Chapter 5
1
Chapter 5
Merchandising Operations
After studying Chapter 5, you
should be able to:
Identify the differences between a service
enterprise and a merchandising company.
Explain the recording of purchases under a
perpetual inventory system.
Explain the recording of sales revenues
under a perpetual inventory system.
Distinguish between a single-step and a
multiple-step income statement.
2
Chapter 5
Merchandising Operations
After studying Chapter 5, you should
be able to
Determine the cost of goods sold under a periodic
system.
Explain the factors affecting the profitability.
3
Service enterprises
perform services as
their primary source
of revenue.
Merchandising
companies buy
and sell
merchandise.
4
Differences Between a Service
Enterprise and a Merchandising Company
In a merchandising company, the primary source of
revenues is the sale of merchandise, referred to as sales
revenue or sales.
Unlike expenses for a service company, expenses for a
merchandising company are divided into two categories:
Cost of goods sold - the total cost of merchandise sold
during the period.
Operating expenses - selling and administrative
expenses.
5
Terms
Sales revenue or sales = revenue
from merchandise sold
Cost of goods sold = total cost of
merchandise sold
6
Page 202 in book
How Income is Measured in
a Merchandising Company
Sales
Revenue
Less
Cost of
Goods Sold
Equals
Gross
Profit
Less
Operating
Expenses
Equals
Net Income
(Loss)
7
Operating cycle of a
company is...
the average time it takes to
go from cash to cash in
producing revenues.
TO
8
Operating cycle of a
merchandising company is...
ordinarily longer than than
that of a service company;
purchase of merchandise and
its sale lengthens the cycle.
9
Service Company
Receive Cash
Perform Services
Cash
Accounts
Receivable
Merchandising Company
Receive Cash
Cash
Buy Inventory
Sell Inventory
Accounts
Receivable
Merchandise
10
Inventory
Inventory Systems
Perpetual - detailed inventory system in
which the cost of inventory is maintained
and the records continuously show the
inventory that should be on hand
Periodic -inventory system in which
detailed records are not maintained and
the cost is goods sold is determined only
at end of accounting period
11
Comparing Periodic and
Perpetual Inventory Systems
Inventory Purchased
Item Sold
End of
Period
Perpetual
Perpetual
No Entry
Record Purchase of Inventory
Inventory Purchased
Record Revenue and compute
and record Cost of Goods
Item Sold
End of
Period
Periodic
Record Purchase of Inventory
Record Revenue Only
Compute and
record Cost of
12
Goods Sold
Computers &
electronic
scanners
have enabled
many
companies to
install
perpetual
inventory
systems
13
What Is Charged to
Merchandise Inventory?
All costs of getting the inventory to
company and ready to sell (location &
condition to sell)
+Freight-In
+Special Permits
Only costs associated with merchandise
purchased for resale - not assets acquired
for use, such as supplies
14
Merchandise Purchases
On May 4 the company bought $ 3,800 worth of
merchandise from PW Audio Supply, Inc.
Task:Record the purchase by getting
information from the Purchase Invoice.
The Purchase Invoice is a copy of the
sales invoice.
15
•1. Seller
•2.Invoice Date
•3.Purchaser
•4.Salesperson
•5.Credit terms
•6.Freight
terms
•7.Goods sold:
catalog
no.,description,
quantity, price
per unit
•8.Total invoice
price
Invoice No. 731
Firm Name: Sauk Stero
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
City Chelsea State Illinois Zip 60915
Date5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description
A2547Z48
QTY
Production Model
Circuits
IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10 DAYS
8
Price
Amount
300
TOTAL
1,500
16
$3,800
Merchandise Purchases
On May 4 the company bought $ 3,800 worth of
merchandise from PW Audio Supply, Inc.
Merchandise
Inventory
Accounts
Payable
May 4 3,800
Freight-out
May 4 3,800
GENERAL JOURNAL
May 4 Merchandise Inventory
Accounts Payable
Debit Credit
3,800
3,800
To record goods purchased on account.
17
Purchases Returns and Allowances
On May 8 the company returned $300 worth of
merchandise to PW Audio Supply, Inc.
