6-1

MERCHANDISING
TRANSACTIONS
CHAPTER 6 CHAPTER 6
6-2
Service Organizations
Service Organizations
vs
vs
.
.
Merchandising Companies
Merchandising Companies
Service organizations sell
time
time to earn
revenue
Examples include accounting firms, law
firms, and plumbing services
These have been our emphasis up to now
Service Company
Income Statement
For the Year Ended December 31, 1999
Service revenues 150,000 $
Expenses 137,500
Net income 12,500 $
Not a
plumber!
6-3
Service Organizations
Service Organizations
vs
vs
.
.
Merchandising Companies
Merchandising Companies
Merchandising companies sell
products
products
to earn revenue
Examples include sporting goods, clothing,
and auto parts stores
These will be our emphasis for the rest of
the semester
Merchandising Company
Income Statement
For the Year Ended December 31, 1999
Sales revenues 150,000 $
Cost of goods sold 80,000
Gross margin 70,000
Expenses 46,500
Net income 23,500 $
6-4
Seller Customer/
Buyer
Transfers Products
Cash
or
Promise to Pay
Merchandising Companies
Merchandising Companies
6-5
Inventory
Products held for sale
Classified as asset
Sales
Exchange of merchandise for an asset
Classified as revenue
Cost of Goods Sold (COGS)
Cost of inventory sold during the period
Classified as expense
Merchandising Companies
Merchandising Companies
6-6
CLASSIFIED INCOME STATEMENT
a/k/a
MULTIPLE STEP INCOME STATEMENT
a/k/a
SATURDAY NIGHT PAGE
226
Merchandising Companies
Merchandising Companies
6-7
ROLL
ROLL

EM !
EM !
Video #1
(Approx. 6 min.)
Video #2
(Approx. 8 min.)
6-8
Merchandising Companies
Merchandising Companies
Manufacturer Wholesaler Retailer
Final
Customer
Channel of Distribution Channel of Distribution
(5 points on next test)
210
Can manufacturer sell direct to final customer?
(i.e., can green box be skipped?)
6-9
Who cares?
Accounting Terminology
Accounting Terminology
Sales Invoice
vs.
Purchase Invoice
Whats the difference?
211
prepares?
6-10
Recording and Reporting Sales
Recording and Reporting Sales
Gross sales
Less: Sales discounts
Less: Sales returns and allowances
Net sales
6-11
Recording Gross Sales
Recording Gross Sales
On May 13, TCom sold $25,000 of
merchandise for cash.
GENERAL JOURNAL Page 74
Date Description PR Debit Credit
May 13 Cash 25,000
Sales 25,000
To record the sale of
merchandise for cash
If the sale had been on account, we would
debit Accounts Receivable instead of Cash.
6-12
Two Types of Discounts
Two Types of Discounts
Trade Discounts
A percentage deduction from the list or
catalog price to arrive at the gross selling
(invoice) price
Know the three reasons for using (p. 213)
Not recorded on either seller Not recorded on either seller s or buyer s or buyer s s
books!! books!!
Example
FastBan, Inc. offers a 30% trade
discount if you purchase at least
1,000 of their most popular
product known as Zippy. Each
Zippy has a list price of $5.25.
Example
FastBan, Inc. offers a 30% trade
discount if you purchase at least
1,000 of their most popular
product known as Zippy. Each
Zippy has a list price of $5.25.
Quantity sold 1,000
Price per unit 5.25 $
Total 5,250
Less 30% discount (1,575)
Invoice price 3,675 $
6-13
Two Types of Discounts
Two Types of Discounts
Cash Discounts
A deduction from the invoice price granted
to induce early payment of the amount due
Two other names for cash discounts
Sales discounts
Purchase discounts
Recorded on whose books?
Both sellers and buyers books
They are pervasive
6-14
Two Types of Discounts
Two Types of Discounts
Cash Discounts
A deduction from the invoice price granted
to induce early payment of the amount due
Two other names for cash discounts
Sales discounts
Purchase discounts
Recorded on whose books?
