Directory UMM :wiley:Public:college:accounting:kimmel:
Financial Accounting:
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
S
EL
1
Chapter 5
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.
Identify the unique features of the financial statements for a
merchandising company.
Explain the factors affecting the profitability.
3
Service enterprises
perform services as
their primary source
of revenue
Merchandising
companies buy
and sell
merchandise
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 = sale of
merchandise
Cost of goods sold = total cost of
merchandise sold
6
Page 202 in book
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
Page 213 in book
PW AUDIO SUPPLY, INC.
Income Statement (Partial)
For the Year Ended December 31, 1998
Sales revenues
Sales
Less: Sales returns and allowance
Sales discounts
Net sales
Cost of goods sold
Gross profit
Operating expenses
Store salaries expense
Rent expense
Utilities expense
Advertising expense
Depreciation expense
Freight-out
Insurance expense
Total operating expenses
Net Income
$ 480,000
$12,000
8,000
20,000
460,000
316,000
144,000
45,000
19,000
17,000
16,000
8,000
7,000
2,000
114,000
$ 30,000
Operating cycle of a
company is...
the average time it takes to
go from cash to cash in
producing revenues.
TO
9
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.
10
Page 203 in book
Service Company
Receive Cash
Cash
Perform Services
Accounts
Receivable
Merchandising Company
Receive Cash
Cash
Buy Inventory
Sell Inventory
Accounts
Receivable
Merchandise
11
Inventory
Page 203 in book
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
12
Page 204 in the book
Comparing Periodic and
Perpetual Inventory Systems
Inventory
Purchased
Item Sold
Point of Sale
End of
Period
Perpetual
Perpetual
Inventory
Purchased
Cost of Goods
Sold Computed
Item Sold
Point of Sale
End of
Period
Periodic
Cost of Goods
Sold
13
Computed
Computers
14
and
electronic
scanners
have
enabled
many
companies
to install
perpetual
inventory
systems
What Is Charged to
Merchandise Inventory?
All Costs of getting the inventory to
company and ready to sell
+Freight-In
+Special Permits
Only costs associated with merchandise
purchased for resale - not assets acquired
for use, such as supplies
16
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 just a copy of
the sales invoice.
17
•1. Seller
•2.Invoice
Date
•3.Purchaser
•4.Salesperso
n
•5.Credit
terms
•6.Freight
terms
•7.Goods
sold: catalog
no.,descriptio
n,quantity,
price per unit
•8.Total
invoice price
Invoice No. 731
Page 206 in book
Firm Name: Sauk Stero
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
City Chelsea State Illinois Zip 60915
Date 8/4/98 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description
QTY
Price
Amount
18
Merchandise Purchases
On May 4 the company bought $ 3,800
worth of merchandise from PW Audio
Supply, Inc.
Merchandise
Accounts
Inventory
Payable
Freight-out
May 4 3,800
May 4 3,800
GENERAL JOURNAL
May 4
Merchandise Inventory
Accounts Payable
Debit
Credit
3,800
3,800
To record goods purchased on account
19
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
20
Freight Costs - On Incoming
Inventory
21
Freight Costs - On Incoming Inventory
On May 6 the company paid $ 150 to have
the merchandise inventory delivered to
them.
Merchandise
Inventory
Cash
Freight-Out
May 4 3,800 May 8 300
May 6
May 6 150
150
GENERAL JOURNAL
May 6 Merchandise Inventory
Cash
To record payment of freight.
Debit
Credit
150
150
22
Freight Costs - On Outgoing
Inventory
23
Freight Costs-on outgoing inventory
On May 6 the seller company paid $ 150 to
have merchandise inventory delivered to
the buyer.
Merchandise
Cash
Inventory
Freight-Out
May 6
150
GENERAL JOURNAL
May 6 Freight-Out
Cash
May 6 150
Debit
Credit
150
150
To record payment of freight on goods sold.
24
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 it is offered.
•2/10,n/30
•1/10 EOM
25
Purchases Discounts
rchased $3800 of merchandise
he credit terms are 2/10, n/30
aid within the discount period
e
ore discount
$3,800
300
$3,500
70
$3,430
26
Purchases Discounts
Review - Company purchased $3800 of merchandise
and returned $300. The credit terms are 2/10, n/30
and the invoice was paid within the discount period.
Merchandise
Inventory
Accounts
Payable
May 4 3,800 May 8 300 May 8
Cash
300 May 4 3,800
May 14 70 May 14 3,500
GENERAL JOURNAL
Debit
May 14 Accounts Payable
Credit
3,500
Cash
3,430
Merchandise Inventory
70
May 14 3430
Sales Invoice ...
a business document that provides
written evidence of a credit sale.
