Accounting for Merchandising
Operations
Chapter 4
Wild, Shaw, and Chiappetta
Financial & Managerial Accounting
6th Edition
Copyright © 2016 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5- 2
Service Companies vs. Merchandising Companies
Service organizations sell time to earn revenue.
Examples: Accounting firms and plumbing services
A merchandiser earns net income by buying and
selling merchandise.
C1
2
5- 3
Merchandiser
Merchandising Companies
Manufacturer
C1
Wholesaler
Retailer
Consumers
3
5- 4
Reporting Income for a
Merchandiser
Exhibits
4.1 & 4.2
Merchandising companies sell products to earn
revenue.
Examples: sporting goods, clothing, and auto parts stores
C1
4
5- 5
Operating Cycle for
a Merchandiser
Exhibit
4.3
Begins with the purchase of merchandise and ends
with the collection of cash from the sale of
merchandise.
C2
5
5- 6
Inventory Systems
C2
Exhibit
4.4
6
5- 7
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
7
Merchandise Purchases
On November 2, Z-Mart purchased $1,200 of
merchandise inventory for cash.
P1
8
Trade Discounts
P1
Exhibit
4.5
9
5- 10
Purchase Discounts
Exhibit
4.6
A deduction from the invoice price granted
to induce early payment of the amount due.
P1
10
5- 11
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
11
5- 12
Purchase Discounts
On November 2, Z-Mart purchased $1,200
of merchandise inventory on account,
credit terms are 2/10, n/30.
P1
12
5- 13
Purchase Discounts
On November 12, Z-Mart paid the amount
due on the purchase of November 2.
Since payment was made within the discount
period, a $24 discount ($1,200 x 2%) is taken.
P1
13
5- 14
Purchase Discounts
After we post these entries, the accounts
involved look like these:
P1
14
5- 15
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
15
5- 16
Purchase Returns and
Allowances
On November 15, Z-Mart (buyer) issues a $300
debit memorandum for an allowance from
Trex for defective merchandise.
P1
16
5- 17
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
17
5- 18
Transportation Costs and
Ownership Transfer
P1
Exhibit
4.7
18
5- 19
Transportation Costs
Z-Mart purchased merchandise on terms of
FOB shipping point. The transportation
charge is $75.
Since freight terms were FOB shipping point, Z-mart is
responsible for the freight charges. We increase
Merchandise Inventory for the cost of the freight.
P1
19
5- 20
Accounting for Merchandise
P1
Exhibit
4.8
20
5- 21
Accounting for Merchandise
Exhibit
Sales
4.9
P2
21
5- 22
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.
22
5- 23
Sales of Merchandise
Z-Mart sold $2,400 of merchandise on credit.
The merchandise has a cost basis to Z-Mart of
$1,600.
Two entries are required:
1) Records the revenue 2) Records the cost
P2
23
5- 24
Sales Discounts
Sales discounts on credit sales can benefit a seller by
decreasing the delay in receiving cash and reducing future
collection efforts.
P2
24
5- 25
Sales Discounts
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.
Option 1: The account was paid in full within the 60-day period.
Option 2: The account was paid in full within the 10-day discount period.
P2
25
5- 26
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.
26
5- 27
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.
Two entries are required:
1) Records the reduction in revenue 2) Records the return of goods to
inventory
P2
27
5- 28
Sales Allowances
Assume that $800 of the merchandise Z-Mart sold on
November 3 is defective but the buyer decides to keep
it because Z-Mart offers a $100 price reduction.
Contra Revenue account
One entry is required:
1) Records the reduction in revenue
P2
28
Merchandising Cost Flow in the
Accounting Cycle
P3
Exhibit
4.10
29
5- 30
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
30
5- 31
Closing Entries for Merchandisers
Exhibit
4.11
P3
31
5- 32
Exhibit
4.13
P4
32
5- 33
Single-Step Income Statement
P4
Exhibit
4.14
33
5- 34
Classified Balance Sheet
Exhibit
4.15
Highly
Liquid
Less
Liquid
P4
34
5- 35
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.
Income Statement Presentation
Both U.S. GAAP and IFRS income statements begin with the net sales
or net revenues (top line) item. For merchandisers and manufacturers,
this is followed by cost of goods sold. The presentation is similar for the
remaining items with the following differences.
1. Order of expenses
2. Separate disclosures
3. Presentation of expenses
4. Operating Income
5. Alternative income
35
5- 36
Acid-Test (Quick) Ratio
Acid-test
ratio
Acid-test
ratio
=
=
Exhibit
4.16
Quick assets
Current liabilities
Cash + short term 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
36
5- 37
JCPenney’s
Acid Test and Current Ratios
A1
Exhibit
4.17
37
5- 38
Gross Margin Ratio
Gross
margin =
ratio
Exhibit
4.18
Net sales - Cost of goods sold
Net sales
Percentage of dollar
sales available to
cover expenses and
provide a profit.
A2
38
JC Penny’s
Gross Margin Ratio
A2
Exhibit
4.19
39
5- 40
Appendix 4A:
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.
40
5- 41
Appendix 4A: Comparison of Adjusting and Closing
Entries--Periodic vs. Perpetual Inventory System
Exhibit
4A.1
P5
41