NetSolutions Income Statement For the Year Ended December 31, 2007

  Accounting for Merchandising Businesses 6542– SRI HANDAYANI, SE, MM, MAk, CPMA _{PROGRAM STUDI MANAJEMEN & AKUNTANSI}

  

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   21 ^st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud ^{© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.}

  

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Objectives

Objectives

  1. Distinguish the activities of a

After studying this

  After studying this service business from those of a

chapter, you should

chapter, you should merchandising business.

be able to:

be able to:

  

2. Describe and illustrate the fnancial

statements of a merchandising business.

  3. Describe the accounting for the sale of merchandise.

  4. Describe the accounting for the

  Objectives Objectives

  5. Describe the accounting for transportation costs, sales taxes, and trade discounts.

  6. Illustrate the dual nature of merchandising transactions.

  7. Prepare a chart of accounts for a merchandising business.

  

8. Describe the accounting cycle for a

merchandising business.

  9. Compute the ratio of net sales to assets as a measure of how

  $XXX Operating expenses

  Service Business Fees earned

• –XXX Net income

  $XXX

  

Nature of Businesses

Nature of Businesses

  Merchandising Business Sales

  $XXX Cost of Merchandise Sold –XXX Gross Profit

  $XXX Operating Expenses

• –XXX Net Income

  $XXX

  Nature of Businesses

Nature of Businesses

  Multiple-Step Income Statement

  NetSolutions Income Statement For the Year Ended December 31, 2007 Revenue from sales: Sales $720,185 Less:Sales returns and allowances $ 6,140

Sales discounts 5,790 11,930

Net sales $708,255

  Cost of merchandise sold 525,305 Gross proft $182,950 Continued

  Operating expenses: Selling expenses:

Sales salaries expense $56,230

Advertising expense 10,860 Depr. Expense–store equipment3,100 Miscellaneous selling expense 630 Total selling expenses $ 70,820 Administrative expenses:

Ofce salaries expense $21,020

Rent expense 8,100 Depr. expense–ofce equipment 2,490 Insurance expense 1,910 Ofce supplies expense 610 Misc. administrative expense 760 Total admin. expenses 34,890

  

Total operating expenses 105,710

Income from operations $ 77,240

  Other income and expenses: Rent revenue $ 600 Interest expense (2,440) (1,840) Net income $75,400 Concluded

  Periodic vs. Perpetual Methods of Periodic vs. Perpetual Methods of

  Accounting Accounting

Periodic Method

  

A method of determining the cost of merchandise

• sold and the amount of merchandise on hand

  Under this method, the inventory records do not

• show the amount available for sale or the amount sold during the period

  Periodic vs. Perpetual Methods of Periodic vs. Perpetual Methods of

  Accounting Accounting

Perpetual Method Under this method, each purchase and sale of

• merchandise is recorded in the inventory and the

  cost of merchandise sold accounts.

• and the amount sold are continuously disclosed in

  the inventory records.

   The amount of merchandise available for sale

  

Cost of Merchandise Purchased

Cost of Merchandise Purchased

  Purchases $521,980 Less: Purchase returns and allowances $9,100 Purchase discounts 2,525 11,625

  Net purchases $510,355 Add transportation-in

  17,400

Cost of merchandise purchased $527,755 Cost of Merchandise Sold

Cost of Merchandise Sold

  

Merchandise inventory, 1/1/07 $ 59,700

Purchases $521,980 Less: Purchase returns and allowances $9,100 Purchase discounts 2,525 11,625

  Net purchases $510,355 Add transportation-in 17,400

  Cost of merchandise purchased 527,755

Merchandise available for sale $587,455

Less merchandise inventory, 12/31/07 62,150

Cost of merchandise sold

  $525,305

  Single-Step Income Statement for a Merchandising Business

  NetSolutions Income Statement For the Year Ended December 31, 2007 Revenues: Net sales $708,255 Rent revenue 600 Total revenues $708,855 Expenses: Cost of merchandise sold $525,305 Selling expenses 70,820 Administrative expenses 34,890 Interest expense 2,440 Total expenses 633,455 Net income $ 75,400

  

Statement of

Owner’s Equity for

a Merchandising

Business

  

NetSolutions

Statement of Owner’s Equity

For the Year Ended December 31,

  