28
•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
Page 206 in book
Firm Name: Sauk Stero
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
City Chelsea State Illinois Zip 60915
Date 8/4/98 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description
QTY
Price
Amount
29
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
30
Sales - under a perpetual system
Assume a CASH sale of $ 2,200
For merchandise having a cost of $ 1,400
Cash
Accounts
Receivable
May 4 2,200
Merchandise
Inventory
May 4 1.400
Sales
May 4 2,200
Sales Returns &
Allowances
Cost of Goods
Sold
May 4 1.400
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
32
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 2,400
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 filing orders
errors in billing customers
mistakes in delivery or shipment of goods
34
What Is the Sales Discount
Account?
Contra Revenue Account to sales
Used to disclose amount of cash discounts
taken by customers
35
Sales Discounts
Flip side of purchase discounts
On buyer’s books
GENERAL JOURNAL
Debit
May 14 Accounts Payable
3,500
Credit
Cash
3,430
Inventory
70
On seller’s books
To record payment within discount period
GENERAL JOURNAL
May 14 Cash
Sales Discounts
Accounts Receivable
3500
Merchandise
Debit
Credit
3,430
70
36
Page 213 in book
PW AUDIO SUPPLY, INC.
Income Statement (Partial)
For the Year Ended December 31, 1998
Sales revenues
Sales
Less: Sales returns and allowance
Sales discounts
Net sales
Cost of goods sold
Gross profit
Operating expenses
Store salaries expense
Rent expense
Utilities expense
Advertising expense
Depreciation expense
Freight-out
Insurance expense
Total operating expenses
Net Income
$ 480,000
$12,000
8,000
20,000
460,000
316,000
144,000
45,000
19,000
17,000
16,000
8,000
7,000
2,000
114,000
$ 30,000
Gross Profit Rate=
Gross Profit
Net Sales
Company’s gross profit expressed as a
percentage
38
Operating Expenses To
Sales Ratio=
Operating Expenses
Net Sales
Many companies have improved the
efficiency of their operations, thus
reducing the ratio of operating
expenses to sales.
39
COP Y R I GHT
Copyright © 1999, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
S
EL
1
Chapter 5
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.
Identify the unique features of the financial statements for a
merchandising company.
Explain the factors affecting the profitability.
3
Service enterprises
perform services as
their primary source
of revenue
Merchandising
companies buy
and sell
merchandise
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 = sale of
merchandise
Cost of goods sold = total cost of
merchandise sold
6
Page 202 in book
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
Page 213 in book
PW AUDIO SUPPLY, INC.
Income Statement (Partial)
For the Year Ended December 31, 1998
Sales revenues
Sales
Less: Sales returns and allowance
Sales discounts
Net sales
Cost of goods sold
Gross profit
Operating expenses
Store salaries expense
Rent expense
Utilities expense
Advertising expense
Depreciation expense
Freight-out
Insurance expense
Total operating expenses
Net Income
$ 480,000
$12,000
8,000
20,000
460,000
316,000
144,000
45,000
19,000
17,000
16,000
8,000
7,000
2,000
114,000
$ 30,000
Operating cycle of a
company is...
the average time it takes to
go from cash to cash in
producing revenues.
TO
9
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.
10
Page 203 in book
Service Company
Receive Cash
Cash
Perform Services
Accounts
Receivable
Merchandising Company
Receive Cash
Cash
Buy Inventory
Sell Inventory
Accounts
Receivable
Merchandise
11
Inventory
Page 203 in book
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
12
Page 204 in the book
Comparing Periodic and
Perpetual Inventory Systems
Inventory
Purchased
Item Sold
Point of Sale
End of
Period
Perpetual
Perpetual
Inventory
Purchased
Cost of Goods
Sold Computed
Item Sold
Point of Sale
End of
Period
Periodic
Cost of Goods
Sold
13
Computed
Computers
14
and
electronic
scanners
have
enabled
many
companies
to install
perpetual
inventory
systems
What Is Charged to
Merchandise Inventory?
All Costs of getting the inventory to
company and ready to sell
+Freight-In
+Special Permits
Only costs associated with merchandise
purchased for resale - not assets acquired
for use, such as supplies
16
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 just a copy of
the sales invoice.
