Accounting for Merchandising
Operations
Chapter 5
PowerPoint Editor:
Beth Kane, MBA, CPA
Wild, Shaw, and Chiappetta
Fundamental Accounting Principles
22nd Edition
Copyright © 2015 McGraw-Hill
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reproduction or distribution without
the prior written consent of
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05-C1: Merchandising
Activities
2
5- 3
Service Companies
Service organizations sell time to
earn revenue.
Examples: Accounting firms, law firms,
and plumbing services
C1
3
5- 4
Merchandiser
Merchandising Companies
Manufacturer
C1
Wholesaler
Retailer
Consumers
4
5- 5
Reporting Income for a
Merchandiser
Merchandising companies sell products to
earn revenue.
Examples: sporting goods, clothing, and auto parts stores
C1
5
05-C2: Reporting Inventory for
a Merchandiser
6
5- 7
Operating Cycle for
a Merchandiser
Begins with the purchase of merchandise and
ends with the collection of cash from the sale
of merchandise.
C2
7
5- 8
Inventory Systems
C2
8
5- 9
Inventory Systems
Perpetual systems
 continually update
accounting records for
merchandising
transactions
C2
Periodic systems
 accounting records
relating to merchandise
transactions are updated
only at the end of the
accounting period
9
05-P1: Accounting for
Merchandise Purchases
10
Merchandise Purchases
On November 2, Z-Mart purchased $1,200 of
merchandise inventory for cash.
P1
11
Trade Discounts
P1
12
5- 13
Purchase Discounts
A deduction from the invoice price granted
to induce early payment of the amount due.
P1
13
5- 14
Purchase Discounts
2/10,n/30
Discount
Percent
P1
Number of
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due in 30
Days
Credit
Period
14
5- 15
Purchase Discounts
On November 2, Z-Mart purchased $1,200
of merchandise inventory on account,
credit terms are 2/10, n/30.
P1
15
5- 16
Purchase Discounts
On November 12, Z-Mart paid the amount
due on the purchase of November 2.
P1
16
5- 17
Purchase Discounts
After we post these entries, the accounts
involved look like these:
P1
17
5- 18
Purchase Returns and
Allowances
Purchase Return . . .
Merchandise returned by the purchaser to the
supplier.
Purchase Allowance . . .
A reduction in the cost of defective or
unacceptable merchandise received by a
purchaser from a supplier.
P1
18
5- 19
Purchase Returns and
Allowances
On November 15, Z-Mart (buyer) issues a $300
debit memorandum for an allowance from
Trex for defective merchandise.
P1
19
5- 20
Purchase Returns and Allowances
Z-Mart purchases $1,000 of merchandise on June 1 with terms
2/10, n/60. Two days later, Z-Mart returns $100 of goods before
paying the invoice. When Z-Mart later pays on June 11, it takes
the 2% discount only on the $900 remaining balance.
P1
20
5- 21
Transportation Costs and
Ownership Transfer
P1
21
5- 22
Transportation Costs
Z-Mart purchased merchandise on terms of
FOB shipping point. The transportation
charge is $75.
P1
22
5- 23
Accounting for Merchandise
P1
23
NEED-TO-KNOW
Prepare journal entries to record each of the following purchases transactions of a merchandising
company. Assume a perpetual inventory system.
Oct. 1
Oct. 3
Oct. 7
Oct. 11
Oct. 31
Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale
are 2/10, n/30, and FOB shipping point; the invoice is dated October 1.
Paid $30 cash for freight charges from UPS for the October 1 purchase.
Returned 50 defective units from the October 1 purchase and received full credit.
Paid the amount due from the October 1 purchase, less the return on October 7.
Assume the October 11 payment was never made and, instead, payment of
the amount due on the October 1 purchase, less the return on October 7,
occurred on October 31.
P1
P1
24
NEED-TO-KNOW
Oct. 1
Oct. 3
Oct. 7
Oct. 11
Oct. 1
Oct. 3
Oct. 31
Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale
are 2/10, n/30, and FOB shipping point; the invoice is dated October 1.
Paid $30 cash for freight charges from UPS for the October 1 purchase.
Returned 50 defective units from the October 1 purchase and received full credit.
Paid the amount due from the October 1 purchase, less the return on October 7.