2007

Chris Clark, capital, 1/1/07 $153,800

Net income for year $75,400 Less withdrawals 18,000

Increase in owner’s equity 57,400

Chris Clark, capital, 12/31/07 $211,200

  Balance Sheet

  NetSolutions Balance Sheet December 31, 2007 Assets Current assets: Cash $52,950

  Accounts receivable 91,080 Merchandise inventory 62,150 Ofce supplies 480 Prepaid insurance 2,650 Total current assets $209,310 Property, plant, and equipment: Land $20,000 Store equipment $27,100 Less accumulated depreciation 5,700 21,400 Ofce equipment $15,570 Less accumulated depreciation 4,72010,850 Total property, plant, and equipment 52,250 Total assets $261,560

  

Liabilities

Current liabilities: Accounts payable $22,420

  

Note payable (current portion) 5,000

Salaries payable 1,140 Unearned rent 1,800 Total current liabilities $ 30,360

  Long-term liabilities:

Note payable (due 2017) 20,000

Total liabilities $ 50,360 Owner’s Equity Chris Clark, capital 211,200

Total liabilities and owner’s equity $261,560

  

Liabilities

Current liabilities: Accounts payable $22,420

  Note payable (current portion) 5,000 Salaries payable 1,140 Unearned rent 1,800 Total current liabilities $ 30,360

  Long-term liabilities: Note payable (due 2017) 20,000 Total liabilities $ 50,360 Owner’s Equity Chris Clark, capital 211,200

Total liabilities and owner’s equity $261,560

  

Sales Transactions

Sales Transactions

  

Cash Sales

Cash Sales PAGE 26

  

JOURNAL

_{Post. Ref.} Dr Cr.

  Date ₂₀₀₇ Description

  1 Jan. 3 Cash 1 800 00

  2 Sales 1 800 00

  3 To record cash sales.

  4

  5 On January 3, a firm sold $1,800

  On January 3, a firm sold $1,800

  

Cash Sales

Cash Sales

  6

  3 Cost of Merchandise Sold 1 280 00

  7 Merchandise Inventory 1 280 00

  8 To record the cost of

  9 merchandise sold.

  Using a perpetual inventory, the inventory

cost of $1,200 must be recorded.

cost of $1,200 must be recorded.

  

Cash Sales

Cash Sales

  PAGE 28

JOURNAL

_{Post. Ref.} Dr Cr.

  Date ₂₀₀₇ Description

  1 Jan. 31 Credit Card Expense 48 00

  2 Cash 48 00

  3 To record service charges

  4 on credit card sales for the 5 month.

  

At the end of the month, $48 was Credit card sales (MasterCard or

  At the end of the month, $48 was Credit card sales (MasterCard or

Sales on Account Sales on Account

  Jan. 12 Accounts Receivable—Sims Co. 510 00 Sales 510 00 Invoice No. 7172.

  12 Cost of Merchandise Sold 280 00 Merchandise Inventory 280 00

  Cost of merchandise sold on Invoice No. 7172.

  On January 12, a firm sold Sims Company

  On January 12, a firm sold Sims Company

  merchandise on account, $510. The cost of

  merchandise on account, $510. The cost of

Sales Discounts

  

Sales Discounts

  

The terms for when payments for

merchandise are to be made are

called credit terms.

  The terms for when payments for merchandise are to be made are called credit terms.

  

If buyer is allowed an

amount of time to pay, it is

known as the credit period.

  If buyer is allowed an amount of time to pay, it is known as the credit period.

Sales Discounts Sales Discounts

  Credit Terms

  If invoice is Invoice for paid within

  $1,500 10 days of

  Terms: invoice date

  2/10, n/30

  $1,470 paid (less 2% as a cash

Sales Discounts Sales Discounts

  Credit Terms

  If invoice is NOT paid

  Invoice for $1,500 within 10

  Terms: days of

  2/10, n/30 invoice date

  $1,500 PAID

Sales Discounts

  

Sales Discounts

  On January 21, the firm receives the amount due from Sims (refer to Slide

  On January 21, the firm receives the amount due from Sims (refer to Slide Jan. 21 Cash

  499 80 Accounts Receivable—Sims Co.

  510 00 Sales Discounts 10 20

  Collection of Invoice No. 7172, less discount.

  

Sales Returns and Allowances

Sales Returns and Allowances

  Merchandise that is returned to the

vendor is referred to as a sales return.

  Merchandise that is returned to the vendor is referred to as a sales return.

  If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as a sales allowance.

  If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as a sales allowance.

Sales Returns and Allowances Sales Returns and Allowances

  Jan. 13 Sales Returns and Allowances 225 00 Accounts Receivable—Krier Co. 225 00 Credit Memo No. 32.

  13 Merchandise Inventory 140 00 Cost of Merchandise Sold 140 00 Cost of merchandise returned—Credit Memo 32.

  On January 13, issued Credit Memo 32 to Krier On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions.

