from sales
Operating expenses:
Selling expenses:
Depreciation expense
$ 3,000
Sales salaries expense
18,500
Rent expense - selling space 8,100
Store supplies expense
1,200
Advertising expense
11,300
General and administrative expenses:
Depreciation expense
$
700
Office salaries expense
25,300
Insurance expense
600
Rent expense
900
Supplies expense
1,800
Total operating expenses
Net income from operations
Other revenues and expenses
Net income
McGraw-Hill/Irwin
$ 321,000
$
4,300
2,000
6,300
$ 314,700
230,400
$
84,300
$ 42,100
29,300
$
$
71,400
12,900
2,000
14,900
Slide 35
P4
SINGLE-STEP INCOME STATEMENT
Z-MART
Income Statement
For Year Ended December 31, 2009
Net sales
Other income
Total revenues
Cost of goods sold
Selling expenses
General and administrative expenses
Interest expense
Total expense
Net income
McGraw-Hill/Irwin
$ 314,700
3,500
318,200
$ 230,400
42,100
29,300
1,500
303,300
$ 14,900
Slide 36
P4
CLASSIFIED BALANCE SHEET
Z-MART
Partial Balance Sheet
December 31, 2009
Assets
Cash
Accounts receivable
Merchandise inventory
Office supplies
Store supplies
Prepaid insurance
Total current assets
McGraw-Hill/Irwin
$
$
8,200
11,200
21,000
550
250
300
41,500
Highly
Liquid
Less
Liquid
Slide 37
A1
ACID-TEST RATIO
Acid-Test
Ratio
Acid-Test
=
Ratio
=
Quick Assets
Current Liabilities
Cash + S-T Investments + Receivables
Current Liabilities
A common rule of thumb is the acid-test ratio should have a
value of at least 1.0 to conclude a company is unlikely to
face liquidity problems in the near future.
McGraw-Hill/Irwin
Slide 38
A1
ACID-TEST RATIO
($ millions)
Total quick assets
Total current assets
Total current liabilities
Acid-test ratio
Current ratio
Industry acid-test ratio
Industry current ratio
2007
2006
2005
$ 3,010 $ 3,286 $ 4,923
6,648
6,702
8,232
3,492
2,762
3,297
0.86
1.19
1.49
1.90
2.43
2.50
0.56
0.61
0.66
2.43
2.55
2.67
JCPenney
3,00
2,00
1,00
Acid-test ratio
McGraw-Hill/Irwin
2007
Current ratio
2006
2005
Slide 39
A2
GROSS MARGIN RATIO
Gross
Margin =
Ratio
Percentage of
dollar sales
available to
cover expenses
and provide a
profit.
McGraw-Hill/Irwin
Net Sales - Cost of Goods Sold
Net Sales
JC Penny's Gross Margin Ratio
($ millions)
2007
2006
2005
Gross margin
$ 7,825 $ 7,191 $ 6,792
Net sales
$ 19,903 $ 18,781 $ 18,096
Gross margin ratio
39.3%
38.3%
37.5%
Slide 40
END OF CHAPTER 5
McGraw-Hill/Irwin
Slide 41