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Accounting for Merchandising Businesses. Chapter 6. Learning Objectives. Distinguish between the activities and financial statements of service and merchandising businesses. Describe and illustrate the accounting for merchandise transactions.
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Accounting for Merchandising Businesses Chapter 6
Learning Objectives • Distinguish between the activities and financial statements of service and merchandising businesses. • Describe and illustrate the accounting for merchandise transactions. • Describe and illustrate the financial statements of a merchandising business. • 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.
Learning Objective 1 Distinguish between the activities and financial statements of service and merchandising businesses.
Nature of Merchandising Businesses Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX
Nature of Merchandising Businesses Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX
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
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. GrossProfit
Nature of Merchandising Businesses • Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.
Learning Objective 2 Describe and illustrate the accounting for merchandise transactions.
Purchase Transactions • 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.
Purchase Transactions • Under the perpetual inventory system, the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records.
Purchase Transactions • On January 3, NetSolutions purchased merchandise for cash. * NOTE: We will assume a perpetual inventory system is used.
Purchase Transactions • On January 4, NetSolutions purchased merchandise on account from Thomas Corporation.
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 2).
Purchases Discounts • A buyer may receive a discount from the seller (sales discount) for early payment of the amount owed. From the buyer’s perspective, such discounts are called purchases discounts.
Purchase Transactions • Alpha Technologies issues an invoice for $3,000 to NetSolutions dated January 5, with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within the discount period.
Discount of 2% on $3,000 $60.00 Interest for 20 days at the rate of 6% on $2,940 – 9.80 Savings from borrowing $50.20 Purchase Transactions • If NetSolutions can borrow cash at an annual interest rate of 6%, should the firm borrow cash to pay the invoice within the discount period? YES
Purchase Transactions • Alpha Technologies issued an invoice for $3,000 to NetSolutions dated January 5, with terms 2/10, n/30. Based on the calculation in the previous slide, NetSolutions pays the amount due, less the discount, on January 15.
Discount Not Taken • Assume that, instead of paying the invoice within the discount period, NetSolutions pays the invoice on February 4.
Purchases Returns and Allowances • A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. From a buyer’s perspective, suchreturns are called purchasesreturns and allowances.
Debit Memo • A debit memorandum, often called a debitmemo, informs the seller of the amount the buyer proposes to debit to the account payable due the seller.
Debit Memo • NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 3 as follows:
Merchandise Purchased • On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.
Merchandise Returned • On May 4 , NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link.
Invoice Paid • On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.
Cash Sales • On March 3, NetSolutions sold $1,800 of merchandise for cash.
Cash Sales • 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 March 3 is $1,200.
Cash Sales • Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $4,150 on March 31.
Sales on Account • On March 10, NetSolutions sold merchandise on account for $18,000. The cost of merchandise sold was $10,800.
Sales Discounts • The terms for when payments for merchandise are to be made are called creditterms. 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 creditperiod, in which to pay.
Receipts on Account • On March 19, NetSolutions receives the amount due within ten days, so the buyer deducted $360 ($18,000 x 2%) from the invoice amount.
Credit Memo • A creditmemorandum, often called a creditmemo, authorizes a credit to (decreases) the buyer’s account receivable. An example of a credit memo issued by NetSolutions is shown in Exhibit 4 (next slide).
Credit Memo • On April 13, issued Credit Memo No. 321 to Krier Company for merchandise returned to NetSolutions. Selling price, $2,250; cost to NetSolutions, $1,600.
Freight • If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, the terms are said to be FOB (free on board) shipping point.
Freight • On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the shipping cost of $50.
Freight • If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB(free on board) destination.
Sale Plus Freight Cost • On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480.
Sale Plus Freight Cost • On June 15, NetSolutions pays freight of $40 on the sale of June 15.
Seller Prepays Freight • On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the merchandise sold is $360.