Both sellers and buyers books
They are pervasive
3/15,n/30
3/15,n/30
Number of
Days
Discount is
Available
Number of
Days
Discount is
Available
Otherwise,
Net (or All)
is Due
Otherwise,
Net (or All)
is Due
In This
Number of
Days
In This
Number of
Days
Discount
Percent
Discount
Percent
6-15
Cash (Sales) Discount Example
Cash (Sales) Discount Example
On November 8, Borey Co. sold
merchandise to West, Inc. for $6,000 on
account; credit terms 2/10, n/30.
General Journal
Page 61
Date Description PR Debit Credit
Nov. 8 Accounts Receivable 6,000
Sales 6,000
To record the sale on account
6-16
Cash (Sales) Discount Example
Cash (Sales) Discount Example
On November 14, West, Inc. paid its
account in full.
General Journal Page 68
Date Description PR Debit Credit
Nov. 14 Cash 5,880
Sales Discount 120
Accounts Receivable 6,000
To record cash received on account
Discount = $6,000
Discount = $6,000

2% = $120
2% = $120
6-17
Other Deductions from Sales
Other Deductions from Sales
Sales Return
Merchandise returned by the buyer as
unsatisfactory or defective.
Sales Allowance
A deduction from the original invoice price
when the customer keeps merchandise
but is dissatisfied with it.
6-18
Sales Returns and Allowances
Sales Returns and Allowances
Example
Example
Before making a payment to you, a customer
returns $135 of goods sold on account.
General Journal Page 68
Date Description PR Debit Credit
Sales Returns and Allowances 135
Accounts Receivable 135
To record return of defective item.
6-19
Partial Income Statement
Partial Income Statement
Gross sales
Less: Sales discounts
Less: Sales returns and allowances
Net sales
Sales discounts and Sales
returns and allowances are
Contra Revenue accounts.
6-20
Inventory Methods
Inventory Methods
Perpetual Method
Periodic Method
6-21
Perpetual Method
Perpetual Method
The inventory account is continuously
up-dated as purchases and sales of
inventory occur.
6-22
Perpetual Method
Perpetual Method
The inventory account is continuously
up-dated as purchases and sales of
inventory occur.
More on this method in Chapter 7.
6-23
Periodic Method
Periodic Method
This is the method used in this chapter.
Entries are not made to the inventory
account during the year.
At the end of the accounting period, a
physical count of inventory is needed
to update the inventory account and
calculate cost of goods sold.
What is the mechanism for updating the
inventory account?
Closing entries
6-24
Closing Entries for
Closing Entries for
Merchandising Company
Merchandising Company
General Journal
Page 88
Date Description
PR Debit Credit
Sales
Purchase Discounts
Purchase Returns and Allowances
Merchandising Inventory (ending)
Income Summary
To close accounts with credit balances and set
up proper balance in ending inventory account.
Dec. 31 XXX
XXX
XXX
XXX
XXX
Closing Entry #1
232 233
6-25
Closing Entries for
Closing Entries for
Merchandising Company
Merchandising Company
General Journal
Page 88
Date Description
PR Debit Credit
Other accounts including all expenses
Sales Discounts
Sales Returns and Allowances
Merchandising Inventory (beginning)
Income Summary
To close accounts with debit balances including
the beginning inventory account.
Dec. 31 XXX
XXX
XXX
XXX
XXX
Closing Entry #2
6-26
Cost of Goods Sold
Cost of Goods Sold
...is an expense representing the cost of the
inventory sold during the period.
...appears on the income statement.
...must be calculated using a multiple-step
process when using the periodic method.
