Chapter 6 MERCHANDISING ACTIVITIES WA hd Merchandising Company A merchandising business is one that buys and sls goods in onde to make a prof. Merchandise: The goods that a company buys in order to resell ate known as merchandise TeeeeeecePEeHEeeH- eC CEPcree |“ Ll ___ Sales Revenue Net sales = Sales Revenue less Sales Returns and Sales et Discounts — a Gross Profit or Gross Margin Target Corporation Income Statement (Adapted) ‘Year Ended December 31, 2000 Net ates revenue (same as Net sales) ‘Ss212 [Cost of goods sold (same at Cost of sales) 23009 Gross profit (same as Gross margin) TINS 7490 st Interest expense 333 Other expenses, net 3m “Total operating expenses Net earnings (same as Net income) i Operating Cycle of a Merchandising |” Income Sattements Business | Sewiee Co. Maveindiing Co. Purchase and Cash Sale Purshate and Salon Account Income Steet Income Siatement ‘Year ended June 30, 20x. ‘Year ended June 30, 20xx Service revenue ‘Sux |Sales revenue Sex coh gg. can B [Cost of goods sold x ~. § Soy gee for prs : ES / Depreciation expense {Operating expenses: 4 Pay Income tax expense —_x | [Salary expense x ‘A Sect Inventory Objective 1 | Use sales and gross profit to evaluate a company. | Operating Cycle of a Merchandising |“ l ‘Company Inventory)Merchandising means selling products to retail customers. Merchandisers, also called retailers, buy products from wholesalers and manufacturers, add a markup or gross profit amount, and sell the products to consumers at a higher price than what they paid. When you go to the mall, all the stores there are retailers, and you are a retail customer. ‘They account for inventory purchases and sales in fone of two ways: Periodic and Perpetual. As the hhames suggest these methods refer to how often the nventory account balances are updated. L Inventory Systems Merchandise may be accounted for under one of two inventory methods: > In a Perioie system, inventory account balances are updated ‘once # year (Some companies may do it mote oflen, but al rust do soa east once per yeu). Pin a Perpetual system, inventory account balances are ‘updated after eich sale. This type of system is much more Merchandise is oten purchased om account. When this occurs, ‘he business andthe vendor mst sgree onthe eet terms. The ‘credit termsdetermine when the invoice must be pa 2 Many vendors offer aascouni the invoice is pid within a specified period of ime that i es than the fal rei ter, > Discount tems are stated in the following way > 210,130 > Tis term is read “Two ten, net thiy” and means tat the buyer will receive a2 percent discount onthe purchase price ithe invoice i paid within ten days ofthe invoice date, ese the otal (net is doe within thiy days Recording Purchases at Net Cost _| Now, assume that Play Clothes waited until July 20 to pay the amount due in full to Kia's Clothes Prepare the journal entry for Play Clothes. GENERAL JOURNAL Nonoperating Expens Bate_| Account Tiles and Explanation uty] 25 [Accounts Payable ti [Purchase Discounts Lost. Calculating a Purchase Discount | ‘The credit terms for this invoice indicat ‘hari this invoice i paid by dune 25 (10 ays afer the invoice dat) ihe buyer may tate 2% aiscoun on the merchandise rive. Otherwise, the ttl amount dc ($265.00) must be pid by uly 15. NOTE: Discounts are caeulated on the merchandise cost only, Ahis invoice spi union Jansary 10, the amount de would ¥e $128.25. The discount of $6.75 (138.00 *.08) 5 ducted fom the tll de in deteining the amount to pay.