Merchandise
Inventory
May 4 3,800 May 8 300
Accounts
Payable
Freight-out
May 8 300 May 4 3,800
GENERAL JOURNAL
May 8 Accounts Payable
Merchandise Inventory
Debit Credit
300
300
To record goods returned that were purchased on account.
18
Freight Costs - On Incoming Inventory
On May 6 the company paid $ 150 to have the
merchandise inventory delivered to them.
Merchandise
Inventory
Freight-Out
Cash
May 4 3,800 May 8 300
May 6
May 6 150
150
GENERAL JOURNAL
May 6 Merchandise Inventory
Cash
Debit Credit
150
150
To record payment of freight.
19
Freight Costs-on outgoing inventory
On May 6 the seller company paid $ 150 to have
merchandise inventory delivered to the buyer.
Merchandise
Inventory
Freight-Out
May 6
Cash
150
GENERAL JOURNAL
May 6 Freight-Out
Cash
May 6 150
Debit Credit
150
150
To record payment of freight on goods sold.
20
Purchase Discounts
•Credit terms of a purchase on account may
permit the buyer to claim a cash discount for
prompt payment.
•Credit terms specify the amount of cash discounts
and the time period during which they are offered.
•2/10,n/30
•1/10 EOM
21
Purchases Discounts
Review - Company purchased $3,800 of merchandise
and returned $300. The credit terms are 2/10, n/30
and the invoice was paid within the discount period
Original Invoice
-Returns
Amount due before discount
2% discount
Net due
$3,800
300
$3,500
70
$3,430
22
Purchases Discounts
Review - Company purchased $3,800 of merchandise
and returned $300. The credit terms are 2/10, n/30 and
the invoice was paid within the discount period.
Merchandise
Inventory
May 4 3,800 May 8 300 May 8
Accounts
Payable
Cash
300 May 4 3,800
May 6 150
May 14 3430
May 6 150 May 14 70 May 14 3,500
GENERAL JOURNAL
May 14 Accounts Payable
Cash
Merchandise Inventory
To record payment within discount period.
Debit Credit
3,500
3,430
70
23
Payment of Invoice
Review - Company purchased $3,800 of merchandise
and returned $300. The credit terms are 2/10, n/30 and
the invoice was NOT paid within the discount period.
Merchandise
Inventory
Accounts
Payable
May 4 3,800 May 8 300 May 8
Jun 3
GENERAL JOURNAL
June 3 Accounts Payable
Cash
300 May 4 3,800
Jun 3 3,500
3,500
Debit Credit
3,500
Cash
To record payment NOT within discount period.
3,500
24
Sales Invoice ...
a business document that provides
written evidence of a credit sale.
25
•1. Seller
•2.Invoice Date
•3.Purchaser
•4.Salesperson
•5.Credit terms
•6.Freight
terms
•7.Goods sold:
catalog
no.,description,
quantity, price
per unit
•8.Total invoice
price
Invoice No. 731
Firm Name: Sauk Stero
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
City Chelsea State Illinois Zip 60915
Date 5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description
A2547Z48
QTY
Production Model
Circuits
IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10 DAYS
8
Price
300
TOTAL
Amount
1,500
26$3,800
Sales Revenues Under a Perpetual System
are recorded when earned-revenue
recognition principle
must be supported by a business documentwritten evidence
2 entries are made for each sale
one to record sale
one to record cost of merchandise sold
27
Sales - under a perpetual system
Assume a sale of $ 3,800 ON ACCOUNT
for merchandise having a cost of $2,400
Accounts
Merchandise
Receivable
Cash
Inventory
May 4 3,800
Sales
May 4 3,800
Sales Returns &
Allowances
May 4 2,400
Cost of Goods
Sold
May 4 2,400
28
Sales Returns and
Allowances
Flip side of purchase returns and allowance
On buyer’s books
GENERAL JOURNAL
May 8 Accounts Payable
Merchandise Inventory
Debit Credit
300
300
To record goods returned that were purchased on account.
On seller’s books
GENERAL JOURNAL
May 8 Sales Returns and Allowance
Accounts Receivable
Debit Credit
300
To record return of goods delivered to Sauk Stero.