17
•1. Seller
•2.Invoice
Date
•3.Purchaser
•4.Salesperso
n
•5.Credit
terms
•6.Freight
terms
•7.Goods
sold: catalog
no.,descriptio
n,quantity,
price per unit
•8.Total
invoice price
Invoice No. 731
Page 206 in book
Firm Name: Sauk Stero
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
City Chelsea State Illinois Zip 60915
Date 8/4/98 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description
QTY
Price
Amount
18
Merchandise Purchases
On May 4 the company bought $ 3,800
worth of merchandise from PW Audio
Supply, Inc.
Merchandise
Accounts
Inventory
Payable
Freight-out
May 4 3,800
May 4 3,800
GENERAL JOURNAL
May 4
Merchandise Inventory
Accounts Payable
Debit
Credit
3,800
3,800
To record goods purchased on account
19
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
20
Freight Costs - On Incoming
Inventory
21
Freight Costs - On Incoming Inventory
On May 6 the company paid $ 150 to have
the merchandise inventory delivered to
them.
Merchandise
Inventory
Cash
Freight-Out
May 4 3,800 May 8 300
May 6
May 6 150
150
GENERAL JOURNAL
May 6 Merchandise Inventory
Cash
To record payment of freight.
Debit
Credit
150
150
22
Freight Costs - On Outgoing
Inventory
23
Freight Costs-on outgoing inventory
On May 6 the seller company paid $ 150 to
have merchandise inventory delivered to
the buyer.
Merchandise
Cash
Inventory
Freight-Out
May 6
150
GENERAL JOURNAL
May 6 Freight-Out
Cash
May 6 150
Debit
Credit
150
150
To record payment of freight on goods sold.
24
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 it is offered.
•2/10,n/30
•1/10 EOM
25
Purchases Discounts
rchased $3800 of merchandise
he credit terms are 2/10, n/30
aid within the discount period
e
ore discount
$3,800
300
$3,500
70
$3,430
26
Purchases Discounts
Review - Company purchased $3800 of merchandise
and returned $300. The credit terms are 2/10, n/30
and the invoice was paid within the discount period.
Merchandise
Inventory
Accounts
Payable
May 4 3,800 May 8 300 May 8
Cash
300 May 4 3,800
May 14 70 May 14 3,500
GENERAL JOURNAL
Debit
May 14 Accounts Payable
Credit
3,500
Cash
3,430
Merchandise Inventory
70
May 14 3430
Sales Invoice ...
a business document that provides
written evidence of a credit sale.
28
•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
Page 206 in book
Firm Name: Sauk Stero
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
City Chelsea State Illinois Zip 60915
Date 8/4/98 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description
QTY
Price
Amount
29
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
30
Sales - under a perpetual system
Assume a CASH sale of $ 2,200
For merchandise having a cost of $ 1,400
Cash
Accounts
Receivable
May 4 2,200
Merchandise
Inventory
May 4 1.400
Sales
May 4 2,200
Sales Returns &
Allowances
Cost of Goods
Sold
May 4 1.400
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
32
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 2,400
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 filing orders
errors in billing customers
mistakes in delivery or shipment of goods
34
What Is the Sales Discount
Account?
Contra Revenue Account to sales
Used to disclose amount of cash discounts
taken by customers
35
Sales Discounts
Flip side of purchase discounts
On buyer’s books
GENERAL JOURNAL
Debit
May 14 Accounts Payable
3,500
Credit
Cash
3,430
Inventory
70
On seller’s books
To record payment within discount period
GENERAL JOURNAL
May 14 Cash
Sales Discounts
Accounts Receivable
3500
Merchandise
Debit
Credit
3,430
70
36
Page 213 in book
PW AUDIO SUPPLY, INC.
Income Statement (Partial)
For the Year Ended December 31, 1998
Sales revenues
Sales
Less: Sales returns and allowance
Sales discounts
Net sales
Cost of goods sold
Gross profit
Operating expenses
Store salaries expense
Rent expense
Utilities expense
Advertising expense
Depreciation expense
Freight-out
Insurance expense
Total operating expenses
Net Income
$ 480,000
$12,000
8,000
20,000
460,000
316,000
144,000
45,000
19,000
17,000
16,000
8,000
7,000
2,000
114,000
$ 30,000
Gross Profit Rate=
Gross Profit
Net Sales
Company’s gross profit expressed as a
percentage
38
Operating Expenses To
Sales Ratio=
Operating Expenses
Net Sales
Many companies have improved the
efficiency of their operations, thus
reducing the ratio of operating
expenses to sales.
39
COP Y R I GHT
Copyright © 1999, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.