Merchandise inventory
500
30
Oct. 7
Oct. 11
324
Date
Oct. 1
Oct. 3
Oct. 7
Oct. 11
P1
200
6
Oct. 7
Oct. 11
General Journal
Merchandise inventory (125 units @ $4)
Accounts payable
Merchandise inventory
Cash
Accounts payable
Oct. 1
200
300
Debit
500
500
Credit
500
30
30
Accounts payable (50 units @ $4)
Merchandise inventory (50 units @ $4)
200
Accounts payable
Merchandise inventory ($300 x .02)
Cash
300
200
6
294
25
NEED-TO-KNOW
Oct. 1
Oct. 3
Oct. 7
Oct. 31
Oct. 1
Oct. 3
Oct. 31
Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale
are 2/10, n/30, and FOB shipping point; the invoice is dated October 1.
Paid $30 cash for freight charges from UPS for the October 1 purchase.
Returned 50 defective units from the October 1 purchase and received full credit.
Assume the October 11 payment was never made and, instead, payment of
the amount due on the October 1 purchase, less the return on October 7,
occurred on October 31.
Merchandise inventory
500
30
Oct. 7
500
330
Date
Oct. 1
Oct. 3
Oct. 7
Oct. 31
P1
200
Oct. 7
Oct. 31
Accounts payable
Oct. 1
200
300
General Journal
Merchandise inventory (125 units @ $4)
Accounts payable
Merchandise inventory
Cash
Debit
500
Credit
500
30
30
Accounts payable
Merchandise inventory (50 units @ $4)
200
Accounts payable
Cash
300
200
300
26
05-P2: Accounting for
Merchandise Sales
27
5- 28
Accounting for Merchandise
Sales
P2
28
5- 29
Sales of Merchandise
Each sales transaction for a seller of
merchandise involves two parts:
Revenue received
in the form of an
asset from a
customer.
P2
Recognition of the
cost of merchandise
sold to a customer.
29
5- 30
Sales of Merchandise
Z-Mart sold $2,400 of merchandise on credit.
The merchandise has a cost basis to Z-Mart of
$1,600.
P2
30
5- 31
Sales Discounts
Sales discounts on credit sales can benefit a seller by
decreasing the delay in receiving cash and reducing future
collection efforts.
P2
31
5- 32
Sales Discounts
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.
The account was paid in full within the 60-day period.
The account was paid in full within the 10-day discount period.
P2
32
5- 33
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.
P2
Sales allowances
refer to reductions in
the selling price of
merchandise sold to
customers.
33
5- 34
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.
P2
34
5- 35
Sales Allowances
Assume that $800 of the merchandise ZMart sold on November 3 is defective but
the buyer decides to keep it because ZMart offers a $100 price reduction.
P2
35
NEED-TO-KNOW
Prepare journal entries to record each of the following sales transactions of a merchandising
company. Assume a perpetual inventory system.
Jun. 1
Jun. 7
Jun. 8
Jun. 11
P2
Sold 500 units of merchandise to a customer for $14 per unit under credit
terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The
merchandise had cost $10 per unit.
The customer returns 20 units because those units did not fit the customer’s
needs. The seller restores those units to its inventory.
The customer discovers that 30 units are damaged but are still of some use
and, therefore, keeps the units because the seller sends the buyer a credit
memorandum for $90 to compensate for the damage.
The customer discovers that 10 units are the wrong color, but keeps 8 of
these units because the seller sends a $12 credit memorandum to compensate.
The customer returns the remaining 2 units to the seller. The seller restores
the 2 returned units to its inventory
36
NEED-TO-KNOW
Jun. 1
Jun. 7
Date
Jun. 1
Jun. 1
Jun. 7
Jun. 7
P2
Sold 500 units of merchandise to a customer for $14 per unit under credit
terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The
merchandise had cost $10 per unit.
The customer returns 20 units because those units did not fit the customer’s
needs. The seller restores those units to its inventory.
General Journal
Accounts receivable
Sales (500 @ $14)
Debit
7,000
Cost of goods sold (500 @ $10)
Merchandise inventory
5,000
Sales returns and allowances (20 @ $14)
Accounts receivable
Merchandise inventory (20 @ $10)
Cost of goods sold
Credit
7,000
5,000
280
280
200
200
37
NEED-TO-KNOW
Jun. 8
Jun. 11
The customer discovers that 30 units are damaged but are still of some use
and, therefore, keeps the units because the seller sends the buyer a credit
memorandum for $90 to compensate for the damage.
