Chapter 6
Merchandising Operations and the
Multistep Income Statement
PowerPoint Author:
Brandy Mackintosh, CA
Copyright © 2016 by McGraw-Hill Education
Learning Objective 6-1
Distinguish between service
and merchandising
operations.
6-2
Operating Cycles
6-3
Operating Cycles
6-4
(in thousands)
(in millions)
(in thousands)
(in millions)
Learning Objective 6-2
Explain the differences
between periodic and
perpetual inventory systems.
6-5
Inventory Systems
Three accounts are particularly important to
a merchandiser:
-
Inventory
The merchandiser’s total cost of acquiring goods
that it has not yet sold
Sales
Revenue
Total selling price of all goods that the merchandiser
did sell to customers
Cost of Goods
Sold
Total cost of all goods that the merchandiser did sell
to customers
= Gross Profit
6-6
Inventory Systems
BI + P – EI = CGS or BI + P – CGS = EI
$4,800 + 10,200 – 6,000 = $9,000
6-7
$4,800 + 10,200 – 9,000 = $6,000
Periodic Inventory System
A periodic inventory system updates the
inventory records for merchandise purchases,
sales, and returns only at the end of the
accounting period.
BI + P – EI = CGS
To determine how much
inventory is on hand and how
much inventory has been
sold, periodic systems
require that inventory be
physically counted by the
employees at the end of the
period.
6-8
Perpetual Inventory System
In a perpetual inventory
system, the inventory
records are updated
“perpetually,” that is, every
time inventory is bought,
sold, or returned.
Perpetual systems often are
combined with bar codes
and optical scanners.
6-9
Inventory Control
6-10
Periodic
Inventory
System
Perpetual
Inventory
System
No Up-to-Date
Records
Continuous
Tracking
Can’t
Estimate
Shrinkage
Can
Estimate
Shrinkage
Learning Objective 6-3
Analyze purchase transactions
under a perpetual inventory
system.
6-11
Recording Inventory Purchases
We will now look at the accounting for
inventory purchases, as well as
transportation costs, purchase returns
and allowances, and purchase
discounts. We will record all inventoryrelated transactions in the Inventory
account.
6-12
Inventory Purchases
Walmart receives $10,500 of bikes purchased on account.
1 Analyze
Assets
Inventory
2
=
+$10,500
Accounts
Payable
+
Stockholders’ Equity
+$10,500
Record
Inventory
Accounts Payable
6-13
Liabilities
10,500
10,500
Transportation Cost
Walmart pays $400 cash to a trucker who delivers the
$10,500 of bikes to one of its stores.
1 Analyze
Assets
Cash
Inventory
2
Liabilities
+
Stockholders’ Equity
-$400
+$400
Record
Inventory
Cash
6-14
=
400
400
Purchase Returns and
Allowances
Walmart returned some of the bikes to the
supplier and received a $500 reduction in the balance owed.
1 Analyze
Assets
Inventory
2
-$500
Liabilities
Accounts
Payable
+
Stockholders’ Equity
-$500
Record
Accounts Payable
Inventory
6-15
=
500
500
Purchase Discounts
Walmart’s bike purchase for $10,500 had terms of 2/10,
n/30. Recall that Walmart returned inventory costing $500
and received a $500 reduction in its Accounts Payable.
Walmart paid within the discount period.
1 Analyze
Assets
Cash
Inventory
2
-$9,800
-$200
Liabilities
+
Stockholders’ Equity
Accounts
Payable -$10,000
Record
Accounts Payable
Cash
Inventory
6-16
=
10,000
9,800
200
Summary of Inventory
Transactions
6-17
Learning Objective 6-4
Analyze sales transactions
under a perpetual inventory
system.
6-18
Recording Inventory Sales
Merchandisers earn revenues by transferring
control of merchandise to a customer, either for
cash or on credit.
For a merchandiser who is shipping goods to a
customer, the transfer of control occurs at one of two
possible times:
1. FOB shipping point —the sale is recorded when the
goods leave the seller’s shipping department.
2. FOB destination —the sale is recorded when the
goods reach their destination (the customer).
