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Merchandising Operations

Merchandising Operations. Chapter 5. Merchandisers. Businesses that sell a product to customers New Accounts Balance Sheet Inventory Asset account Income Statement Sales (Sales Revenue) Cost of Goods Sold Expense account. Balance Sheet Differences.

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Merchandising Operations

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  1. Merchandising Operations Chapter 5

  2. Merchandisers • Businesses that sell a product to customers • New Accounts • Balance Sheet • Inventory • Asset account • Income Statement • Sales (Sales Revenue) • Cost of Goods Sold • Expense account

  3. Balance Sheet Differences ** Greg’s Tunes, in your textbook, is an example of a merchandising company. * Smart Touch, in textbook Chapters 1-4, is a service company.

  4. Income Statement Differences

  5. Operating Cycle

  6. Inventory Systems PERIODIC • Goods counted periodically to determine quantity • Used by small businesses • Less popular due to computerized inventory systems

  7. Inventory Systems PERPETUAL Record of Units purchased and cost amount Units sold and sales and cost amounts The quantity of inventory on hand and its cost Better control of inventory Popular due to bar codes Physical count once a year

  8. Bar Codes Used to: Record Sales and Cost of goods sold Updates Inventory count Updates purchasing and generates purchase orders

  9. Purchasing Inventory(perpetual) • The inventory account is increased with each purchase • The vendor submits an invoice for payment • The invoice contains: • The seller • The purchaser • The date of purchase (or shipment) • Credit terms • Total amount due • The due date

  10. Journal Entry for Purchase of Inventory • The Inventory account, an asset–used only for goods purchased • Debit for gross amount of purchase • The method of payment is credited • Accounts payable, if on account • Cash, if purchased with cash

  11. Purchase Discounts • Discount for early payment • Expressed as follows: Other terms: 2/10 , n/30 2% discount if paid within 10 days Full amount due within 30 days No discount, full amount due in 30 days n/30 eom Full amount due by the end of month

  12. Payment within the Discount Period • Debit Accounts payable for invoice amount • Credit Cash for the actual payment amount(Gross amount – discount amount) • Credit Inventory for the discount amount • If payment is sent after the discount period • Credit cash for the full invoice amount • Do not reduce the inventory account 12

  13. Purchase Returns and Allowances • Purchase return • Merchandise returned by the purchaser • Purchase allowance • Seller reduces amount owed • Incentive for purchaser to keep goods

  14. Journal Entry for Purchase Returns and Allowances • Debit Accounts payable for amount returned • Credit Inventory for the amount returned • Reverses original purchase entry • Entry the same for a purchase allowance • Company keeps the inventory 14

  15. Seller Buyer Transportation Costs FOB Shipping Point Goods Title transfers to buyer Buyer pays freight charges Increases cost of inventory

  16. Seller Buyer Transportation CostsFOB Destination Goods Title transfers to buyer Seller pays freight charges Increases expenses

  17. Purchase Discount when Shipping Added to Invoice • Discount applied to inventory cost only • No discount computed on shipping cost

  18. Sale of Inventory(perpetual system) • Sales revenue • Amount earned from selling inventory • Revenue account • Cost of goods sold • Cost of inventory sold to customers • Expense account

  19. Accounting for Sales Transactions • Two journal entries: • Record the sale • Cash sale • Credit sale • Update the inventory

  20. Sale of Inventory issues • Sales returns and allowances • When customer returns goods or refuses services • Contra revenue account (debit balance) • Sales allowance • Seller grants a reduction in price to customer • Merchandise is defective, damaged, or otherwise unsuitable

  21. Entry for Sales Returns and Allowances • Process the return (opposite of sale) • Sales returns and allowances (debit, reducing sales) • Refund Cash or reduce Accounts receivable (credit) • Increase inventory (debit, if returned and sellable) • Reduce Cost of goods sold (credit) • Process the allowance (same first entry) • Reduce Sales (Sales returns and allowances) • Refund Cash or reduce Accounts receivable

  22. Entry for Sales Discounts • Sales discounts • Customer pays within the discount period • Seller has credit terms • Reduce Sales • (Contra revenue account) • Sales discount debited

  23. Net Sales Sales made to customers minus Sales Returns & Allowances minus Sales Discounts equals Net Sales

  24. Gross Profit or Gross Margin Net Sales minus Cost of Goods Sold equals Gross Profit

  25. Adjusting Inventory • Physical count of inventory at least once per year • Account may differ from the books due to: • Theft or damage – Inventory shrinkage • Errors

  26. Closing Entries of Merchandiser 1. Close revenues 2. Close expenses and contra revenues

  27. Closing Entries of a Merchandiser 3. Close Income summary 4. Close Drawing Moore, Capital Moore, Capital Moore, Drawing

  28. Moore, Drawing

  29. Prepare a merchandiser’s financial statements 5

  30. Income Statement

  31. Operating Expenses • Selling Expenses • Marketing and selling products • Includes: • Advertising • Sales’ salaries • Store rent, depreciation, taxes, utilities and insurance • Freight out or delivery expenses

  32. Operating Expenses • General Expenses • NOT marketing products • Includes: • Executive and staff salary • Administrative office building rent, depreciation, taxes, utilities and insurance • Not store related

  33. Income Statement Formats Multi-step Income Statement • Lists several important subtotals • Gross profit • Operating income • More popular

  34. Income Statement Formats Single-step Groups all revenues and all expenses together No subtotals Works well for service companies

  35. Wal-Mart Income Statement

  36. Other Financial Statements • Statement of Owner’s Equity • Same as service company • Balance Sheet • Inventory account • Current asset

  37. Statement of Owner’s Equity

  38. Balance Sheet

  39. Wal-Mart Balance Sheet(partial)

  40. Use gross profit percentage, inventory turnover, and days in inventory to evaluate a business 6

  41. Gross Profit Percentage • Calculation: • Carefully watched measure • Small increase may indicate rise in income • Small decrease may indicate trouble Gross Profit Net Sales Revenue

  42. Rate of Inventory Turnover Cost of goods sold Average inventory • Calculation: • Measures how rapidly inventory is sold • The higher the turnover, the more quickly inventory is sold

  43. Days in Inventory 365 days Inventory turnover ratio • Calculation: • Measures average number of days inventory held • The higher the days, the longer inventory is being held

  44. Inventory Using a Periodic System • Periodic system has separate accounts for: • Purchases • Purchases discount • Purchase returns and allowance • Transportation cost

  45. Purchase Discounts and Purchase Returns and Allowances • Separate purchase discount account • Purchase returns and allowance

  46. Net Purchases Purchases (debit) minus Purchase discounts (credit) minus Purchase returns and allowances (credit) equals Net purchases

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