Chapter 4
T.Hend Alajaji

Nature of Businesses .

Special terms of Merchandising businesses .

Analysis of merchandising transactions.

Multiple-Step Income Statement

1.
Nature of Businesses :
Service Businesses provide services rather than
products to customers.
2.
Merchandising businesses sell products they
purchase from other business to customers.
Objective 1 . Nature of Businesses :
Service Business
Fees earned
$XXX
Operating expenses
–XXX
Net income
$XXX
Objective 1 . Nature of Businesses:
Merchandising Business
Sales
Cost of Merchandise Sold
Gross Profit
Operating Expenses
Net Income
$XXX
–XXX
$XXX
–XXX
$XXX
Compute the net income
Service business:
Fees earned – operating expenses = net income
Merchandise business:
Sales – cost of merchandise sold = gross profit
Gross profit – operating expenses = net income
Income Statement Comparison
Service Business
$150,000
Fees earned
120,000
Operating expenses(-)
$ 30,000
Net income
Merchandising Business
$600,000
Sales revenue
450,000
Cost of mdse. Sold $150,000
Gross profit
120,000
Operating expenses $ 30,000
Net income
Objective 2 . Special terms of Merchandising businesses
 sales revenue or sales :
 the amount that a business earns from selling merchandise
inventory is called sales revenue, or sales.
 cost of merchandise sold :
 the major expense of a merchandiser is cost of goods sold.
 Gross margin or Gross profit :

The excess of sales over cost of sales is called gross margin.
 Merchandise inventory
 Merchandise on hand at the end of an account period
Objective 3
Analyze Merchandising transactions
Every merchandise sale has two components,
each of which requires an entry in a perpetual
inventory system.
Selling
Price
Cost
6-11
•On January 3, NetSolutions sold $1,800 of merchandise for cash.
Using the perpetual inventory system, the cost of merchandise sold and
the decrease in merchandise inventory are also recorded. The cost of
merchandise sold on January 3 is $1,200
Date
Description
Debit
Jan. 3
Cash
Sales
1,800
Jan. 3
Cost of merchandise sold
Merchandise inventory
1,200
Credit
1,800
1,200
•On January 12, NetSolutions sold merchandise on account for $510. The
cost of merchandise sold was $280.
Date
Description
Debit
Jan. 12 Account receivable
Sales
510
Jan. 12 Cost of merchandise sold
Merchandise inventory
280
Credit
510
280
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.
•On January 13, issued Credit Memo No. 32 to Alsaud Company for
merchandise returned to NetSolutions.
Selling price, $225; cost to
NetSolutions, $140.
Date
Description
Debit
Jan. 13 Sales returns and allowances
Account receivable – Krier Co.
225
Jan. 13 Merchandise inventory
Cost of merchandise sold
140
Credit
225
140
A sales discount is a sales price reduction given to
customers for prompt payment of their account
balance.
•To encourage the buyer to pay before the end of the credit period, the seller
may offer a discount, such as 2/10, n/30. These terms indicate that a two
percent discount can be taken if the invoice is paid within ten days. After ten
days the full amount is due by the thirtieth day from the invoice date
•On January 17, NetSolutions receives the amount due within ten days, so the
buyer deducted $30 ($1,500 x 2%) from the invoice amount
Date
Description
Debit
Credit
Jan.
22
Cash
Sales discounts
Account receivable
1,470
30
1,500
The sales returns and allowances and sales
discounts introduced in this section were
recorded using contra-revenue accounts.
Purchase Transactions
•On January 3, NetSolutions purchased merchandise for cash.
•On January 4, NetSolutions purchased merchandise on account from
Thomas Corporation
Date
Description
Debit
Jan. 3 Merchandise inventory
Cash
2,510
Jan. 4 Merchandise inventory
Account payable - Thomas Corporation
9,250
Credit
2,510
9,250
2- Purchases Discounts :
•Alpha Technologies issues an invoice for $3,000 to NetSolutions
dated March 12, with terms 2/10, n/30. NetSolutions is trying to
determine if it should pay the invoice within the discount period.
•Based on the calculation in the previous slide, NetSolutions pays the
amount due, less the discount, on March 22.
Date
Mar. 12
Mar. 22
Description
Merchandise inventory
Account payable - Alpha
Technologies
Account payable - Alpha Technologies
Cash
Merchandise inventory
Debit
3,000
3,000
Credit
3,000
2,940
60
3- Purchases Returns and Allowances :
•NetSolutions receives a delivery from Maxim Systems and determines that
$900 of the items are not the merchandise ordered. Debit memorandum #18
is issued to Maxim Systems. NetSolutions records the return of the
merchandise as follows:
Date
Description
Debit
Mar. 7
Account payable - Maxim Systems
Merchandise inventory
900
Credit
900
Multiple-Step Income
Statement
Revenue from sales:
Sales
Less:Sales returns and allowances
Sales discounts
Net sales
Cost of merchandise sold
Gross profit
$ 6,140
5,790
Continued
$720,185
11,930
$708,255
525,305
$182,950
Operating expenses:
Selling expenses:
Sales salaries expense
$56,230
Advertising expense
10,860
Depr. Expense–store equipment
Miscellaneous selling expense
3,100
630
Total selling expenses
$ 70,820
Administrative expenses:
Office salaries expense
$21,020
Rent expense
8,100
Depr. expense–office equipment
2,490
Insurance expense
1,910
Office supplies expense
610
Misc. administrative expense
760
Total admin. expenses
34,890
Total operating expenses
105,710
Income from operations
$ 77,240
Continued
Other income and expenses:
Rent revenue
Interest expense
Net income
Concluded
$ 600
(2,440)
(1,840)
$75,400
M6-11 Calculating Shrinkage in a Perpetual Inventory System
Corey’s Campus Store has $50,000 of inventory on hand at the
beginning of the month. During the month, the company buys
$8,000 of merchandise and sells merchandise that had cost
$30,000. At the end of the month, $25,000 of inventory is on
hand. How much shrinkage occurred during the month?
Beginning inventory
Purchases
Cost of Goods Sold
Ending balance
Inventory count
Shrinkage
6-26
$50,000
+8,000
-30,000
28,000
-25,000
$3,000