Chapter 4

Reporting and Analyzing

Merchandising Operations

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Conceptual Learning Objectives

C1: Describe merchandising activities and
identify income components for a
merchandising company
C2: Identify and explain the inventory asset of
a merchandising company
C3: Describe both perpetual and periodic
inventory systems
C4: Analyze and interpret cost flows and
operating activities of a merchandising
company
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Analytical Learning Objectives

A1: Compute the acid-test ratio and

explain its use to assess liquidity
A2: Compute the gross margin ratio and
explain its use to assess profitability

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Procedural Learning Objectives

P1: Analyze and record transactions for merchandise
purchases using a perpetual system
P2: Analyze and record transactions for merchandise
sales using a perpetual system
P3: Prepare adjustments and close accounts for a
merchandising company
P4: Define and prepare multiple-step and single-step
income statements
P5: Appendix 4A: Record and compare merchandising
transactions using both periodic and perpetual
inventory systems
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C1

Merchandising Activities
Service
Service organizations
organizations sell
sell time
time to
to earn
earn revenue.
revenue.
Examples:
Examples: Accounting
Accounting firms,
firms, law
law firms
firms and
and plumbing
plumbing services
services

Revenues

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Minus

Expenses

Equals

Net
income

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Merchandising Activities

C1

Merchandising Companies
Manufacturer

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Wholesaler

Retailer

Customer

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Reporting Income of a
Merchandiser

C1

Merchandising companies sell products to earn revenue.

Examples: sporting goods, clothing, and auto parts stores

Net
Sales

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Minus

Cost of Equals
Goods Sold

Gross
Profit

Minus

Expenses

Equals

Net
Income

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Operating Cycle for a

Merchandiser

C2

Begins with the purchase of merchandise and ends with

the collection of cash from the sale of merchandise.
Cash Sale
Purchases

Cash
collection

Purchases

Merchandise
inventory

Account
receivable

Cash
sales

Merchandise
inventory
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Credit Sale

Credit sales
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C3

Inventory Systems
Beginning
inventory

Net cost of
purchases

Merchandise
=
available for sale

Ending inventory
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Cost of goods
sold
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P1

Merchandise Purchases
On June 20, Jason, Inc. purchased $14,000 of
Merchandise Inventory paying cash.

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P1

Trade Discounts
Used by manufacturers and wholesalers to offer
better prices for greater quantities purchased.

Example
Example

Matrix,
Matrix, Inc.
Inc. offers
offers aa 30%
30% trade
trade
discount
discount on
on orders
orders of
of 1,000
1,000
units
units or
or more
more of
of their
their popular
popular
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price of
of $5.25.
$5.25.
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P1

Seller
Invoice date
Purchaser
Order number
Credit terms
Freight terms
Goods
Invoice amount

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Purchase Discounts

P1

A deduction from the invoice price granted to induce early

payment of the amount due.

Terms

Discount Period

Credit Period

Time
Due
Date of
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Invoice

Due: Invoice
price minus
discount

Due: Full Invoice Price

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Purchase Discounts

P1

2/10,n/30
Discount
Discount
Percent
Percent
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Number
Number of
of
Days
Days
Discount
Discount Is
Is
Available
Available

Otherwise,
Otherwise,
Net
Net (or
(or All)
All)
Is
Is Due
Due in
in 30
30
Days
Days

Credit
Credit
Period
Period

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P1

Purchase Discounts
On
On May
May 7,
7, Jason,
Jason, Inc.
Inc. purchased
purchased $27,000
$27,000 of
of
merchandise
merchandise inventory
inventory on
on account,
account, credit
credit
terms
terms are
are 2/10,
2/10, n/30.
n/30.

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P1

Purchase Discounts
On
On May
May 15,
15, Jason,
Jason, Inc.
Inc. paid
paid the
the amount
amount due
due
on
on the
the purchase
purchase of
of May
May 7.
7.

*$27,000 2% = $540 discount

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Purchase Discounts

P1

After we post these entries, the

accounts involved look like this:

Merchandise Inventory
5/7

27,000 5/15

Bal. 26,460

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540

Accounts Payable
5/15 27,000 5/7 27,000
Bal.

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P1

When Discount is Not Taken

If we fail to take a 2/10, n/30
discount, is it really expensive?

365 days 20 days 2% = 36.5% annual rate

Days
Days
in
in aa
year
year

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Number
Number
of
of additional
additional
days
days before
before
payment
payment

Percent
Percent
paid
paid to
to
keep
keep
money
money

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P1

Purchase Returns and Allowances

Purchase
Purchase Return
Return .. .. ..
Merchandise
Merchandise returned
returned by
by the
the purchaser
purchaser to
to the
the
supplier.
supplier.
Purchase
Purchase Allowance
Allowance .. .. ..
A
A reduction
reduction in
in the
the cost
cost of
of defective
defective merchandise
merchandise
received
received by
by aa purchaser
purchaser from
from aa supplier.
supplier.

