Accounting for Merchandising Businesses

1. 0 6 Accounting for Merchandising Businesses

2. 0 After studying this chapter, you should be able to: • Distinguish between the activities and financial statements of service and merchandising businesses. • Describe and illustrate the financial statements of a merchandising business.

3. 0 After studying this chapter, you should be able to: • Describe and illustrate the accounting for merchandise transactions including: • sale of merchandise • purchase of merchandise • transportation costs, sales taxes, trade discounts • dual nature of merchandising transactions. • Describe the adjusting and closing process for a merchandising business.

4. 0 6-1 Objective 1 Distinguish between the activities and financial statements of service and merchandising businesses.

5. 0 6-1 Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX

6. 0 6-1 Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX

7. 0 6-1 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost ofmerchandise sold.

8. 0 6-1 The cost of merchandise sold is subtracted from sales to arrive at gross profit. This amount is called gross profit because it is the profit before deducting the operating expenses.

9. 0 6-1 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

10. Follow My Example 1-1 Follow My Example 6-1 Example Exercise 6-1 $137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service. 31 • 0 1-2 6-1 On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records? During the current year, merchandise is sold for Rp250,000,000 cash and for Rp975,000,000 on account. The cost of the merchandise sold is Rp735,000,000. What is the amount of the gross profit? The gross profit is Rp490,000,000 (Rp250,000,000 + Rp975,000,000 –Rp735,000,000). 10 For Practice: PE 6-1A, PE 6-1B

11. 0 6-1 11

12. 0 6-2 Objective 2 Describe and illustrate the financial statements of a merchandising business.

13. 0 6-2 Multiple-Step Income Statement The multiple-step incomestatement contains several sections, subsections, and subtotals.

14. 0 6-2 The Salesaccount provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.

15. 0 6-2 Sales returns andallowancesare granted by the seller to customers for damaged or defective merchandise.

16. 0 6-2 Sales discountsare granted by the seller to customers for early payment of amounts owed.

17. 0 6-2 Net salesis determined by subtracting sales returns and allowances and sales discounts from sales.

18. 0 6-2 Multiple-Step Income Statement SolusiNet Income Statement For the Year Ended December 31, 2009 (in Rp000) Revenue from sales: Sales Rp720,185 Less: Sales returns and allowances Rp 6,140 Sales discounts 5,790 11,930 Net sales Rp708,255 Cost of merchandise sold 525,305 Gross profit Rp182,950 (Continued) 18

19. (In Rp000) • 0 Operating expenses: Selling expenses: Sales salaries expense Rp53,430 Advertising expense 10,860 Depr. Expense–store equipment 3,100 Delivery Expense 2,800 Miscellaneous selling expense 630 Total selling expenses Rp 70,820 Administrative expenses: Office salaries expense Rp21,020 Rent expense 8,100 Depr. expense–office equipment 2,490 Insurance expense 1,910 Office supplies expense 610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations Rp 77,240 (Continued) 19

20. Other income and expenses: Rent revenue Rp 600 Interest expense (2,440) (1,840) Net income Rp75,400 • 0 6-2 (In Rp000) 20 (Concluded)

21. 0 6-2 Cost of merchandise soldwas discussed earlier. It is the cost of the merchandise sold to customers.

22. 0 6-2 As we discussed in Slide 16, sellers may offer customers sales discounts for early payment of their bills. From the buyer’s perspective, such discounts are referred to as purchase discounts.

23. 0 6-2 The buyer may return merchandise to the seller (apurchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (apurchase allowance).

24. 6-2 Cost of Merchandise Sold

25. 0 6-2 Single-Step Income Statement An alternative form of income statement is the single-stepincome statement. As shown in the next slide, the income statement for SolusiNet deducts the total of all expenses in one step from the total of all revenues.

26. 0 SolusiNetIncome Statement For the Year Ended December 31, 2009 (in Rp000) 6-2 Exhibit 3: Single-Step Income Statement Revenues: Net sales Rp708,255 Rent revenue 600 Total revenues Rp708,855 Expenses: Cost of merchandise sold Rp525,305 Selling expenses 70,820 Administrative expenses 34,890 Interest expense 2,440 Total expenses 633,455 Net income Rp 75,400 26

27. 0 6-2 Exhibit 4: Statement of Owner’s Equity SolusiNetStatement of Owner’s EquityFor the Year Ended December 31, 2009 (in Rp000) Chris Clark, capital, 1/1/09 Rp153,800 Net income for year Rp75,400 Less withdrawals 18,000 Increase in owner’s equity 57,400 Chris Clark, capital, 12/31/09 Rp211,200 27

28. 0 SolusiNetBalance SheetDecember 31, 2009 (in Rp000) 6-2 Exhibit 5: Report Form of Balance Sheet Assets Current assets: Cash Rp52,950 Accounts receivable 91,080 Merchandise inventory 62,150 Office supplies 480 Prepaid insurance 2,650 Total current assets Rp209,310 28 (Continued)

29. 0 6-2 Exhibit 5: Report Form of Balance Sheet Property, plant, and equip.: Land Rp20,000 Store equipment Rp27,100 Less accumulated depreciation 5,700 21,400 Office equipment Rp15,570 Less accumulated depreciation 4,72010,850 Total property, plant, and equipment 52,250 Total assets Rp261,560 29 (In Rp000) (Continued)

30. 0 6-2 Exhibit 5: Report Form of Balance Sheet Liabilities Current liabilities: Accounts payable Rp22,420 Note payable (current portion) 5,000 Salaries payable 1,140 Unearned rent 1,800 Total current liabilities Rp 30,360 Long-term liabilities: Note payable (final pmt. due 2017) 20,000 Total liabilities Rp 50,360 Owner’s Equity Cinta Cita, capital 211,200 Total liabilities and owner’s equity Rp261,560 30 (Concluded)

