Chapter 4 Accounting for Merchandising Businesses

Service Businesses vs. Merchandise Operations Merchandise Operations –Revenue activities involve the buying and selling of merchandise. –Example: Home Depot Inc. Service Businesses –Revenue activities involve providing services to customers. –Example: Family Health Care, P.C.

Gross Profit for a Merchandise Operation Gross Profit = Net Sales – COGS Net Sales: revenue less returns and discounts Cost of Goods Sold: cost paid for merchandise

NetSolutions – Multiple-Step Income Statement Measures income/loss from the core operations of the business Assume a perpetual inventory system Considers customer returns and discounts

NetSolutions – Cost of Merchandise Sold – Periodic Inventory

NetSolutions – Income Statement

NetSolutions – Retained Earnings Statement

NetSolutions – Balance Sheet Value of units on hand, not sold

NetSolutions – Statement of Cash Flows Equals cash on balance sheet

NetSolutions - Sales Transactions

Sample Sales Invoice Credit terms

Sales Discounts

NetSolutions - Sales Discounts

Sales Returns and Allowances

NetSolutions - Sales Returns and Allowances

Purchase Transaction - Using the Perpetual System

Purchase Discounts

Purchase Returns and Allowances

NetSolutions - Return of Merchandise

Transportation Costs

NetSolutions - Transportation Costs

Sales Taxes Sale is made, liability for sales tax recorded as an obligation of the seller Payment is made to state taxing authority to satisfy obligation

Dual Nature of Merchandise Transactions Company A records a sale Company B records a purchase

Merchandise Shrinkage

NetSolutions - Merchandise Shrinkage