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P1

Purchase Returns and Allowances

On
On May
May 9,
9, Matrix,
Matrix, Inc. purchased $20,000
of
of merchandise
merchandise inventory
inventory on
on account,
account,
credit
credit terms
terms are
are 2/10,
2/10, n/30.

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P1

Purchase Returns and Allowances

On
On May
May 10,
10, Matrix,
Matrix, Inc.
Inc. returned
returned $500
$500 of
of defective
defective
merchandise
merchandise to
to the
the supplier.
supplier.

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P1

Purchase Returns and Allowances

On May 18, Matrix, Inc. paid the amount owed for
the purchase of May 9.

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Transportation Costs

P1

Buyer

Seller

FOB shipping point

(buyer pays)

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Merchandise

FOB destination
(seller pays)

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Transportation Costs

P1

On May 12, Jason, Inc. purchased $8,000 of

merchandise inventory for cash and also
paid $100 transportation costs.

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P1

Quick Check

On
On July
July 6,
6, 2010,
2010, Seller
Seller Co.
Co. sold
sold $7,500
$7,500 of
of merchandise
merchandise to
to Buyer,
Buyer,
Co.
Co. on
on account;
account; terms
terms of
of 2/10,n/30.
2/10,n/30. The
The shipping
shipping terms
terms were
were FOB
FOB
shipping
shipping point.
point. The
The shipping
shipping cost
cost was
was $100.
$100. Which
Which of
of the
the following
following
will
will be
be part
part of
of Buyers
Buyers July
July 66 journal
journal entry?
entry?
a.
a. Credit
Credit Sales
Sales $7,500
$7,500
b.
b. Credit
Credit Purchase
Purchase Discounts
Discounts $150
$150
c.
c. Debit
Debit Merchandise
Merchandise Inventory
Inventory $7,600
$7,600
d.
d. Debit
Debit Accounts
Accounts Payable
Payable $7,450
$7,450
FOB shipping point indicates the buyer
ultimately pays the freight. This is recorded with
a debit to Merchandise Inventory.
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P1

Cost of Merchandise Purchased

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P2

Accounting for Merchandise Sales

Sales
Sales discounts
discounts and
and returns
returns and
and allowances
allowances are
are Contra
Contra Revenue
Revenue accounts.
accounts.
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P2

Sales of Merchandise
On March 18, Diamond Store sold $25,000 of
merchandise on account. The merchandise was carried
in inventory at a cost of $18,000.

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P2

Sales Discounts
On
On June
June 8,
8, Barton
Barton Co.
Co. sold
sold merchandise
merchandise costing
costing $3,500
$3,500
for
for $6,000
$6,000 on
on account.
account. Credit
Credit terms
terms were
were 2/10,
2/10, n/30.
n/30. Lets
Lets
prepare
prepare the
the journal
journal entries.
entries.

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P2

Sales Discounts
On June 17, Barton Co. received a check for $5,880
in full payment of the June 8 sale.

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P2

Sales Returns and Allowances

On June 12, Barton Co. sold merchandise
costing $4,000 for $7,500 on account. The
credit terms were 2/10, n/30.

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P2

Sales Returns and Allowances

On June 14, merchandise with a sales price of $800 and
a cost of $470 was returned to Barton. The return is
related to the June 12 sale.

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P2

Sales Returns and Allowances

On June 20, Barton received the amount owed to it from the
sale of June 12.

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C4

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Lets complete the

accounting cycle
by preparing the
closing entries for
Barton.

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P3

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Step 1: Close Credit Balances in

Temporary Accounts to Income
Summary.

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P3

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Step 2: Close Debit Balances in

Temporary Accounts to Income
Summary.

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P3

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Step 3: Close Income Summary to

Owners Capital

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P3

Step 4: Close Withdrawals to Owners

Capital

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P4

Income Statement Formats

Multiple-Step
Single-Step

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P4

Multiple-Step Income Statement

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P4

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Single-Step Income Statement

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P4

Balance Sheet

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Acid-Test Ratio

A1

Acid-Test
=
Ratio

Quick Assets
Current Liabilities

Cash + S-T Investments + Receivables

Acid-Test
=
Current Liabilities
Ratio
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.
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Gross Margin Ratio

A2

Gross
Margin =
Ratio

Net Sales - Cost of Goods Sold

Net Sales

Percentage of
dollar sales
available to cover
expenses and
provide a profit.

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End of Chapter 4

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