6-27
Beginning Inventory
+ Purchases
- Purchase Discounts
- Purchase Returns and Allowances
+ Transportation-in
= Cost of Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold
Calculation of
Calculation of
Cost of Goods Sold
Cost of Goods Sold
Multiple Multiple- -Step Process Step Process
6-28
Cost of goods sold:
Merchandise inventory, January 1, 1999 24,000 $
Purchases: 167,000 $
Less: Purchase discounts 3,000 $
Purchase returns and allowances 8,000 11,000
Net purchases 156,000
Add: Transportation-in 10,000
Net cost of purchases 166,000
Cost of goods available for sale 190,000
Less: Merchandise inventory, December 31, 1999 31,000
Cost of goods sold 159,000 $
Calculation of
Calculation of
Cost of Goods Sold
Cost of Goods Sold
Formal Income Statement Presentation Formal Income Statement Presentation
6-29
Purchase of Merchandise
Purchase of Merchandise
One May 7, Barbee, Inc. purchased
$27,000 of merchandise on account;
terms 2/10, n/30.
General Journal
Page 26
Date Description PR Debit Credit
May 7 Purchases 27,000
Accounts Payable 27,000
Purchase merchandise on account
6-30
Purchase of Merchandise
Purchase of Merchandise
One May 16, Barbee, Inc. paid for the
purchase of May 7 in full.
$27,000 2% = $540 discount
General Journal Page 41
Date Description PR Debit Credit
May 16 Accounts Payable 27,000
Cash 26,460
Purchase Discounts 540
Payment on account
6-31
General Journal Page 41
Date Description PR Debit Credit
May 16 Accounts Payable 27,000
Cash 26,460
Purchase Discounts 540
Payment on account
$27,000 2% = $540 discount
Purchase of Merchandise
Purchase of Merchandise
One May 16, Barbee, Inc. paid for the
purchase of May 7 in full.
Purchase Discounts is a
Contra Purchases
Contra Purchases
account.
6-32
Purchase Returns and Allowances
Purchase Returns and Allowances
The buyer returns, or accepts a reduction in
invoice price of, merchandise to the seller.
On May 27, Barbee, Inc. returns $200 of defective
merchandise purchased on account before
payment is made to the supplier.
6-33
Purchase Returns and Allowances
Purchase Returns and Allowances
The buyer returns, or accepts a reduction in
invoice price of, merchandise to the seller.
On May 27, Barbee, Inc. returns $200 of defective
merchandise purchased on account before
payment is made to the supplier.
General Journal
Page 88
Date Description
PR Debit Credit
May 27 Accounts Payable 200
Purchase Returns and Allowances 200
Returned defective merchandise
6-34
Transportation Costs
Transportation Costs
Transportation-In
Inward freight costs of acquiring
merchandise.
Transportation-In is
part of cost of goods sold!
6-35
Transportation Costs
Transportation Costs
Transportation Out/Delivery Expense
Outgoing freight costs that must be paid by
the seller.
Delivery Expense is a
selling expense on the
income statement!
6-36
Transportation Costs
Transportation Costs
Free on Board (FOB) Shipping Point.
FOB Destination.
Freight Prepaid
Freight Collect
Who pays the
freight charges?
6-37
FOB Points
FOB Points
ABC Wholesalers
FOB what? (Pick one)
FOB what? (Pick one)
Shipping Point
Shipping Point
Destination
Destination
6-38
FOB Shipping Point
Free on board at the shipping (selling) point
Title passes to buyer upon shipment
Buyer owns en route and...
Ultimately bears the cost of the freight
Assumes risk of loss in transit
FOB Destination
Free on board at the destination point
Seller owns en route and...
Ultimately bears the cost of the freight
Assumes risk of loss in transit
FOB Points
FOB Points
6-39
Transportation Cost Summary
Transportation Cost Summary
Terms
Initially
Pays
Ultimately
Bears
Expense
FOB Shipping Point - Freight Collect Buyer Buyer
FOB Destination - Freight Prepaid Seller Seller
FOB Destination - Freight Collect Buyer Seller
FOB Shipping Point - Freight Prepaid Seller Buyer
223
6-40
Transportation Cost Summary
Transportation Cost Summary
Terms
Initially
Pays
Ultimately
Bears
Expense
FOB Shipping Point - Freight Collect Buyer Buyer
FOB Destination - Freight Prepaid Seller Seller
FOB Destination - Freight Collect Buyer Seller
FOB Shipping Point - Freight Prepaid Seller Buyer
6-41
Prepare the journal entries for Jackson Co. Use
the periodic inventory method.