  Company for merchandise returned to NetSolutions.

  Purchase

Transactions

Purchase

Transactions

  

Purchase Transactions

Purchase Transactions

Post. _Ref. Dr Cr.

  Date ₂₀₀₇ Description

  1 Jan. 3 Merchandise Inventory 2 510 00

  2 Cash 2 510 00

  3 Purchased inventory from

  4 Bowen Co.

  5 On January 3, Purchased merchandise On January 3, Purchased merchandise

for cash from Bowen Company, $2,510.

Purchase Discounts Purchase Discounts

  What’s the last What’s the last day the invoice day the invoice can be paid? can be paid?

  Alpha Technologies

  Alpha Technologies

  issues an invoice for

  issues an invoice for

  $3,000 to

  $3,000 to

  NetSolutions dated

  NetSolutions dated

  March 12, with terms

  March 12, with terms 2/10, n/30.

  2/10, n/30.

Purchase Discounts Purchase Discounts

  The full amount is The full amount is

  Let’s do a simple due on April 11.

  Let’s do a simple due on April 11. calculation. calculation.

  Invoice period

  30 Days in March 31 Date of invoice 12 Remaining days

  19 April

  11

Purchase Discounts Purchase Discounts

  We can borrow at an annual interest rate of 6%. Should we borrow to pay the invoice within the discount period?

  We can borrow at an annual interest rate of 6%. Should we borrow to pay the invoice within the discount period?

  $60 discount (2% x $3,000)?

  $60 discount (2% x

  $3,000)?

  Discount $60.00 Interest for 20 days at the rate of 6% on $2,940 –9.80 Savings from borrowing $50.20

  Let’s see… Interest on the amount due of $3,000 less the 2 percent…

  Let’s see… Interest on the amount due of $3,000 less the 2 percent…

  Purchase Discounts Purchase Discounts

  Looks like we should take advantage of the discount even if we have to borrow the money. Looks like we should take advantage of the discount even if we have to borrow the money.

  Purchase Discounts Purchase Discounts Discount $60.00 Interest for 20 days at the rate of 6% on $2,940 –9.80 Savings from borrowing $50.20

  

Purchase Discounts

Purchase Discounts

  PAGE 27

JOURNAL

_{Post. Ref.} Dr Cr.

  Date ₂₀₀₇ Description

  1 Mar. 12 Merchandise Inventory 3 000 00

  2 Accounts Payable—Alpha

  3 Technologies 3 000 00

  4

  5 On March 12, NetSolutions purchased

  On March 12, NetSolutions purchased

  

merchandise on account from Alpha

  merchandise on account from Alpha

  

Purchase Discounts

Purchase Discounts PAGE 27

  

JOURNAL

_{Post. Ref.} Dr Cr.

  Date ₂₀₀₇ Description

  1 Mar. 22 Accounts Payable—Alpha Technol. 3 000 00

  2 Cash 2 940 00

  3 Merchandise Inventory 60 00

  4

  5 If payment is made by March 22 NetSolutions

  If payment is made by March 22 NetSolutions

records the discount as a reduction in cost.

records the discount as a reduction in cost.

  

Purchase Discounts

Purchase Discounts

  PAGE 27

JOURNAL

_{Post. Ref.} Dr Cr.

  Date ₂₀₀₇ Description

  1 Apr. 11 Accounts Payable—Alpha Technol. 3 000 00

  2 Cash 3 000 00

  3

  4

  5 If NetSolutions does not pay the invoice until

  If NetSolutions does not pay the invoice until

Purchases Returns and Allowances

  

Purchases Returns and Allowances

  A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.

  When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.

  When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.

  Purchases Returns and Allowances Purchases Returns and Allowances You sent me the wrong interface cards.

  You sent me the wrong interface cards. We’ll send a debit memorandum with the

  We’ll send a debit memorandum with the returned items. returned items.

  NetSolutions received the

  NetSolutions received the

  delivery from Maxim

  delivery from Maxim

  Systems and determined that

  Systems and determined that

  $900 of the items were not

  $900 of the items were not the merchandise ordered. the merchandise ordered.

  Debit memorandum #18 is Debit memorandum #18 is Mar. 7 Accounts Payable—Maxim Systems 900 00 Debit Memo No. 18 Merchandise Inventory

  900 00 Purchases Returns and Allowances Purchases Returns and Allowances

  

Purchases Returns and Allowances

Purchases Returns and Allowances

  

On May 2, NetSolutions purchased $5,000

of merchandise from Delta Data Link,

subject to terms 2/10, n/30.

  On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30.

  May 2 Merchandise Inventory 5 000 00 Purchased merchandise.