300
29
Sales - under a perpetual system
Assume a sale of $ 3,800 ON ACCOUNT
For merchandise having a cost of $2,400
Accounts
Merchandise
Receivable
Cash
Inventory
May 4 3,800
Sales
May 4 3,800
Sales Returns &
Allowances
May 4 2,400
Cost of Goods
Sold
May 4 2,400
30
What Is the Sales Returns
and Allowances Account?
Contra Revenue Account to sales
Used to show how much came in on returns
and allowances
Excessive returns and allowances suggest:
inferior merchandise
inefficiencies in filling orders
errors in billing customers
mistakes in delivery or shipment of goods
31
What Is the Sales
Discount Account?
Contra Revenue Account to sales
Used to disclose amount of cash
discounts taken by customers
32
Sales Discounts
Flip side of purchase discounts
On buyer’s books
GENERAL JOURNAL
Debit Credit
May 14 Accounts Payable
Cash
Merchandise Inventory
3,500
3,430
70
To record payment within discount period
On seller’s books
GENERAL JOURNAL
Debit Credit
May 14 Cash
Sales Discounts
Accounts Receivable
3,430
70
To record collection within discount period.
3500
33
Two Forms Of
Income Statements
Single-step income statement
Multiple-step income statement
34
Single-Step Income
Statement
One step… subtract total
expenses from total revenues
Revenues $10,000
Expenses
3,000
Net income $ 7,000
35
PW AUDIO, Inc.
Single-step Income Statement
For the Year Ended December 31, 2004
Sales
Interest Revenue
Gain on Sale of equipment
Total Revenues
Expenses
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Casualty Loss from vandalism
Income tax expense
Total expenses
Net income
$460,000
3,000
600
$463,600
$316,000
76,000
38,000
1,800
200
10,100
442,100
$ 21,500
36
PW AUDIO SUPPLY, INC.
Multi-step Income Statement For the Year Ended
December 31, 2004
Sales revenues
Sales
Less: Sales returns and allowance
Sales discounts
Net sales
Cost of goods sold
Gross profit
Operating expenses
Selling expenses:
Store salaries expense
Advertising expense
Depreciation expense
Freight-out
Total selling expenses
Administrative expenses
Salaries expense
Utilities expense
Insurance Expense
Total administrative expenses
Total operating expenses
Income from operations
$ 480,000
$12,000
8,000
20,000
460,000
316,000
$ 144,000
$45,000
16,000
8,000
7,000
$76,000
$19,000
17,000
2,000
38,000
114,000
37
$ 30,000
PW AUDIO SUPPLY, INC.
Multi-step Income Statement
For the Year Ended December 31, 2004
Income from operations (continued)
Other revenues and gains
Interest revenue
Gain on sale of equipment
$ 30,000
$ 3,000
600
$ 3,600
Other expenses and losses
Interest expense
Casualty loss from vandalism
$ 1,800
200
2,000
Income before income income taxes
Income tax expense
Net income
1,600
31,600
10,100
$21,500
38
Cost of Goods Sold Periodic Method
A running account of changes in
inventory is not maintained.
Separate accounts use to record
freight costs, returns and discounts
Cost of goods sold and ending
inventory are calculated at end of
period.
39
PW AUDIO SUPPLY, INC.
Cost of Goods Sold
For the Year Ended December 31, 2004
Cost of goods sold
Inventory, January 1
Purchases
Less Purchase returns and allowances $10,400
Purchase discounts
6,800
Net purchases
Add: Freight-in
Cost of goods purchased
Cost of goods available for sale
Inventory, December 31
Cost of goods sold
$ 36,000
$325,000
17,200
307,800
12,200
320,000
356,000
40,000
316,000
40
Gross Profit Ratio=
Gross Profit
Net Sales
• Company’s gross profit expressed as a
•
percentage
Also called “Gross margin ratio”
41
Profit Margin Ratio
Measures the percentage of each dollar of
sales that results in net income
Profit Margin Ratio =
Net Income
Net Sales
Higher value suggests favorable
return on each dollar of sales.
42