6-19
Recording Inventory Sales
Every merchandise sale has two components,
each of which requires an entry in a perpetual
inventory system.
Selling
Price
Cost
6-20
Recording Inventory Sales
Walmart sells two Schwinn mountain bikes at a selling price of
$200 per bike, for a total of $400 cash. The bikes had
previously been recorded in Walmart’s Inventory at a cost of
$175 per bike, for a total cost of $350.
1 Analyze
Assets
Cash
Inventory
2
+$400
-$350
Liabilities
+
Stockholders’ Equity
Sales Revenue
+$400
Cost of Goods Sold -$350
Record
Cash
Sales Revenue
Cost of Goods Sold
Inventory
6-21
=
400
400
350
350
Sales Returns and Allowances
When goods sold to a customer arrive
in damaged condition or are otherwise
unsatisfactory, the customer can
(1) return them for a full refund or
(2) keep them and ask for a reduction in
the selling price, called an allowance.
6-22
Sales Returns and Allowances
Suppose that after Walmart sold the two Schwinn mountain
bikes, the customer returned one to Walmart. Assuming that
the bike is still like new, Walmart would refund the $200 selling
price to the customer and take the bike back into inventory.
1 Analyze
Assets
Cash
Inventory
2
=
Liabilities
-$200
+$175
Stockholders’ Equity
Sales Returns and
Allowances (+xR)
Cost of Goods Sold
-$200
+$175
Record
Sales Returns & Allowances (+xR)
Cash
Inventory
Cost of Goods Sold
6-23
+
200
200
175
175
Sales on Account and Sales Discounts
Suppose Walmart’s warehouse store (Sam’s Club) sells
printer paper on account to a local business for $1,000 with
payment terms of 2/10, n/30. The paper had cost Sam’s Club
$700.
1 Analyze
Assets
Accounts Receivable+$1,000
Inventory
-$700
2
Liabilities
+
Stockholders’ Equity
Sales Revenue
+$1,000
Cost of Goods Sold -$700
Record
Accounts Receivable
Sales Revenue
Cost of Goods Sold
Inventory
6-24
=
1,000
1,000
700
700
Sales on Account and Sales Discounts
To take advantage of this 2% discount, the customer must pay
Walmart within 10 days. If the customer does so, it will deduct
the $20 discount (2% $1,000) from the total owed ($1,000),
and then pay $980 to Walmart.
1 Analyze
Assets
=
Cash
+$980
Accounts Receivable -$1,000
2
Liabilities
+
Stockholders’ Equity
Sales Discounts (+xR)
Record
980
20
Cash
Sales Discounts (+xR)
Accounts Receivable
1,000
(2% × $1,000)
6-25
-$20
Summary of Sales-Related
Transactions
The sales returns and allowances and sales
discounts introduced in this section were
recorded using contra-revenue accounts.
6-26
Learning Objective 6-5
Prepare and analyze a
merchandiser’s multistep
income statement.
6-27
Multistep Income Statement
6-28
Gross Profit Analysis
Gross
Gross Profit
=
× 100
Profit %
Net Sales
6-29
Comparing Gross Profit
Percentages
6-30
Supplement 6A
Recording Inventory Transactions in
a Periodic System
Copyright © 2016 by McGraw-Hill Education
Learning Objective 6-S1
Record inventory transactions
in a periodic system.
6-32
Recording Inventory Transactions
in a Periodic System
An electronics retailer stocks and sells just one item
and the following events occurred:
Jan. 1
Apr. 14
Nov. 30
Dec. 31
Beginning inventory: 80 units at a cost of $60.
Purchased 170 additional units on account at a cost of $60.
Sold 150 units on account at a unit sales price of $80.
Counted 100 units at a unit cost of $60.
We will record these events assuming the company uses
a periodic inventory system and then compare the
periodic inventory system to a perpetual inventory system.
6-33
Recording Inventory Transactions
in a Periodic System
Periodic Inventory System
6-34
Perpetual Inventory System
Recording Inventory Transactions
in a Periodic System
Periodic Inventory System
BI + P – EI = CGS
End-of-year adjustment entries are not required using a perpetual inventory system.
