5-1
Chapter 5
Accounting for
Merchandise
Operations
Electronic Presentation
by Douglas Cloud
Pepperdine University
5-2
Learning Goals
1. Distinguish the operating activities of a
After studying this
service business from those of a
chapter, you should
merchandising business.
be able to:
2. Describe and illustrate the financial
statements of a merchandising business.
3. Describe the accounting for the sale of
merchandise.
4. Describe the accounting for the purchase of
merchandise.
Continued
5-3
Learning Goals
5. Describe the accounting for transportation
costs and sales taxes.
6. Illustrate the dual nature of merchandising
transactions.
7. Describe the accounting for merchandise
shrinkage.
8. Describe and illustrate the effects of inventory
misstatements on the financial statements.
Continued
5-4
Learning Goals
9. Describe and illustrate the use of gross profit
and operating income in analyzing a
company’s operations.
5-5
Learning Goal
1
Distinguish the
operating activities of a
service business from
those of a merchandising
business.
5-6
In prior chapters, you were
introduced to how to report the
financial condition and changes
in financial condition for a
service business.
5-7
In this chapter, you will be
exposed to the accounting for
merchandise operations.
5-8
Home Depot Inc.
Condensed Income Statement
For the Year Ending December 28, 2001
millions)
Net
sales
is the revenue
The(in
revenue
received
The cost of less
from
selling
merchandise
account
for
Net sales
$45,738
merchandise
sold
any
returned32,057
or any
merchandise
Revenue
minus
Cost of merchandise
soldmerchandise
is matched
against
discounts
reported.
is Sales.
Gross profit
$13,681
cost
provides
Operating expenses gross profit. net sales. 9,490
Operating income
Other income
Income before taxes
Income taxes
Net income
$ 4,191
26
$ 4,217
1,636
$ 2,581
What’s different on a
merchandising income statement?
5-9
Learning Goal
2
Describe and illustrate
the financial statements
of a merchandising
business.
5-10
Multiple-Step Income Statement
Online Solutions
Income Statement
For the Year Ended December 31, 2007
Net sales
Cost of merchandise sold
Gross profit
Operating expenses
Operating income
Other income and expense (net)
Operating income before taxes
Income taxes
Net income
$708,255
525,305
$182,950
105,710
$ 77,240
(1,840)
$ 75,400
15,000
$ 60,400
5-11
Multiple-Step Income Statement
Sales
Less sales returns and allowances
Less sales discounts
Net sales
$720,185
$6,140
5,790
11,930
$708,255
Sales is the total amount the customers are
charged for merchandise sold, including
cash sales and sales on account.
Detailed Revenue Section
5-12
Multiple-Step Income Statement
Sales
Less sales returns and allowances
Less sales discounts
Net sales
$720,185
$6,140
5,790
11,930
$708,255
Sales returns and allowances are granted
by the seller for damaged or defective
merchandise.
5-13
Multiple-Step Income Statement
Sales
Less sales returns and allowances
Less sales discounts
Net sales
$720,185
$6,140
5,790
11,930
$708,255
Sales discounts are granted by the seller to
customers for early payment of amounts owed.
5-14
Multiple-Step Income Statement
Purchases
$521,980
Less: Purchases returns and allowances $9,100
Purchases discounts
2,525 11,625
Net purchases
$510,355
Add transportation-in
17,400
Cost of merchandise purchased
$527,755
Purchases is the full cost of
buying merchandise for resale.
Detailed Cost of Merchandise Purchased Section
5-15
Multiple-Step Income Statement
Purchases
$521,980
Less: Purchases returns and allowances $9,100
Purchases discounts
2,525 11,625
Net purchases
$510,355
Add transportation-in
17,400
Cost of merchandise purchased
$527,755
AAPurchase
Purchaseallowance
return is the
is acost
reduction
of the in
purchase
merchandise
pricereturned
becausetothe
theitem
seller.
has a
defect or was the wrong item ordered.
5-16
Multiple-Step Income Statement
Purchases
$521,980
Less: Purchases returns and allowances $9,100
Purchases discounts
2,525 11,625
Net purchases
$510,355
Add transportation-in
17,400
Cost of merchandise purchased
$527,755
A Purchase discount is a reduction in the
initial cost of the merchandise. Usually, it
is due to early payment of the debt.
5-17
Multiple-Step Income Statement
Purchases
$521,980
Less: Purchases returns and allowances $9,100
Purchases discounts
2,525 11,625
Net purchases
$510,355
Add transportation-in
17,400
Cost of merchandise purchased
$527,755
Transportation-in is the shipping cost paid
by the buyer for merchandise. Note that
this freight payment increases the cost of
the merchandise. It is not an expense.
