Accounting for Merchandising Businesses

1. Accounting for Merchandising Businesses Chapter 5

2. Learning Objectives Distinguish between the activities and financial statements of service and merchandising businesses. Describe and illustrate the financial statements of a merchandising business. Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; and dual nature of merchandising transactions.

3. Learning Objectives Describe the adjusting and closing process for a merchandising business. Describe and illustrate the use of the ratio of net sales to assets in evaluating a company’s operating performance. 4. Describe the adjusting and closing process for a merchandising business.

4. Learning Objective 1 Distinguish between the activities and financial statements of service and merchandise businesses.

5. Nature of Merchandising Businesses LO 1 Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX

6. Nature of Merchandising Businesses LO 1 Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX

7. Nature of Merchandising Businesses When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandisesold. GrossProfit LO 1 (continued)

8. GrossProfit LO 1 Nature of Merchandising Businesses • The cost of merchandise sold is subtracted from sales to arrive at gross profit. It is the profit before deducting operating expenses.

9. Nature of Merchandising Businesses Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory. LO 1

10. EE 5-1

11. LO 1 Nature of Merchandising Businesses

12. Learning Objective 2 Describe and illustrate the financial statements of a merchandising business.

13. Multiple-Step Income Statement The multiple-step income statement contains several sections, subsections, and subtotals. LO 2

14. Revenue from Sales LO 2

15. Revenue from Sales Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account. LO 2

16. Revenue from Sales Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. LO 2

17. Revenue from Sales Sales discounts are granted by the seller to customers for early payment of amounts owed. LO 2

18. Revenue from Sales Net sales is determined by subtracting sales returns and allowances and sales discounts from sales. The location of net sales on the multiple-step income statement is shown on the next slide. LO 2

19. LO 2 Multiple-Step Income Statement

20. Cost of Merchandise Sold The cost of merchandise sold is the cost of the merchandise sold to customers. Merchandise costs consist of all the costs of acquiring the merchandise and readying it for sale, such as purchase and freight costs. A single figure for cost of merchandise sold is shown on the multiple-step income statement on the next slide. LO 2

21. Multiple-Step Income Statement LO 2

22. Cost of Merchandise Sold The buyer may return merchandise to the seller (purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (purchase allowance). LO 2

23. Cost of Merchandise Sold You have seen that 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. LO 2

24. Cost of Merchandise Sold If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodicinventory system is being used. LO 2

25. Cost of Merchandise Sold Under the perpetual inventory system, the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records. LO 2

26. LO 2 Gross Profit • Gross profit is computed by subtracting the cost of merchandise sold from net sales. GrossProfit

27. LO 2 Multiple-Step Income Statement

28. Income from Operations Selling expenses are incurred directly in the selling of merchandise. Sales salaries Store supplies used Depreciation of store equipment Delivery expense Advertising expense LO 2

29. Income from Operations Administrative expenses, sometimes called general expenses, are incurred in the administration or general operations of the business. Office salaries Depreciation of office equipment Office supplies used LO 2

30. LO 2 Multiple-Step Income Statement

31. Income from operations, sometimes called operating income, is determined by subtracting operating expenses from gross profit. Income from operations follows total operating expenses on the multiple-step income statement. LO 2 Income from Operations

32. LO 2 Multiple-Step Income Statement

33. Other Income and Expense Other income is revenue from sources other than the primary operating activity of a business. Other expense is an expense that cannot be traced directly to the normal operations of the business. LO 2

34. LO 2 Multiple-Step Income Statement

35. Single-Step Income Statement An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues. LO 2

36. Single-Step Income Statement LO 2

37. Retained Earnings Statement LO 2

38. Balance Sheet The form of balance sheet with the assets on the left-hand side and the liabilities and stockholders’ equity on the right-hand side is called the account form. LO 2

39. LO 2 Balance Sheet • When the balance sheet is presented in a downward sequence in three sections, it has been prepared using the report form. This is the form used in the next two slides.

40. Balance Sheet LO 2 (continued)

41. Balance Sheet LO 2

42. Learning Objective 3 Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions.

43. Chart of Accounts LO 3

44. Cash Sales LO 3 On January 3, NetSolutions sold $1,800 of merchandise for cash.

45. Cash Sales LO 3 Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on January 3 is $1,200.

46. Cash Sales LO 3 Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 31.

47. Sales on Account LO 3 On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.

48. Sales Discounts LO 3 • The terms for when payments for merchandise are to be made are called credit terms. • If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay.

49. Invoice LO 3

50. Credit Terms To encourage the buyer to pay before the end of the credit period, the seller may offer a discount. Credit terms of 2/10, n/30 are summarized in the next slide (Exhibit 7). LO 3