  Accounts Payable—Delta Data 5 000 00

  

Purchases Returns and Allowances

Purchases Returns and Allowances

  On May 4, NetSolutions returns

  

On May 4, NetSolutions returns

$3,000 of the merchandise.

  

$3,000 of the merchandise.

  May 4 Accounts Payable—Delta Data Links 3 000 00 Merchandise Inventory 3 000 00 Returned portion of merchandise purchased.

  

Purchases Returns and Allowances

Purchases Returns and Allowances

On May 12, NetSolutions pays the amount due.

  On May 12, NetSolutions pays the amount due.

  May 12 Accounts Payable—Delta Data Links 2 000 00 Paid invoice.

  Cash 1 960 00 Merchandise Inventory 40 00

  ($5,000 – $3,000) x 2%

  ($5,000 – $3,000) x 2%

  Transportation Costs

  FOB Shipping Point FOB Shipping Point

  Buyer pays freight costs and debits

  Merchandise Inventory Fruit Express

  Title passes to buyer as shipment leaves Title passes to buyer as shipment leaves

  FOB Shipping Point FOB Shipping Point

  June 10 Merchandise Inventory 900 00 Accounts Payable—Magna Data 900 00 Purchased merchandise, terms FOB shipping point.

  10 Merchandise Inventory 50 00 Cash 50 00 Paid shipping cost .

  On June 10, NetSolutions buys merchandise from On June 10, NetSolutions buys merchandise from

  Magna Data on account, $900, terms FOB shipping Magna Data on account, $900, terms FOB shipping

  FOB Destination FOB Destination

  Title passes to buyer upon arrival at Title passes to buyer upon arrival at

  Seller pays freight costs and debits

  Transportation Out Fruit Express

FOB Destination

  

On June 15, NetSolutions sells merchandise to Kranz

Company on account, $700, terms FOB destination.

  On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination.

  

FOB Destination

  June 15 Accounts Receivable—Kranz Co. 700 00 Sold merchandise, terms FOB destination. Sales

  700 00

  15 Cost of Merchandise Sold 480 00 Merchandise Inventory 480 00 Cost of sale of Kranz Co .

  

FOB Destination

FOB Destination

  June 15 Transportation Out 40 00 Cash

  40 00 Paid shipping cost on merchandise sold.

  

On June 15, NetSolutions sells merchandise to Kranz

Company on account, $700, terms FOB destination.

  

On June 15, NetSolutions sells merchandise to Kranz

Company on account, $700, terms FOB destination.

  

Sales Taxes

Sales Taxes

  Aug. 12 Accounts Receivable—Lemon Co. 106 00 Sales 100 00 Sales Taxes Payable

  6 00 Invoice No. 339

On August 12, merchandise is sold on

  On August 12, merchandise is sold on

  

account to Lemon Company, $100. The

  account to Lemon Company, $100. The

state has a 6% sales tax.

  

Sales Taxes

Sales Taxes

  Sept.15 Sales Tax Payable 2 900 00 Cash

  2 900 00 Payment for sales taxes collected during August.

  

On September 15, the seller sends in a

  On September 15, the seller sends in a

  

payment of $2,900 to the taxing unit for

  payment of $2,900 to the taxing unit for

the August taxes collected.

  

Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

  

July 1. Scully Company sold merchandise on account

to Burton Co., $7,500, terms FOB shipping point, n/45.

  Scully Company (Seller) Accounts Receivable—Burton Co. 7,500 Sales

  7,500 Cost of Merchandise Sold 4,500 Merchandise Inventory

  4,500 Burton Company (Buyer)

  Merchandise Inventory. 7,500 Accounts Payable—Scully Co. 7,500

  

Illustration of Accounting for

Illustration of Accounting for

Merchandise Transactions

  

Merchandise Transactions

Scully Company (Seller) No entry. Burton Company (Buyer)

  Merchandise Inventory 150 Cash

  150

July 2. Burton Company paid transportation charges of

  

Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

  

July 5. Scully Company sold merchandise on account

to Burton Co., $5,000, terms FOB shipping point,

Scully Company (Seller)

  Accounts Receivable—Burton Co. 5,000 Sales 5,000 Cost of Merchandise Sold 3,500

  Merchandise Inventory 3,500

  Burton Company (Buyer) Merchandise Inventory. 5,000 Accounts Payable—Scully Co. 5,000

  

Illustration of Accounting for

Illustration of Accounting for

  

Merchandise Transactions

Merchandise Transactions

  

Scully Company (Seller)

Transportation Out

  250 Cash 250

  

Burton Company (Buyer)

No entry.

