0 6 Accounting for Merchandising Businesses
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.
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.
0 6-1 Objective 1 Distinguish between the activities and financial statements of service and merchandising businesses.
Service organizations sell time to earn revenue. Examples: accounting firms, law firms, and plumbing services Expenses • Equals Netincome • Minus Reporting Financial Performance Revenues
0 6-1 Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX
Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores Reporting Financial Performance • Cost Mds Sold • Minus • Equals • Minus • Equals • NetSales • Expenses • NetIncome • GrossProfit
0 6-1 Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX
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.
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.
0 6-1 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.
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 $250,000 cash and for $975,000 on account. The cost of the merchandise sold is $735,000. What is the amount of the gross profit? The gross profit is $490,000 ($250,000 + $975,000 –$735,000). 10 For Practice: PE 6-1A, PE 6-1B
0 6-1 11
0 6-2 Objective 2 Describe and illustrate the financial statements of a merchandising business.
0 6-2 Multiple-Step Income Statement The multiple-step incomestatement contains several sections, subsections, and subtotals.
0 6-2 The Salesaccount provides the total amount charged to customers for merchandise sold, including cash sales and sales on account.
0 6-2 Sales returns andallowancesare granted by the seller to customers for damaged or defective merchandise.
0 6-2 Sales discountsare granted by the seller to customers for early payment of amounts owed.
0 6-2 Net salesis determined by subtracting sales returns and allowances and sales discounts from sales.
0 6-2 Multiple-Step Income Statement NetSolutionsIncome Statement For the Year Ended December 31, 2009 Revenue from sales: Sales $720,185 Less: Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930 Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950 (Continued) 18
0 Operating expenses: Selling expenses: Sales salaries expense $53,430 Advertising expense 10,860 Depr. Expense–store equipment 3,100 Delivery Expense 2,800 Miscellaneous selling expense 630 Total selling expenses $ 70,820 Administrative expenses: Office salaries expense $21,020 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 $ 77,240 (Continued) 19
Other income and expenses: Rent revenue $ 600 Interest expense (2,440) (1,840) Net income $75,400 • 0 6-2 20 (Concluded)
0 6-2 Cost of merchandise soldwas discussed earlier. It is the cost of the merchandise sold to customers.
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.
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).
0 6-2 Cost of Merchandise Sold 24
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 NetSolutions deducts the total of all expenses in one step from the total of all revenues.
0 NetSolutionsIncome Statement For the Year Ended December 31, 2009 6-2 Exhibit 3: Single-Step Income Statement Revenues: Net sales $708,255 Rent revenue 600 Total revenues $708,855 Expenses: Cost of merchandise sold $525,305 Selling expenses 70,820 Administrative expenses 34,890 Interest expense 2,440 Total expenses 633,455 Net income $ 75,400 26
0 6-2 Exhibit 4: Statement of Owner’s Equity NetSolutionsStatement of Owner’s EquityFor the Year Ended December 31, 2009 Chris Clark, capital, 1/1/09 $153,800 Net income for year $75,400 Less withdrawals 18,000 Increase in owner’s equity 57,400 Chris Clark, capital, 12/31/09 $211,200 27
0 NetSolutionsBalance SheetDecember 31, 2009 6-2 Exhibit 5: Report Form of Balance Sheet Assets Current assets: Cash $52,950 Accounts receivable 91,080 Merchandise inventory 62,150 Office supplies 480 Prepaid insurance 2,650 Total current assets $209,310 28 (Continued)
0 6-2 Exhibit 5: Report Form of Balance Sheet Property, plant, and equip.: Land $20,000 Store equipment $27,100 Less accumulated depreciation 5,700 21,400 Office equipment $15,570 Less accumulated depreciation 4,72010,850 Total property, plant, and equipment 52,250 Total assets $261,560 29 (Continued)
0 6-2 Exhibit 5: Report Form of Balance Sheet Liabilities Current liabilities: Accounts payable $22,420 Note payable (current portion) 5,000 Salaries payable 1,140 Unearned rent 1,800 Total current liabilities $ 30,360 Long-term liabilities: Note payable (final pmt. due 2017) 20,000 Total liabilities $ 50,360 Owner’s Equity Chris Clark, capital 211,200 Total liabilities and owner’s equity $261,560 30 (Concluded)
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 $121,200 Merchandise Inventory, May 31 142,000 Purchases 985,000 Purchases Returns and Allowances 23,500 Purchases Discounts 21,000 Transportation In 11,300 31
Follow My Example 6-2 Merchandise Inventory, May 1 $ 121,200 Purchases $985,000 Less: Purchases returns and allowances $23,500 Purchases discounts 21,000 44,500 Net purchases $940,500 Add transportation in 11,300 Cost of merchandise purchased 951,800 Merchandise available for sale $1,073,000 Less merchandise inventory, May 31 142,000 Cost of merchandise sold $ 931,000 • 0 6-2 32 For Practice: PE 6-2A, PE 6-2B
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.