6-35
Recording Inventory Transactions
in a Periodic System
Summary of the Effects on the Accounting Equation
6-36
Chapter 6
Solved Exercises
M6-2, M6-16, E6-3, E6-5, E6-13,
E6-20
Copyright © 2016 by McGraw-Hill Education
M6-2 Calculating Shrinkage in a Perpetual Inventory System
Corey’s Campus Store has $4,000 of inventory on hand at the
beginning of the month. During the month, the company buys $41,000
of merchandise and sells merchandise that had cost $30,000. At the
end of the month, $13,000 of inventory is on hand. How much
shrinkage occurred during the month?
Beginning inventory
Purchases
Cost of Goods Sold
Ending balance
Inventory count
Shrinkage
6-38
$ 4,000
+41,000
-30,000
15,000
-13,000
$ 2,000
M6-16 Interpreting Changes in Gross Profit Percentage
Luxottica Group, the Italian company that sells Ray Ban and Oakley
sunglasses, reported net sales of €7.1 billion in 2012 and €6.2 billion in
2011. Gross profit increased from €4.1 billion in 2011 to €4.7 billion in
2012. Was the increase in gross profit caused by (a) an increase in
gross profit per sale, (b) an increase in sales volume, or (c) a
combination of (a) and (b)?
(in billions of euro)
Net Sales
Cost of Goods Sold
Gross Profit
Gross Profit Percentage
6-39
2012
7.1
2.4
4.7
2011
6.2
2.1
4.1
66.2%
66.1%
E6-3 Identifying Shrinkage and Other Missing Inventory
Information
Calculate the missing information for each of the following
independent cases:
Beg.
Inventory
Purchases
A
$100
$700
$300
B
200
800
C
150
D
260
500
?
600
Case
6-40
Cost of
Goods
Sold
Ending
Inventory
(perpetual)
Ending
Inventory
(As Counted)
$420
850
?
$500
?
150
150
$80
?
?0
200
450
650
210
440
?
200
10
?
10
Shrinkage
E6-5 Inferring Missing Amounts Based on Income Statement
Relationships
Supply the missing dollar amounts for each of the following independent cases.
6-41
E6-5 Inferring Missing Amounts Based on Income Statement Relationships
Supply the missing dollar amounts for each of the following independent cases.
Sales
Revenue
Beginning
Inventory
Purchases
A
$700
$100
$800
B
900
200
C
600 ?
D
E
Case
6-42
Cost of
Goods
Available
Cost of
Goods Sold
Gross
Profit
850 ?
600$?
150
400$?
50?
500 ?
200
300
400
600
900 ?
650
250
900
950 ?
500 ?
450?
150 ?
500
800
900 ?
1,000 ?
100
400 ?
800
300 ?
1,000
50
$300
Cost of
Ending
Inventory
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.
Jan. 6
Accounts Receivable
Sales Revenue
Cost of Goods Sold
Inventory
6-43
100
100
70
70
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.
Jan. 6
6-44
Accounts Receivable
Sales Revenue
80
Cost of Goods Sold
Inventory
60
80
60
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.
Jan. 14 Cash ($100 x 98%)
Sales Discounts ($100 x 2%)
Accounts Receivable
6-45
98
2
100
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.
Feb. 2
Cash
80
Accounts Receivable
6-46
80
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.
Feb. 28 Accounts Receivable
Sales Revenue
Cost of Goods Sold
Inventory
6-47
50
50
30
30
E6-20 Inferring Missing Amounts Based on Income Statement
Relationships
Supply the missing dollar amounts for the income statement of
Williamson Company for each of the following independent cases:
Sales Revenue
Sales Returns and Allowances
Net Sales
Cost of Goods Sold
Gross Profit
6-48
Case A
Case B
Case C
$ 8,000
150
7,850
5,750
$ 2,100
$ 6,000
500
5,500
4,050
$ 1,450
$ 6,195
275
5,920
5,400
$ 520
End of Chapter 6
6-49