The customer discovers that 10 units are the wrong color, but keeps 8 of
these units because the seller sends a $12 credit memorandum to compensate.
The customer returns the remaining 2 units to the seller. The seller restores
the 2 returned units to its inventory
Date
Jun. 1
Jun. 01
Jun. 07
Jun. 07
Jun. 08
Jun. 11
Jun. 11
P2
General Journal
Accounts receivable
Sales (500 @ $14)
Debit
7,000
Cost of goods sold (500 @ $10)
Merchandise inventory
5,000
Sales returns and allowances (20 @ $14)
Accounts receivable
Merchandise inventory (20 @ $10)
Cost of goods sold
Sales returns and allowances
Accounts receivable
Credit
7,000
5,000
280
280
200
200
90
90
Sales returns and allowances ($12 + (2 @ $14))
Accounts receivable
40
Merchandise inventory (2 @ $10)
Cost of goods sold
20
40
20
38
NEED-TO-KNOW
Partial income statement
Sales
Sales returns and allowances
Sales discounts
Net sales
Cost of goods sold
Gross profit on sales
Date
Jun. 1
Jun. 01
Jun. 07
Jun. 07
Jun. 08
Jun. 11
P2
Jun. 11
$7,000
$410
0
(410)
6,590
4,780
$1,810
General Journal
Accounts receivable
Sales (500 @ $14)
Debit
7,000
Cost of goods sold (500 @ $10)
Merchandise inventory
5,000
Sales returns and allowances (20 @ $14)
Accounts receivable
Merchandise inventory (20 @ $10)
Cost of goods sold
Sales returns and allowances
Accounts receivable
Credit
7,000
5,000
280
280
200
200
90
90
Sales returns and allowances ($12 + (2 @ $14))
Accounts receivable
40
Merchandise inventory (2 @ $10)
Cost of goods sold
20
40
20
39
05-P3: Adjusting Entries for
Merchandisers
40
Merchandising Cost Flow in the
Accounting Cycle
P2
41
5- 42
Adjusting Entries for
Merchandisers
A merchandiser using a perpetual inventory system is
usually required to make an adjustment to update the
Merchandise Inventory account to reflect any loss of
merchandise, including theft and deterioration.
P3
42
5- 43
Closing Entries for Merchandisers
P3
43
NEED-TO-KNOW
A merchandising company’s ledger on May 31, its fiscal year-end, includes the following selected
accounts that have normal balances (it uses the perpetual inventory system). A physical count of its
May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a)
Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in
temporary revenue and expense accounts.
Merchandise inventory
Z. Zee, Capital
Z. Zee, Withdrawals
Sales
Sales discounts
$756
2,306
140
3,204
94
Sales returns and allowances
Cost of goods sold
Depreciation expense
Salaries expense
Other operating expenses
Merchandise inventory
Z. Zee, Capital
Z. Zee, Withdrawals
Sales
Sales discounts
Sales returns and allowances
Cost of goods sold
Depreciation expense
Salaries expense
Other operating expenses
P3
Debit
$756
$130
2,100
206
650
100
Credit
$2,306
140
3,204
94
130
2,100
206
650
100
44
NEED-TO-KNOW
A merchandising company’s ledger on May 31, its fiscal year-end, includes the following selected
accounts that have normal balances (it uses the perpetual inventory system). A physical count of its
May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a)
Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in
temporary revenue and expense accounts.
Merchandise inventory
Z. Zee, Capital
Z. Zee, Withdrawals
Sales
Sales discounts
Sales returns and allowances
Cost of goods sold
Depreciation expense
Salaries expense
Other operating expenses
Date
May 31
P3
Debit
$756
$718
Credit
$2,306
140
3,204
94
130
2,100
2,138
206
650
100
General Journal
Cost of Goods Sold
Merchandise inventory ($756 - $718)
Debit
38
Credit
38
45
NEED-TO-KNOW
Merchandise inventory
Z. Zee, Capital
Z. Zee, Withdrawals
Sales
Sales discounts
Sales returns and allowances
Cost of goods sold
Depreciation expense
Salaries expense
Other operating expenses
Date
May 31
May 31
P3
Debit
$756
$718
General Journal
Sales
Income Summary
Income Summary
Sales discounts
Sales returns and allowances
Cost of Goods Sold ($2,100 + $38)
Depreciation expense
Salaries expense
Other operating expenses
Credit
$2,306
140
3,204
94
130
2,100
2,138
206
650
100
Debit
3,204
Credit
3,204
3,318
94
130
2,138
206
650
100
46
05-P4: Financial Statement
Formats
47
5- 48
P4
48
5- 49
Single-Step Income Statement
P4
49
5- 50
Classified Balance Sheet
Highly
Liquid
Less
Liquid
P4
50
NEED-TO-KNOW
Assume Target’s adjusted trial balance on April 30, 20X1, its fiscal year-end, follows. (a)
Prepare a multiple-step income statement that includes separate categories for selling
expenses and for general and administrative expenses. (b) Prepare a single-step income
statement that includes these expense categories: cost of goods sold, selling expenses, and
general and administrative expenses.
