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Merchandising Operations

Merchandising Operations. Chapter 5. Merchandising Operations. Buying and selling products. Objective 1. Account for the purchase of inventory. Operating Cycle of a Merchandising Business. Inventory Systems. Periodic Perpetual. Purchase of Inventory S5-1. Inventory 10,000

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Merchandising Operations

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  1. Merchandising Operations Chapter 5

  2. Merchandising Operations • Buying and selling products

  3. Objective 1 Account for the purchase of inventory

  4. Operating Cycle of a Merchandising Business

  5. Inventory Systems • Periodic • Perpetual

  6. Purchase of Inventory S5-1 Inventory 10,000 Accounts Payable 10,000 Purchased inventory

  7. Purchase Discounts • A deduction from the invoice price granted to encourage early payment of the amount due • 2/10, n/30 • n/30 • eom

  8. Inventory 10,000 200 Bal 9,800 Purchase of Inventory S5-2 Accounts Payable 10,000 Cash 9,800 Inventory 200 Paid within discount period

  9. Purchase Returns and Allowances • Purchase Return - Merchandise returned by the purchaser to the supplier • Purchase Allowance - A reduction in the cost of defective merchandise received by a purchaser from a supplier

  10. Purchase Returns and Allowances – S5-2 Inventory 100,000 Accounts Payable 100,000 Purchased inventory

  11. Inventory Purchase Returns and Allowances – S5-2 Accounts Payable 10,000 Inventory 10,000 Returned damaged goods Accounts Payable 100,000 10,000 100,000 10,000 Bal 90,000 Bal 90,000

  12. Inventory Purchase Returns and Allowances – S5-2 Accounts Payable 90,000 Cash 90,000 Paid after the discount period Accounts Payable 100,000 10,000 100,000 10,000 90,000 Bal 0 Bal 90,000

  13. Inventory Purchase Returns and Allowances – S5-2 Accounts Payable 90,000 Cash 87,300 Inventory 2,700 Paid within discount period Accounts Payable 100,000 100,000 10,000 10,000 2,700 90,000 Bal 0 Bal 87,300

  14. Buyer Seller Goods Transportation Costs FOB Shipping Point (Buyer Pays) FOB Destination (Seller Pays)

  15. Transportation Costs • Freight in • Transportation cost on purchased goods • Debit inventory • Freight-out • Transportation cost on goods sold • Debit an expense (delivery expense)

  16. E5-15 Apr 30 Inventory 6,000 Accounts Payable 6,000 Purchased inventory

  17. Inventory E5-15 Apr 30 Inventory 300 Cash 300 Paid freight charges Accounts Payable 6,000 6,000 300 Bal 6,300

  18. Inventory E5-15 Apr 30 Accounts Payable 1,000 Inventory 1,000 Returned unsuitable goods Accounts Payable 6,000 1,000 6,000 1,000 300 Bal 5,000 Bal 5,300

  19. Inventory E5-15 May 14 Accounts Payable 5,000 Cash 4,850 Inventory 150 Paid within discount period Accounts Payable 6,000 1,000 6,000 1,000 300 150 5,000 Bal 5,150 Bal 0

  20. Objective 2 Account for the sale of inventory

  21. Sale of Inventory • Sales Revenue • Amount earned from selling inventory • Revenue account • Cost of Goods Sold • Cost of inventory that has been sold to customers • Expense account

  22. Sale of Inventory • Sales Returns & Allowances • When customer returns goods or the seller grants a reduction in price to customer • Contra-revenue account (debit balance) • Sales Discounts • If customer pays within the discount period allowed by the seller • Contra-revenue account (debit balance) • Delivery Expense (Freight Out)

  23. Sales TransactionsS5-5 Accounts Receivable 60,000 Sales Revenue 60,000 To record sales on account Cost of Goods Sold 32,000 Inventory 32,000 To record cost of sales

  24. Sales TransactionsS5-5 Cash 60,000 Accounts Receivable 60,000 Collected on account

  25. Sales TransactionsS5-5 Cash 58,800 Sales Discount 1,200 Accounts Receivable 60,000 Collected on account

  26. Sales TransactionsS5-5 Sales $60,000 Sales Discount (1,200) Net Sales $58,800

  27. S5-6 Accounts Receivable 10,000 Sales Revenue 10,000 To record sales on account Cost of Goods Sold 6,000 Inventory 6,000 To record cost of sales

  28. S5-6 Sales Returns & Allowances 1,000 Accounts Receivable 1,000 To record 100 books returned Inventory 600 Cost of Goods Sold 600 Returned books to inventory

  29. S5-6 Accounts Receivable Sales 10,000 1,000 10,000 Bal 9,000 Sales Discounts Sales Returns & Allowances 1,000 Bal 1,000

  30. S5-6 Cash 8,820 Sales Discount 180 Accounts Receivable 9,000 Collected on account

  31. S5-6 Accounts Receivable Sales 10,000 1,000 10,000 9,000 Bal 0 Sales Discounts Sales Returns & Allowances 180 1,000 Bal 1,000 Bal 180 Cost of Goods Sold 6,000 600 Bal 5,400

  32. S5-7 Sales $10,000 Sales Returns & Allowances (1,000) Sales Discounts (180) Net Sales $8,820 Cost of Goods Sold (5,400) Gross Profit $3,420

  33. Objective 3 Adjust and close the accounts of a merchandising business

  34. Adjusting Inventory • If physical count of inventory is different from amount on the books – Inventory Shrinkage • Debit Cost of Goods Sold • Credit Inventory

  35. S5-8 $65,000 (per books) - 63,900 (physical count) $1,100 (shrinkage) Cost of Goods Sold 1,100 Inventory 1,100 Adjustment for shrinkage

  36. Closing Entries • Close all income statement accounts with credit balances to Income Summary • Close all income statement accounts with debit balances to Income Summary • Close Income Summary to Capital • Close Withdrawals to Capital

  37. S5-9 Dec 31 Sales Revenue 700,000 Income Summary 700,000 31 Income Summary 424,000 Cost of Goods Sold 385,000 Rent Expense 20,000 Depreciation Expense 10,000 Sales Discounts 9,000

  38. S5-9 Dec 31 Income Summary 276,000 J. Hayes, Capital 276,000 (700,000 – 424,000) 31 J. Hayes, Capital 60,000 J. Hayes, Withdrawals 60,000

  39. Objective 4 Prepare a merchandiser’s financial statements

  40. Income Statement Net sales - Cost of goods sold Gross profit - Operating expenses: Selling expenses – related to selling and marketing the inventory General expense – office expenses Operating income + Other revenue and expense Net income

  41. Income Statement Formats • Multiple-Step – see previous slide • Contains key subtotals • Single-Step • Total revenues minus total expenses

  42. S5-10

  43. S5-10

  44. Objective 5 Use gross profit percentage and inventory turnover to evaluate a business

  45. Gross Profit Percentage Gross Profit Net Sales Percentage of dollar sales available to cover expenses and provide a profit

  46. Rate of Inventory Turnover Cost of goods sold Average inventory Average inventory = (Beg inventory + End inventory) / 2 How rapidly is inventory sold?

  47. E5-25 Net sales $65 Cost of sales (33) Gross profit $32 Gross profit percentage: Gross Profit Net Sales $32 $65 49% = =

  48. E5-25 Inventory Turnover: Cost of goods sold Average inventory $33 $(4 + 3)/2 9.4 times = =

  49. Objective 6 Compute cost of goods sold in a periodic inventory system

  50. Cost of Goods Sold – Periodic Inventory System Beginning Inventory Goods Available for Sale + Purchases

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