Exh. • 6-5 Inventory Systems Beginninginventory Net cost ofpurchases • + Merchandiseavailable for sale = Ending Inventory Cost of GoodsSold • +
Inventory Systems • Perpetual MethodGives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account. • Periodic MethodRequires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account.
Inventory Systems • Perpetual MethodGives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account. • Periodic MethodRequires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account. Because of advances in computer technology, the perpetual method is widely used in practice and will be the focus of our discussion.
Merchandising and Inventory • Merchandising involves selling inventory • Inventory is usually an important asset • Inventory must be accounted for periodically or perpetually • Traditional periodic method is often being replaced by perpetualinventory accounting
Income Statement Comparison • Service Business • Fees earned $150,000 • Operating expenses 120,000 • Net income $ 30,000 • 20% of revenues • Merchandising Business • Sales revenue $600,000 • Cost of mdse. sold 450,000 • Gross profit $150,000 • Operating expenses 120,000 • Net income $ 30,000 • 5% of revenues
Income Statement Comparison • Service Business • Fees earned $150,000 • Operating expenses 120,000 • Net income $ 30,000 • 20% of revenues • Merchandising Business • Sales revenue $600,000 • Cost of mdse. sold 450,000 • Gross profit $150,000 • Operating expenses 120,000 • Net income $ 30,000 • 75% of revenues • 5% of revenues
Advantages of Using Perpetual Inventory • Continuous determination of inventory value • Continuous determination of gross profit • Affordable with computers, scanners, and bar codes on most products • Perpetual inventory accounting provides managementcontrols • Managers know which items are selling fastest and the profit margin on those items
0 6-3 Cash Sales On January 3, NetSolutions sold $1,800 of merchandise for cash. 34
0 6-3 Cash Sales (continued) Using a perpetual inventory, the $1,200 cost of the inventory must be recorded. 35
0 6-3 Credit Card Sales At the end of the month, $48 was sent to pay the service charge on credit card sales. 36
0 6-3 Sales on Account Using a Perpetual Inventory Jan. 12 Accounts Receivable—Sims Co. 510 00 Sales 510 00 Invoice No. 7172 12 Cost of Merchandise Sold 280 00 Merchandise Inventory 280 00 Cost of merchandise sold on Invoice No. 7172. On January 12, NetSolutions sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280. 37
Merchandise Purchases On June 20, Melton Company purchased $14,000 of Merchandise Inventory paying cash.
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.
Exh. • 6-7 Purchase Discounts A deduction from the invoice price granted to induce early payment of the amount due. • Terms • Time • Due • Discount Period • Credit Period • Full amount • less discount • Full amount due Purchase or Sale
Number of Days Discount Is Available Otherwise, Net (or All) Is Due Discount Percent CreditPeriod Purchase Discounts 2/10,n/30