Merchandise inventory
Other (noninventory) assets
Total liabilities
Target, Capital
Target, Withdrawals
Sales
Sales discounts
Sales returns and allowances
Cost of goods sold
Sales salaries expense
Rent expense - Selling space
Store supplies expense
Advertising expense
Office salaries expense
Rent expense - Office space
Office supplies expense
Totals
P4
Debit Credit
$820
2,608
$500
2,091
160
4,512
45
240
1,490
640
160
30
260
570
72
8
$7,103 $7,103
51
NEED-TO-KNOW
Merchandise inventory
Other (noninventory) assets
Total liabilities
Target, Capital
Target, Withdrawals
Sales
Sales discounts
Sales returns and allowances
Cost of goods sold
Sales salaries expense
Rent expense - Selling space
Store supplies expense
Advertising expense
Office salaries expense
Rent expense - Office space
Office supplies expense
Totals
P4
Debit Credit
$820
2,608
$500
2,091
160
4,512
45
240
1,490
640
160
30
260
570
72
8
$7,103 $7,103
TARGET
Income Statement
For Year Ended April 30, 20X1
Sales
$4,512
Less: Sales discounts
$45
Sales returns and allowances
240
285
Net sales
4,227
Cost of goods sold
1,490
Gross profit
2,737
Expenses
Selling expenses
Sales salaries expense
640
Rent expense - Selling space
160
Store supplies expense
30
Advertising expense
260
Total selling expenses
1,090
General and administrative expenses
Office salaries expense
570
Rent expense - Office space
72
Office supplies expense
8
Total general and administrative expenses
650
Total expenses
1,740
Net income
$997
52
NEED-TO-KNOW
TARGET
Income Statement
For Year Ended April 30, 20X1
Sales
$4,512
Less: Sales discounts
$45
Sales returns and allowances
240
285
Net sales
4,227
Cost of goods sold
1,490
Gross profit
2,737
Expenses
Selling expenses
Sales salaries expense
640
Rent expense - Selling space
160
Store supplies expense
30
Advertising expense
260
Total selling expenses
1,090
General and administrative expenses
Office salaries expense
570
Rent expense - Office space
72
Office supplies expense
8
Total general and administrative expenses
650
Total expenses
1,740
Net income
$997
P4
TARGET
Income Statement
For Year Ended April 30, 20X1
Net sales
Expenses
Cost of goods sold
Selling expenses
General and administrative expenses
Total expenses
Net income
$4,227
1,490
1,090
650
3,230
$997
53
5- 54
Global View
Accounting for Merchandise Purchases and Sales
Both U.S. GAAP and IFRS include broad and similar guidance
for the accounting of merchandise purchases and sales.
1.
2.
3.
4.
5.
Income Statement Presentation
Order of expenses
Separate disclosures
Presentation of expenses
Operating Income
Alternative income
54
05-A1: Acid-Test Ratios
55
5- 56
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.
A1
56
05-A2: Gross Margin Ratios
57
5- 58
Gross Margin Ratio
Gross
margin =
ratio
Net sales - Cost of goods sold
Net sales
Percentage of dollar
sales available to
cover expenses and
provide a profit.
A2
58
5- 59
JCPenney
A1/A2
59
05-P5: Periodic & Perpetual
Inventory Systems
60
5- 61
Appendix 5A:
Periodic Inventory System
(a)
(b)
(c)
(d)
(e)
(f)
(g)
P5
A periodic
inventory
system requires
updating the
inventory
account only at
the end of a
period to reflect
the quantity and
cost of both the
goods available
and the goods
sold.
61
5- 62
Appendix 5A:
Periodic Inventory System
P5
62
5- 63
Appendix 5B:
Work Sheet—Perpetual System
P5
63
5- 64
End of Chapter 5
64