{ Recording Purchases at Gross Invoice |“ I Price | | Recording Purchases at Gross Invoice Price (On July 6, Play Clothes purchased $4,000 of ‘merchandise on credit with terms of | 2/10, n/30 from Kid's Clothes, [___Prepare the journal entry fr Play Clothes, Now, assume that Play Clothes waited until July 20 to pay the full amount due to Kid's Clothes. Prepare the journal entry for Play Clothes. GENERAL JOURNAL GENERAL JOURNAL Dato | Account Ties and Explanation | oebit | crevit ate | Account Tites and Explanation | petit_| crcit eau | Recording Purchases at Gross Invoice |“ Price Recording Purchases at Gross Invoice Price merchandise on credit with terms of 240, 1/30 from Kia's Clothes. Prepare the journal entry for Play Clothes. ‘On July 6, Play Clothes purchased $4,000 of [ Now, assume that Play Clothes waited uni uy 20 to pay the full amount due to Kid's Clothes. Prepare the journal entry for Play Clothes. GENERAL JOURNAL (GENERAL JOURNAL ten | pecou rast ana ccpuraton | ooot [cman oats | _ecnon TesandExptanaton | owbn | cost ny fen Tope a anaccounsayti e lmes) “0 comnts Payable Vs Coes) = ca Fr | | Recording Purchases at Gross Invoice |" L Price On July 15, Play Clothes pays the fall amount due to Kid's Clothes | Prepare the journal entry for Play Clothes. | GENERAL JOURNAL Date | Account Tiiesand Explanation | debit | creat Recording Purchases at Gross Invoice |” Price (On July 15, Play Clothes pays the full amount due to Kid’s Clothes. | Prepare the journal entry for Play Clothes. eel Reduces Cost of |s#i000 x o8% = 3,020) “Goods Sold _|L JOURN $4:000 » 98% = $3,920, aN [dene Fae spent [les load | Snare ane comes om Purchase Discounts Taken [__PurchaseRetums & Allowances Sometimes merchandise must be returned to the vendor or an adjustment is made to the amount due for the merchandise (allowance), > The source document for a purchasereturn or allowance is the debit memorandum Efffect of PurchaseRetumns & 7 ___ Allowances > When a return is made or an allowance is granted for merchandise bought on account, the effect of the transaction is to reduce the amount due to the Vendor (Accounts Payable) and to reduce the value of Merchandise Inventory.| Returns of Unsatisfactory Merchandise Transactions Relating to Sales 'nerchante purchesed fom kiss Clothes on cre terms ol Zito. he purchase was orginlyvecerded st net cost othe journal entry for Ply Cates > The ouma ney record this eansation na perpetual inventory system iss flows GENERAL JOURNAL ate | Account Titesane Explanation | bebit_| credit Returns of Unsatisfactory Merchandise ‘Computer sam Paral income Statomont Forthe YearEnded Decembor 31,2005 Revenue Sales 912,000 Less: Sales returns and allowsnces $ 8,000 Sslos discounts 4000 _ 12,000 Not estes $00,000, Credit terms and merchandise returns affect the amount of revenue earned by the seller. Sales | pOR AvGuSt Slay Clothes returned $500 of |) unsatisfactory merchandise purchased from Kid's Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at nat cost. Prepare the journal entry for Play Clothes. ‘On August 2, Kids Clothes sold $2,000 of merchandise to Play Clothes on credit terms 2/70, n/30. Kid's Cothes ‘original paid $1,000 for the merenandise Because K's Clothes uses a perpetual inventory system, they must make two entries. [__ Transportation Costs on Purchases _| Transportation costs related to the | acquisition of assets are part of the cost of the asset being acquired. GENERAL JOURNAL By GENERAL JOURNAL | vameeatrst ay ce meee | tl [Pema Goa) Ant esta easvsnll [laa [Toad |aug.| 5 [Accounts Payable (Kid's Clothes) 490) |Aug.