July 5, 1998 Purchased 1,000 units of inventory
for $25,000 cash.
July 9, 1998 Sold 300 units of inventory to a
customer on account for $35 per
unit.
Periodic Method
Periodic Method
6-42
Periodic Method
Periodic Method
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
July 5 Purchases 25,000
Cash 25,000
To record inventory purchases
At Cost
6-43
Periodic Method
Periodic Method
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
July 5 Purchases 25,000
Cash 25,000
To record inventory purchases
July 9 Accounts Receivable 10,500
Sales 10,500
To record inventory sales
300 units $35 = $10,500
At Retail
6-44
Saturday Night Page, Again
Saturday Night Page, Again
P. 226
P. 226
6-45
Classified Income Statement:
Classified Income Statement:
Revenue
Revenue
Sales 250,000 $
Less: Sales Discounts 3,000 $
Sales Ret. & Allow. 1,500 4,500
Net Sales 245,500 $
Earned from the sale of inventory
227
Alternative way to express income
statement relationships?
(Hint: 8th Grade)
Net sales = Gross sales - (Sales disc.+ SR&A)
6-46
Classified Income Statement:
Classified Income Statement:
Cost of Goods Sold
Cost of Goods Sold
Beginning Inventory (BI) 55,000 $
Purchases (P) 176,500
Cost of Goods Avail. for Sale (GAS) 231,500
Less: Ending Inventory (EI) 64,000
Cost of Goods Sold (COGS) 167,500 $
Three approaches to Cost of Goods Sold:
(1) Simplified Income Statement Approach
(2) Equation Approach
COGS = BI + P - EI
6-47
Classified Income Statement:
Classified Income Statement:
Cost of Goods Sold
Cost of Goods Sold
Beginning Inventory 55,000 $
Purchases 175,000 $
Less: Purchase Discounts 6,000 $
Purchase Ret. & Allow. 2,500 8,500
Net Purchases 166,500 $
Add: Transportation-in 10,000
Net Cost of Purchases 176,500
Cost of Goods Avail. for Sale 231,500 $
Less: Ending Inventory 64,000
Cost of Goods Sold 167,500 $
(3) Formal Income Statement Approach
6-48
Classified Income Statement:
Classified Income Statement:
Gross Margin
Gross Margin
Net Sales 245,500 $
Cost of Goods Sold 167,500
Gross Margin 78,000 $
Gross Margin = Net Sales - COGS
Gross Margin is also called
Gross Profit
Gross Profit
6-49
Classified Income Statement:
Classified Income Statement:
Types of Operating Expenses
Types of Operating Expenses
Selling Expenses
Administrative Expenses
6-50
Gross margin 78,000 $
Operating expenses:
Selling expenses:
Sales salaries 26,000 $
Delivery expense 3,000
Advertising expense 2,000
Rent - store building 4,000
Depreciation - store equip. 2,500 37,500
Administrative expenses:
Executive salaries 29,000
Rent - office building 1,600
Insurance expense 1,500
Supplies expense 1,100 33,200
Total operating expenses 70,700
Income from operations 7,300 $
Classified Income Statement:
Classified Income Statement:
Income from Operations
Income from Operations
6-51
Classified Income Statement:
Classified Income Statement:
Types of
Types of
Nonoperating
Nonoperating
Items
Items
Nonoperating Revenues
Nonoperating Expenses
Income from operations 7,300 $
Nonoperating revenues and expenses
Nonoperating revenues:
Interest revenue 400
Rent Revenue 2,000
Nonoperating expenses:
Interest expense (700)
Safe deposit box rental 100
Net income 9,100 $
6-52
Work Sheet and Closing Entries
Work Sheet and Closing Entries
Appx. 231
6-53
Gross Margin
Gross Margin
Percentage
Percentage
Percentage of each sales dollar available
to cover expenses and a profit
GROSS MARGIN
NET SALES
GM% =
6-54
WE CAN LOOK FORWARD
TO A CLOSER INSPECTION
OF INVENTORY IN
CHAPTER 7!
THE END
THE END