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Chapter 5 ACCOUNTING FOR MERCHANDISING OPERATIONS 5 - 2 Service organizations sell time to earn revenue. Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores. P1 5 - 11 PURCHASE DISCOUNTS A deduction from the invoice price granted to induce early payment of the amount due.
Chapter 5 ACCOUNTING FOR MERCHANDISING OPERATIONS 5 - 2 Service organizations sell time to earn revenue. Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores. P1 5 - 11 PURCHASE DISCOUNTS A deduction from the invoice price granted to induce early payment of the amount due.
Chapter 5 ACCOUNTING FOR MERCHANDISING OPERATIONS 5 - 2 Service organizations sell time to earn revenue. Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores. P1 5 - 11 PURCHASE DISCOUNTS A deduction from the invoice price granted to induce early payment of the amount due.
Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA McGraw-Hill/I rwin Copyright 2011 by The McGraw-Hill Companies, I nc. All rights reserved. Chapter 5 ACCOUNTING FOR MERCHANDISING OPERATIONS 5 - 2 Service organizations sell time to earn revenue.
Examples: Accounting firms, law firms and plumbing services
SERVICE COMPANIES C 1 5 - 3 Manufacturer Wholesaler Retailer Consumers Merchandising Companies MERCHANDISER C 1 5 - 4 REPORTING INCOME FOR A MERCHANDISER Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores C 1 5 - 5 OPERATING CYCLE FOR A MERCHANDISER Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. C 2 5 - 6 INVENTORY SYSTEMS C 2 5 - 7 Perpetual systems continually update accounting records for merchandising transactions
Periodic systems accounting records relating to merchandise transactions are updated only at the end of the accounting period C 2 INVENTORY SYSTEMS 5 - 8 MERCHANDISE PURCHASES On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash. P1 5 - 9 TRADE DISCOUNTS Used by manufacturers and wholesalers to offer better prices for greater quantities purchased. Example Z-Mart offers a 30% trade discount for orders of 1,000 units or more on its popular product Racer. Each Racer 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 $ P1 5 - 10 P1 ACCOUNTING FOR MERCHANDISE PURCHASES 5 - 11 PURCHASE DISCOUNTS A deduction from the invoice price granted to induce early payment of the amount due. P1 5 - 12 2/10,n/30 Discount Percent Number of Days Discount Is Available Otherwise, Net (or All) Is Due in 30 Days Credit Period PURCHASE DISCOUNTS P1 5 - 13 On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30. PURCHASE DISCOUNTS P1 5 - 14 On November 12, Z-Mart paid the amount due on the purchase of November 2. PURCHASE DISCOUNTS P1 5 - 15 PURCHASE DISCOUNTS After we post these entries, the accounts involved look like these: P1 5 - 16 PURCHASE RETURNS AND ALLOWANCES Purchase Return . . . Merchandise returned by the purchaser to the supplier. Purchase Allowance . . . A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. P1 5 - 17 On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. PURCHASE RETURNS AND ALLOWANCES P1 5 - 18 Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes the 2% discount only on the $900 remaining balance. PURCHASE RETURNS AND ALLOWANCES P1 5 - 19 TRANSPORTATION COSTS AND OWNERSHIP TRANSFER P1 5 - 20 TRANSPORTATION COSTS Z-Mart purchased merchandise on terms of FOB shipping point. The transportation charge is $75. P1 5 - 21 ACCOUNTING FOR MERCHANDISE P1 5 - 22 ACCOUNTING FOR MERCHANDISE SALES P2 5 - 23 SALES OF MERCHANDISE P2 Each sales transaction for a seller of merchandise involves two parts: Revenue received in the form of an asset from a customer. Recognition of the cost of merchandise sold to a customer. 5 - 24 On November 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of $1,600. SALES OF MERCHANDISE P2 5 - 25 SALES DISCOUNTS P2 Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts. 5 - 26 Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60. SALES DISCOUNTS P2 The account was paid in full within the 60-day period. The account was paid in full within the 10-day discount period. 5 - 27 SALES RETURNS AND ALLOWANCES P2 Sales returns and allowances usually involve dissatisfied customers and the possibility of lost future sales. Sales returns refer to merchandise that customers return to the seller after a sale. Sales allowances refer to reductions in the selling price of merchandise sold to customers. 5 - 28 Recall Z-Marts sale for $2,400 that had a cost of $1,600. Assume the customer returns part of the merchandise. The returned items sell for $800 and cost $600. SALES RETURNS AND ALLOWANCES P2 5 - 29 Assume that $800 of the merchandise Z-Mart sold on November 3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction. SALES ALLOWANCES P2 5 - 30 MERCHANDISING COST FLOW IN THE ACCOUNTING CYCLE Beginning inventory Net purchases Merchandise available for sale Ending inventory Cost of goods sold To Income Statement To Balance Sheet To Income Statement To Balance Sheet P e r i o d
1
Beginning inventory Net purchases Merchandise available for sale Ending inventory Cost of goods sold P e r i o d
2
P2 5 - 31 ADJUSTING ENTRIES FOR MERCHANDISERS Z-Marts Merchandise Inventory account at the end of year 2011 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists. P3 A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of merchandise, including theft and deterioration. 5 - 32 CLOSING ENTRIES FOR MERCHANDISERS P3 5 - 33 P4 An income statement format shows net sales and other costs and expenses. INCOME STATEMENT 5 - 34 CLASSIFIED BALANCE SHEET Highly Liquid Less Liquid P4 5 - 35 A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future. = Quick Assets Current Liabilities Acid-Test Ratio Acid-Test Ratio = Cash + S-T Investments + Receivables Current Liabilities ACID-TEST RATIO A1 5 - 36 Percentage of dollar sales available to cover expenses and provide a profit. Gross Margin Ratio Net Sales - Cost of Goods Sold Net Sales = GROSS MARGIN RATIO A2 5 - 37 Nestl A1/A2 5 - 38 APPENDIX 5A: PERIODIC INVENTORY SYSTEM P5 A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold. (a) (b) (c) (d) (e) (f) (g) 5 - 39 APPENDIX 5A: PERIODIC INVENTORY SYSTEM P5 5 - 40 APPENDIX 5B: WORKSHEETPERPETUAL SYSTEM P5 5 - 41 END OF CHAPTER 5