  

July 7. Scully Company paid transportation costs

of $ 250 for delivery of merchandise sold to

Illustration of Accounting for Merchandise Transactions

  

Illustration of Accounting for

Merchandise Transactions

  

July 13. Scully Company issued Burton Company a credit

memorandum for $1,000 of merchandise returned from a July 5

Scully Company (Seller)

  Sales Returns and Allowances 1,000

Accounts Receivable—Burton Co. 1,000

Merchandise Inventory

  700 Cost of Merchandise Sold 700

  Burton Company (Buyer) Accounts Payable—Scully Co. 1,000 Merchandise Inventory

  1,000

  Illustration of Accounting for

Merchandise Transactions

  

Illustration of Accounting for

Merchandise Transactions

July 15. Scully Company received payment

  

Scully Company (Seller)

Cash

  4,000 Accounts Receivable—Burton Co. 4,000

Burton Company (Buyer)

  Accounts Payable—Scully Co. 4,000 Cash 4,000

  

Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

  

July 18. Scully Company sold merchandise on account to Burton

Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

Scully Company (Seller)

  Accounts Receivable—Burton Co. 12,000 Sales 12,000 Accounts Receivable—Burton Co. 500

  Cash 500

  Burton Company (Buyer) Merchandise Inventory 12,500 Accounts Payable—Scully Co. 12,500

  

Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

  

July 18. Scully Company sold merchandise on account to Burton

Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

Continued (Seller)

  Cost of Merchandise Sold 7,200 Merchandise Inventory 7,200

  Burton Company (Buyer)

  

Illustration of Accounting for

Merchandise Transactions

July 28. Scully Company received payment

from Burton Company for purchase of July

Illustration of Accounting for Merchandise Transactions

  

Scully Company (Seller)

Cash

  12,260 Sales Discounts 240 Accounts Receivable—Burton Co. 12,500

  

Burton Company (Buyer)

Accounts Payable—Scully Co. 12,500 Merchandise Inventory

  240 Cash 12,260

  

NetSolutions

Chart of Accounts

_{100 Assets} Balance Sheet Accounts _{200 Liabilities 115 Merchandise Inventory 112 Accounts Receivable} 110 Cash _{211 Salaries Payable 210 Accounts Payable 116 Office Supplies 117 Prepaid Insurance} 212 Unearned Rent _{215 Notes Payable 124 Accumulated Depreciation— 123 Store Equipment 120 Land 311 Chris Clark, Drawing 310 Chris Clark, Capital} 300 Owner’s Equity _{126 Accumulated Depreciation— 125 Office Equipment Store Equipment} 312 Income Summary Office Equipment

  NetSolutions Chart of Accounts _{400 Revenues} Income Statement Accounts _{500 Costs and Expenses 411 Sales Returns and 410 Sales Allowances 521 Advertising Expense 520 Sales Salaries Expense} 510 Cost of Merchandise Sold _{412 Sales Discounts 600 Other Income 523 Transportation Out} 522 Depreciation Expense— _{Store Equipment}

610 Rent Revenue 529 Miscellaneous Selling Expense _{700 Other Expense 531 Rent Expense 530 Office Salaries Expense} 710 Interest Expense _{533 Insurance Expense 532 Depreciation Expense— Office Equipment 539 Miscellaneous Admin. Expense} 534 Office Supplies Expense Merchandise Inventory Merchandise Inventory

  Shrinkage Shrinkage

  NetSolutions inventory

  NetSolutions inventory

  records indicate that

  records indicate that

  $63,950 of merchandise

  $63,950 of merchandise

  should be available for sale

  should be available for sale on December 31, 2007. on December 31, 2007.

  The physical count reveals

  The physical count reveals

  that only $62,150 is

  that only $62,150 is

  

Merchandise Inventory

Merchandise Inventory

  Shrinkage

Shrinkage

  Adjusting Entry Dec. 31 Cost of Merchandise Sold 1 800 00 Merchandise Inventory

  1 800 00

  Inventory records $63,950 Inventory count 62,150 Inventory shortage $ 1,800

  

Profitability Measures -- Effective Use of Assets

Ratio of Net Sales to Assets Ratio of Net Sales to Assets Sears Penney

  Net sales $41,366,000 $31,846,000 Total assets: Beginning of year $50,409,000 $19,742,000 End of year $44,317,000 $20,908,000 Average $47,363,000 $20,325,000

  Ratio of net sales to assets .87 to 1 1.57 to 1

Ratio Use: To assess the effectiveness in the

use of assets to generate sales. Ratio Use: To assess the effectiveness in the use of assets to generate sales.

  The End The End