5-18
Multiple-Step Income Statement
“Cost of merchandise purchased” is
a major portion of the cost of
merchandise sold section, which
follows the revenue section.
5-19
Multiple-Step Income Statement
Note on the next slide that the only
change is that the section begins by
adding the beginning inventory and
ends by subtracting the ending
inventory.
5-20
Multiple-Step Income Statement
Merchandise inventory, Jan. 1, 2007
Purchases
$521,980
Less: Pur. returns and allow.
$9,100
Purchases discounts
2,525
11,625
Net purchases
$510,355
Add transportation-in
17,400
Cost of merchandise purchased
Merchandise available for sale
Less merchandise inventory, Dec. 31, 2007
Cost of merchandise sold
$ 59,700
527,755
$587,455
62,150
$525,305
Detailed Cost of Merchandise Sold Section
5-21
Multiple-Step Income Statement
This income statement was
prepared using the periodic
inventory method. The number
of units on hand was determined
by a physical count.
5-22
Multiple-Step Income Statement
In contrast, a perpetual inventory
system keeps a running amount for
each item as it is bought and sold.
A physical count is still necessary
for verification purposes.
5-23
Single-Step Income Statement
Online Solutions
Income Statement
For the Year Ended December 31, 2007
Revenue:
Net sales
Expenses:
Cost of merchandise sold
Operating expenses
Income taxes
Other income and expense (net)
Net income
$708,255
$525,305
105,710
15,000
1,840
647,855
$ 60,400
5-24
Retained Earnings Statement
Online Solutions
Retained Earnings Statement
For the Year Ended December 31, 2007
Retained earnings, January 1, 2007
Net income for the year
Less dividends
Increase in retained earnings
Retained earning, December 31, 2007
$128,800
$60,400
18,000
42,400
$171,200
5-25
Balance Sheet
Online Solutions
Balance Sheet
December 31, 2007
Assets
Current assets:
Cash
Accounts receivable
Merchandise inventory
Office supplies
Prepaid insurance
Total current assets
$ 52,950
76,080
62,150
480
2,650
$194,310
Continued
5-26
Property, plant, and equipment:
Land
$ 20,000
Store equipment
$27,100
less accumulated depr.
5,700
21,400
Office equipment
$15,570
less accumulated depr.
4,720
10,850
Total property, plant, and equip.
52,250
Total assets
$246,560
Liabilities
Current liabilities:
Accounts payable
Note payable
Salaries payable
Unearned rent
Total current liabilities
Continued
$ 22,420
5,000
1,140
1,800
$ 30,360
5-27
Long-term liabilities:
Note payable (final payment
due 2017)
Total liabilities
20,000
$ 50,360
Stockholders’ Equity
Capital stock
$ 25,000
Retained earnings
171,200 196,200
Total liabilities and stockholders’ equity
$246,560
5-28
Statement of Cash Flows
Online Solutions
Statement of Cash Flows
For the Year Ended December 31, 2007
Cash flows from operating activities:
Net income
$ 60,400
Add: Depreciation expense—store equipment $ 3,100
Depreciation expense—office equipment 2,490
Decrease in office supplies
120
Decrease in prepaid insurance
350
Increase in accounts payable
8,150 14,210
Continued
5-29
Deduct:
Increase in accounts receivable
Increase in merchandise inventory
Decrease in salaries payable
Decrease in unearned rent
Net cash flow form operating activities
Cash flows from investing activities:
Purchase of store equipment
Purchase of office equipment
Net cash flows used in investing activities
Cash flows from financing activities:
Payment of note payable
Payment of dividends
Net cash flows used in financing activities
Net increase in cash
January 1, 2007 cash balance
December 31, 2007 cash balance
$(24,080)
(2,450)
(360)
(600) (27,400)
$47,120
$ (7,100)
(5,570)
(12,670)
$ (5,000)
(18,000)
(23,000)
$11,450
41,500
$ 52,950
5-30
Learning Goal
3
Describe the
accounting for the
sale of merchandise.
5-31
On January 3 Online Solutions sells
merchandise costing $1,200 for
$1,800. The customer charges the
purchase on a MasterCard.
Transactions involving MasterCard or
Visa are treated as cash sales.
5-32
Jan. 3 Cash
Sales
1,800
1,800
This entry is made whether the company uses
the periodic or perpetual system.
An additional entry is made if the firm uses a
perpetual inventory system.
