Ch 4: Reporting and Analyzing Merchandising Operations
Multiple-Step Income Statement
1
Multi-Step Income Statement
Format
Sales (net of discounts/allowances)
- COGS
= Gross Profit
- Operating Expenses
= Income from Operations
+ / – Other Revenues and Expenses
= Net Income
2
Ch 4: Reporting and Analyzing Merchandising Operations
Merchandising vs. Service
Operations
• Revenues derived from sale of merchandise
(i.e., inventory)
• Two categories of expenses:
– Operating expenses (similar to service company)
– Cost of goods sold
• Represents expense of inventory sold in a period
• “Matched” against the revenue from sale of goods
3
Inventory Financial Statement
Presentation
• On balance sheet
– Current asset: “Inventory”
• Represents cost of goods on hand
• Resold to customers at markup (vs. kept for internal use
– e.g., supplies)
• On income statement
– Revenue: “Sales” (of inventory)
– Operating expense: “Cost of Goods Sold”
• Represents cost of inventory sold (not here)
• New format for income statement
4
– Multi-step
Inventory Systems: Graphic
Exhibit
4.4
5
Multi-Step Income Statement
• In what order should we list accounts on the income
statement?
– For a merchandiser/retailer, direct profit on sale of inventory is critical
• Called Gross Profit
– Gross profit = Sales – COGS
– Distinguish between revenues and expenses that are a result of:
• “Normal” operations versus
• Other “incidental” activities
• Take “steps” to calculating net income:
– Determine gross profit (Sales – COGS)
– Determine net income from OPERATING activities (Gross Profit –
Operating Expenses)
– Determine final net income after NON- OPERATING activities (NI from
Operations – non-operating activities)
6
Multi-Step Income Statement
Format
Sales (net of discounts/allowances)
- COGS
= Gross Profit
- Operating Expenses
= Income from Operations
+ / – Other Revenues and Expenses
= Net Income
7
Ch 4: Reporting and Analyzing Merchandising Operations
Multiple-Step Income Statement
8
Chapter 4: Merchandising
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9
Ch 4: Reporting and Analyzing Merchandising Operations
Multiple-Step Income Statement
10
Inventory Systems: Definitions
Perpetual systems
 updates accounting
records for each
purchase and sale of
merchandising
 Assume perpetual system
is being used unless clear
information available
that periodic system is
being used.
Periodic systems
 Updates records for
purchase and sale of
merchandise only at the
end of the accounting
period
 Covered in Appendix
11
Inventory Systems - Purchases
Periodic inventory system updates inventory only at the end of a period
to reflect the quantity and cost of goods available and goods sold.
12
Other Merchandising Transactions
• Freight Costs
– Goods can be shipped either FOB Shipping Point
or FOB destination
– FOB Shipping Point
• Freight paid by buyer
• Freight costs are included as part of cost of inventory
purchased (Dr. Inventory) – “Freight
In”/”Transportation In”
– FOB Destination
13
• Freight paid by seller
• Freight costs are an operating expense to seller –
“Delivery Expense”
FOB Shipping Point vs. Destination
FOB Shipping Point
SELLER
Ownership
passes to
buyer here
BUYER
FOB Destination
SELLER
14
Ownership
passes to
buyer here
BUYER
Purchases and Transportation Costs
Exhibit
4.7
15
Other Merchandising Transactions (cont.)
• Purchase returns & allowances
– Reduces amount owed to vendor and inventory balance by
amount returned (Dr. A/P, Cr. Inventory)
• Purchase discounts
– Cash discount for timely payment on account
– If taken, discount decreases Inventory
– Stated in credit terms
– Example: “1/10, n/30” (one ten, net thirty)
• 1% cash discount if paid within 10 days of invoice date (“discount
period”)
• Payment due no later than 30 days from invoice date
16
Purchases with Returns and Allowances
Purchase Return:
Merchandise returned by the purchaser to the supplier.
Purchase Allowance:
A price reduction to the buyer of defective or
unacceptable merchandise.
•
(buyer) issues debit memorandum for an
allowance for defective merchandise.
© McGraw-Hill
Education
Exhibit
4.8
17
Chapter 4: Merchandising
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18
Ch 4: Reporting and Analyzing Merchandising Operations
Multiple-Step Income Statement
19
Inventory Systems - Sales
Periodic inventory system updates inventory only at the end of a period
to reflect the quantity and cost of goods available and goods sold.
20
Other Merchandising Transactions (cont.)
• Sales returns and allowances
– Reduces amount received from customer
• Dr. Sales Returns & Allowances, Cr. A/R
– Also increases inventory balance if goods are returned
• Dr. Inventory, Cr. COGS
• Use estimated value of goods when returned, not original cost
– Contra-revenue account – offsets “Sales”
• Sales discounts
– Seller’s view of purchase discounts taken
– Reduced Cash in the door, recorded as a Dr. to Sales Discount
– Also a contra-revenue account
21
Sales Returns and Allowances
Sales returns and allowances usually involve
dissatisfied customers and the possibility of
lost future sales.
Sales returns refer
to merchandise that
customers return to
the seller after a
sale.
Sales allowances
refer to reductions in
the selling price of
merchandise sold to
customers.
22
Sales with Returns and Allowances
Customer returns merchandise which sold
for $15 and cost $9.
Returned Goods - Not Defective:
Returned Goods - Are Defective:
23
Sales Allowances
Assume that $40 of the merchandise Z-Mart
sold on November 12 is defective but the
buyer decides to keep it because Z-Mart
offers a $10 price reduction.
24
Adjusting Entry for Merchandisers
Shrinkage: adjustment to reflect loss of merchandise:
25
Sales Closing Entries for Merchandisers
Exhibit
4.11
26
Chapter 4: Merchandising
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Multiple-Step Income Statement
28
Inventory Systems - Purchases
Periodic inventory system updates inventory only at the end of a period
to reflect the quantity and cost of goods available and goods sold.
29
Inventory Systems - Sales
Periodic inventory system updates inventory only at the end of a period
to reflect the quantity and cost of goods available and goods sold.
30
Inventory Systems –Closing Entries
Exhibit
4A.1
31
Chapter 4: Merchandising
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32