31. Example Exercise 6-2 • 0 6-2 Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2. Merchandise Inventory, May 1 Rp121,200,000 Merchandise Inventory, May 31 142,000,000 Purchases 985,000,000 Purchases Returns and Allowances 23,500,000 Purchases Discounts 21,000,000 Transportation In 11,300,000 31

32. Follow My Example 6-2 Merchandise Inventory, May 1 Rp 121,200 Purchases Rp985,000 Less: Purchases returns and allowances Rp23,500 Purchases discounts 21,000 44,500 Net purchases Rp940,500 Add transportation in 11,300 Cost of merchandise purchased 951,800 Merchandise available for sale Rp1,073,000 Less merchandise inventory, May 31 142,000 Cost of merchandise sold Rp 931,000 • 0 6-2 32 For Practice: PE 6-2A, PE 6-2B

33. 0 6-3 Objective 3 Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; transportation costs, sales taxes, trade discounts; dual nature of merchandise transactions.

34. 6-3 Cash Sales On January 3, SolusiNet sold Rp1,800,000 of merchandise for cash. @solusinet

35. 6-3 Cash Sales (continued) Using a perpetual inventory, the Rp1,200,000 cost of the inventory must be recorded.

36. 0 6-3 Credit Card Sales At the end of the month, Rp48,000 was sent to pay the service charge on credit card sales. 36

37. 0 6-3 Sales on Account Using a Perpetual Inventory Jan. 12 Accounts Receivable—CV Agung Surya 510 000 Sales 510 000 Invoice No. 7172 12 Cost of Merchandise Sold 280 000 Merchandise Inventory 280 000 Cost of merchandise sold on Invoice No. 7172. On January 12, SolusiNet sold CV Agung Surya merchandise on account, Rp510,000. The cost of the merchandise to the seller was Rp280,000. 37

38. 0 6-3 Sales Discounts The terms for when payments for merchandise are to be made, agreed on by the buyer and the seller, are called credit terms. If buyer is allowed an amount of time to pay, it is known as the credit period.

39. Invoice for Rp1,500,000 Terms: 2/10, n/30 • 0 6-3 Credit Terms If invoice is paid within 10 days ofinvoice date Rp1,470,000 paid (Rp1,500,000 less a 2% discount) 39

40. Invoice for Rp1,500,000 Terms: 2/10, n/30 • 0 6-3 If invoice is NOT paid within 10 days ofinvoice date Full amount (Rp1,500,000) is due within 30 days of invoice date 40

41. 6-3 Sales Discounts Jan. 22 Cash 1 470 000 Sales Discounts 30 000 Accounts Receivable–Omega Tech. 1 500 000 Collection of Invoice No. 106-8, less 2% discount. On January 22, SolusiNet receives the amount due, less the 2 percent discount. 41

42. 0 6-3 Jan. 13 Sales Returns and Allowances 225 000 Accounts Receivable-PT Krisna 225 000 Credit Memo No. 32 13 Merchandise Inventory 140 000 Cost of Goods Sold 140 000 Cost of merchandise returned. Credit Memo No. 32. On January 13, issued Credit Memo 32 to PT Krisna for merchandise returned to SolusiNet. Selling price, Rp225,000; cost to SolusiNet, Rp140,000. 42

43. Example Exercise 6-3 • 0 1-2 6-3 Journalize the following merchandise transactions: • Sold merchandise on account, Rp7,500,000 with terms of 2/10, n/30. The cost of the merchandise sold was Rp5,625,000. • Received payment less the discount. 43

44. Follow My Example 6-3 • 0 6-3 • Accounts Receivable 7,500,000 Sales 7,500,000 Cost of Merchandise Sold 5,625,000 Merchandise Inventory 5,625,000 • Cash 7,350,000 Sales Discounts 150,000 Accounts Receivable 7,500,000 44 For Practice: PE 6-3A, PE 6-3B

45. 0 6-3 Purchase Transactions (Perpetual Inventory) JOURNAL PAGE 24 Post. Ref. Description Dr Cr. Date 2009 Jan. 3 Merchandise Inventory 2 510 000 Cash 2 510 000 Purchased inventory from CV Budi. On January 3, SolusiNet purchased merchandise for cash from Alden Company, Rp2,510,000. 45

46. 0 6-3 Jan. 4 Merchandise Inventory 9 250 000 Accounts Payable—CV Thomas 9 250 000 Purchased inventory on account. On January 4, SolusiNet purchased merchandise on account from CV Thomas, Rp9,250,000. 46

47. 0 6-3 Purchases Discounts PT Alpha Technologies issues an invoice for Rp3,000,000 to SolusiNet dated March 12, with terms 2/10, n/30.

48. Discount of 2% on Rp3,000,000 Rp60,000 Interest for 20 days at the rate of 6% on Rp2,940,000 – 9,800 Savings from borrowing Rp50,200 • 0 6-3 SolusiNet borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay the invoice within the discount period? YES

49. 0 6-3 Purchase Transactions (Perpetual Inventory) Mar. 12 Merchandise Inventory 3 000 000 Accounts Payable— PT Alpha Tech. 3 000 000 Purchased inventory on account. On March 12, SolusiNet purchased merchandise on account from PT Alpha Technologies, Rp3,000,000. 49

50. 0 6-3 Mar. 22 Accounts Payable— PT Alpha Technol. 3 000 000 Cash 2 940 000 Merchandise Inventory 60 000 Paid PT Alpha Technologies for March 12 purchase. If payment is made by March 22, SolusiNet records the discount as a reduction in cost. Notice that Merchandise Inventory is credited because NetSolutions maintains a perpetual inventory. 50