Jan. 3 Cost of Merchandise Sold 1,200
Merchandise Inventory
1,200
5-33
During January Online Solutions sold
merchandise costing $68,000 to American
Express customers for $100,000. Online
Solutions uses a perpetual inventory.
Transactions involving American Express
are recorded as sales on account.
5-34
Jan. 31 Accounts Receivable—
American Express
Sales
31 Cost of Merchandise Sold
Merchandise Inventory
100,000
100,000
68,000
68,000
Online receives cash from American Express of
$100,000, less a 4% service fee on February 15..
Feb. 15 Cash
Credit Card Expense
Accounts Receivable–
American Express
96,000
4,000
100,000
5-35
Sales Discounts
Credit Terms
2/10, n/30
Theisnet (full)
…the is
account
The buyer
amount
paid
within
10 is due by
allowed
a 2%
th day.
the
30
days.
discount if…
5-36
Sales Discounts
On January 12 Online Solutions sells
merchandise costing $850 on account to Omega
Tech for $1,500. Credit terms are 2/10, n/30.
Payment is received on January 22.
Jan. 12 Accounts Receivable—
Omega Tech
Sales
12 Cost of Merchandise Sold
Merchandise Inventory
1,500
1,500
850
850
5-37
Sales Discounts
On January 12 Online Solutions sells
merchandise costing $850 on account to Omega
Tech for $1,500. Credit terms are 2/10, n/30.
Payment is received on January 22.
Contra
Jan. 22 Cash
1,470
(offsetting)
Sales Discounts
30
account to
Accounts Receivable—
Sales 1,500
Omega Tech.
5-38
Sales Returns and Allowances
On January 13 Online Solutions issues a $2,000
credit memorandum to Krier Company for
merchandise that was returned. The merchandise
(cost $1,200) was sold on account.Contra
(offsetting)
Jan. 13 Sales Returns and Allowances
2,000
account to
Accounts Receivable—
Sales
Krier Company
2,000
13 Merchandise Inventory
Cost of Merchandise Sold
1,200
1,200
5-39
Learning Goal
4
Describe the
accounting for the
purchase of
merchandise.
5-40
On January 3 Online Solutions purchased
$2,500 of merchandise for cash. Recall that
Online Solutions uses the perpetual system.
Jan. 3 Merchandise Inventory
Cash
2,500
2,500
If this transaction had been on account from
Max Corporation (terms: 1/15, n/30), the
entry would have been:
Jan. 3 Merchandise Inventory
Accounts Payable—Max
Corporation
2,500
2,500
5-41
Purchase Discounts
On January 17 Online Solutions pays Max
Corporation the invoice amount less the discount.
The asset
Jan. 17 Accounts Payable—Max Corp. 2,500
Merchandise Inventory
25 is
account
Cash
2475
reduced.
Instead, assume the payment is made on Feb. 1 .
Feb. 1 Accounts Payable—Max Corp. 2,500
Cash
2,500
5-42
Purchases Returns and Allowances
On January 22 Online Solutions returns $5,000 of
merchandise purchased from Quantum Inc.
Jan. 22 Accounts Payable—Quantum Inc. 5,000
Merchandise Inventory
5,000
If the above return represents only part of the total
purchase and credit terms are 2/10, n/45, the
discount, if taken on the balance of the order, only
applies to the merchandise kept.
5-43
Learning Goal
5
Describe the
accounting for
transportation costs
and sales taxes.
5-44
Transportation Costs
Phil’s
Trucking
5-45
5-46
Transportation Costs
On January 19 Online Solutions buys
merchandise from Data Max on Account, $2,900,
terms FOB shipping point, and prepays the
transportation cost of $150.
Jan. 19 Merchandise Inventory
Accounts Payable—Data Max
19 Merchandise Inventory
Cash
2,900
2,900
150
150
5-47
Transportation Costs
On January 24 Online Solutions sells
merchandise to Miller Company on account,
$4,700, terms FOB destination. The cost of the
merchandise sold is $2,750, and Online Solutions
pays the transportation cost of $350.
Jan. 24 Accounts Receivable—Miller Co.
Sales
24 Cost of Merchandise Sold
Merchandise Inventory
4,700
4,700
2,750
2,750
5-48
Transportation Costs
On January 24 Online Solutions sells
merchandise to Miller Company on account,
$4,700, terms FOB destination. The cost of the
merchandise sold is $2,750, and Online Solutions
pays the transportation cost of $350.