| 2 |Accounts Receivable (Play Clothes) 2,00 inventory i sues omy {$600 98% = $490 aa : —— Sales (On August 2, Kis Clothes sold $2,000 of merchandise to Play Clothes on credit terms 2/70, 0/30, Kid's Cothes. ‘originally paid $1,000 for the merchandise Because K's Clothes uses a perpetual inventory system, they must make two entries. oun | Account Taessodegtznaton | ome | cree ag 1209 Now, let's talk about sales! [__ Sales Retums and Allowances | On August 5, Play Clothes returned $600 of unsatisfactory mmtcandae Kafe Chteoferne napus eae” | | "Kafe Cates costtor na muchandes ua saa | incre tunes eertineatcl neds noo they must make to nts [_Contra-revenue | GENERAL JOURNAL ‘Account Tiles and Explanation [abit | creat [Aug] 6 [Sales Returns and Allowances sof ‘Accounts Receivable (Pisy Clothes) 0)| Effect of Purchase Returns & | Allowances ‘When areas made ora allowance erated for merchandise ‘ought on acount he eet ofthe tasactin ist reduce the mmount det the Vendoe (Accounts Payable) nd to reduce the Vale of Merchandise lave. J Sales Discounts (On July 15, Kid's Clothes receives the full ‘amount due from Play Clothes from the July 6 | sale. Prepare the journal entry for Kid's Clothes. GENERAL JOURNAL Date | Account Ties and Explenstion ‘Sales Returns and Allowances ‘On August 6, Pay Clothes returned $500 of unsatisfactory ‘merchandise to Kid's Clothes from the August 2 sale Kia's Clothes cost fr this merchandise was $250 Because Kie's Clothes uses a perpetual inventory system, they must make two entries, L Sales Discounts ] ) [ On July 15, Kid's Clothes receives the full amount due from Play Clothes from the July 6 sale. Prepare the journal entry for Kid's Clothes. oa Contrarevenue |, joy $4,000 x 98% = $3,920]] tue | AccountTitsandexoianaton | peri | creat tue | _AccdmiTivsand eptanation | osbit Eat {avo.| 5 [inventory 280 uty] 18 ash - 3 Cost of Goods Sold 2 sates Dounte ol c Accounts Receivable (Pay Gnew | 09 Sales Sales Discounts | ‘On July 6, Kid's Clothes sold $4,000 of merchandise to Play | CCothes on credit with terms of 2/10, n/30. The ‘merchandise originally cost Kid's Clothes $2,000, Because Kid's Clothes uses a perpetual inventory system, | ‘thoy must make two entries, ‘Now, assume that it wasn’t until July 20 that |__ Kid's Clothes received the full amount due | __ from Play Clothes from the July 6 sale. | Prepare the journal entry for Kic's Clothes. GENERAL JOURNAL GENERAL JOURNAL foal alert erma sean Dow aon cp | acoutteemercnmtcr [ost | coe Fit esevetenen sents ‘Sales t I Sales ‘On July 6, Kid's Clothes sold $4,000 of merchandise to Play ] Ciothes on credit with terms of 2/10, n/30, ‘The merchandise originally cost Kid's Clothes $2,000, Because Kid's Clothes uses a perpetual inventory system, | they must make two enties, Sales Discounts Now, assume that it wasn't until July 20 that | Kic's Clothes received the full amount due from Play Clothes from the July 6 sale Prepare the journal entry for Kids Clothes. | GENERAL JOURNAL GENERAL JOURNAL Dato | Account Ties end Explanation | pebit | credit Date | Account Ties snd Explanation | pebit | credit [aay] € ost of Goods Sots 2.00 uly/20/Caeh a Inventory {3 ‘Accounts Recoiable [Play Clothes) 000a Delivery very Expenses "Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense. | Accounting for Sales Taxes _ Businesses collect sales tax at the point of sale, Then, they remit the tax to the appropriate governmental agency at times specified by law. x 7% tax = $70 sales tax ate | Account ves and Expiration | pent _| crear [Tens Seles Tex Payable Modifying an Accounting System Most businesses use special journals rather than a general journal to record routine transactions that occur frequently. Gene sournad peoit_| creat Hl a A eroas \. > << Pront Margins Margi rends over ti [+ Gross profit» Net sates + Comparable store sales Overall gross profit, Sales per square foot of —_ soling spac “Gross profit margins by ‘deparment and product oe