Jan. 24 Transportation Out
Cash
An expense
350
350
5-49
Transportation Costs
On January 14 Online Solutions sells
merchandise to Golden Company on account,
$8,000, terms 2/10, n/30, FOB shipping point.
The cost of the merchandise sold is $4,800, and
Online pays the transportation cost of $500.
Jan. 14 Accounts Receivable—Golden Co.
Sales
14 Cost of Merchandise Sold
Merchandise Inventory
8,000
8,000
4,800
4,800
5-50
Transportation Costs
On January 14 Online Solutions sells
merchandise to Golden Company on account,
$8,000, terms 2/10, n/30, FOB shipping point.
The cost of the merchandise sold is $4,800, and
Online pays the transportation cost of $500.
Jan. 14 Accounts Receivable—Golden Co.
Cash
500
500
Online prepaid the transportation cost although it is Golden’s
responsibility. This debit sets up the reimbursement.
5-51
Sales Taxes
On March 19 Tom’s Meat Market had cash sales
totaling $1,700. The local sales tax is 7%, which
is collected on each sale. The entry to record the
day’s sales is as follows:
Mar. 19 Cash
Sales
Sales Taxes Payable
1,819
1,700
119
5-52
Learning Goal
6
Illustrate the
dual nature of
merchandising
transactions.
5-53
July 1. Scully Company sold merchandise on
account to Burton Co., $7,500, terms FOB
shipping point, n/45. The cost of the
merchandise sold was $4,500
Scully Co. (Seller)
Accounts Receivable—Burton Co.
Sales
7,500
Cost of Merchandise Sold
Merchandise Inventory
4,500
7,500
4,500
5-54
July 1. Scully Company sold merchandise on
account to Burton Co., $7,500, terms FOB
shipping point, n/45. The cost of the
merchandise sold was $4,500
Burton Co. (Buyer)
Merchandise Inventory
Accounts Payable—Scully Co.
7,500
7,500
5-55
July 2. Burton Co. paid
transportation charges of $150 on
July 1 purchase of Scully Company.
Scully Co. (Seller)
No entry.
Burton Co. (Buyer)
Merchandise Inventory
Cash
150
150
5-56
July 5. Scully Company sold merchandise
on account to Burton Co., $5,000, terms
FOB destination, n/45. The cost of the
merchandise sold was $3,500
Scully Co. (Seller)
Accounts Receivable—Burton Co.
Sales
5,000
Cost of Merchandise Sold
Merchandise Inventory
3,500
5,000
3,500
5-57
July 5. Scully Company sold merchandise
on account to Burton Co., $5,000, terms
FOB destination, n/45. The cost of the
merchandise sold was $3,500
Burton Co. (Buyer)
Merchandise Inventory
Accounts Payable—Scully Co.
5,000
5,000
5-58
July 7. Scully Co. paid transportation
charges of $250 for delivery of
merchandise sold to Burton Co. on July 5.
Scully Co. (Seller)
Transportation Out
Cash
250
250
Burton Co. (Buyer)
No entry
5-59
July 13. Scully Company issued Burton Co. a
credit memorandum for merchandise returned,
$1,000. The merchandise had been purchased
by Burton Co. on account on July 5. The cost
of the merchandise returned was $700.
Scully Co. (Seller)
Sales Return and Allowances
Accounts Receivable—Burton Co.
Merchandise Inventory
Cost of Merchandise Sold
1,000
1,000
700
700
5-60
July 13. Scully Company issued Burton Co. a
credit memorandum for merchandise returned,
$1,000. The merchandise had been purchased
by Burton Co. on account on July 5. The cost
of the merchandise returned was $700.
Burton Co. (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
1,000
1,000
5-61
July 15. Scully Company received payment
from Burton Co. for purchase of July 5.
Scully Co. (Seller)
Cash
Accounts Receivable—Burton Co.
4,000
4,000
Burton Co. (Buyer)
Accounts Payable—Scully Co.
Cash
4,000
4,000
5-62
July 18. Scully Co. sold merchandise on
account to Burton Co., $12,000, terms FOB
shipping point, 2/10, n/eom. Scully Co.
prepaid transportation costs of $500, which
were added to the invoice. The cost of the
The full amount is
merchandisedue
sold
$7,200.
bywas
the end
of
the month.
Scully Co. (Seller)
Accounts Receivable—Burton Co.
Sales
Accounts Receivable—Burton Co.
Cash
12,000
12,000
500
500
5-63
July 18. Scully Co. sold merchandise on
account to Burton Co., $12,000, terms FOB
shipping point, 2/10, n/eom. Scully Co.
prepaid transportation costs of $500, which
were added to the invoice. The cost of the
merchandise sold was $7,200.
Scully Co. (Seller)
Cost of Merchandise Sold
Merchandise Inventory
7,200
7,200
5-64
July 18. Scully Co. sold merchandise on
account to Burton Co., $12,000, terms FOB
shipping point, 2/10, n/eom. Scully Co.
prepaid transportation costs of $500, which
were added to the invoice. The cost of the
merchandise sold was $7,200.
Burton Co. (Buyer)
Merchandise Inventory
Accounts Payable—Scully Co.
12,500
12,500
5-65
July 28. Scully Company received payment
from Burton Company for purchase of July 18,
less discount (2% x $12,000).
Scully Co. (Seller)
Cash
Sales Discount
Accounts Receivable—Burton Co.
12,260
240
12,500
Burton Co. (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
Cash
12,500
240
12,260
5-66
Learning Goal
7
Describe the
accounting for
merchandise
shrinkage.
5-67
When a company
uses a perpetual
inventory, a physical
count is taken at the
end of the
accounting period to
determine the
accuracy of the
perpetual records
and to record any
inventory shrinkage.
5-68
Online Solutions’ inventory records
indicate that $63,950 of merchandise
should be available for sale on December
31, 2007. The physical inventory taken on
that date indicates that only $62,150 of
merchandise is available for sale.
Inventory shrinkage is $1,800
Cost of Merchandise Sold
Merchandise Inventory
1,800
1,800
5-69
Learning Goal
8
Describe and
illustrate the effects
of inventory
misstatements on
the financial
statements.
5-70
Effects of Inventory Misstatements
Income Statement Effects
Physical
Inventory
Misstatement
Inventory
Shrinkage
Misstated
Cost of
Gross
Merchandise
Profit
Sold Misstated Misstated
Net
Income
Misstated
Balance Sheet Effects
Physical
Inventory
Misstatement
Adjusted
Mer. Inv.
Misstated
Net
Current
Total Retained
Assets
Assets Earnings Income
Misstated Misstated Misstated Misstated
5-71
On December 31, 2007, Sapra Company
incorrectly counted its physical inventory
as $115,000 instead of $125,000.
Amount of Misstatement
Overstated (Understated)
2007 Financial Statements
Balance Sheet as of December 31, 2007:
Merchandise inventory
Current assets
Total assets
Total stockholders’ equity (retained earnings)
Income Statement for Year Ended December 31, 2007:
Cost of merchandise sold
Gross profit
Net income
$(10,000)
(10,000)
(10,000)
(10,000)
$10,000
(10,000)
(10,000)
5-72
On December 31, 2007, Sapra Company
incorrectly counted its physical inventory
as $115,000 instead of $125,000.
Amount of Misstatement
Overstated (Understated)
2008 Financial Statements
Balance Sheet as of December 31, 2008:
Merchandise inventory
Current assets
Total assets
Total stockholders’ equity (retained earnings)
Correct
Correct
Correct
Correct
Income Statement for Year Ended December 31, 2008:
Cost of merchandise sold
Gross profit
Net income
$(10,000)
10,000
10,000
5-73
Learning Goal
9
Describe and illustrate
the use of gross profit
and operating income
in analyzing a
company’s operations.
5-74
Gross profit and operating
…the efficiency and
income are two important
effectiveness of a
profitability measures analyst
merchandiser’s operations.
use in assessing…
5-75
Gross Profit Percent
Net sales
Cost of merchandise sold
Gross profit
Operating expenses
Operating income
$32,004
22,789
$ 9,215
8,459
$ 756
$9,2l5
= 28.8%
$32,004
5-76
Gross Profit Percent
J. C. Penny’s gross profit percentage
went from 28.8% to 27.7%, then
recovered back to 29.8%.
5-77
Gross Profit Percent
The recovery in the third year was
attributed to better merchandise
assortment, improved inventory
productivity, and centralized buying.
5-78
Operating Income Percent
Net sales
Cost of merchandise sold
Gross profit
Operating expenses
Operating income
$756
= 2.4%
$32,004
$32,004
22,789
$ 9,215
8,459
$ 756
5-79
Operating Income Percent
The company’s operating income
percentage dropped from 2.4% to
0.6%, then recovered back to 2.7%.
5-80
Operating Income Percent
This recovery was attributed to
lower catalog and marketing costs,
lower telemarketing costs, and a
shift from development to
maintenance of JCPenny.com.
5-81
Chapter 5
The End
5-82