Certified General Accountants Module 1 Certified General Accountants Financial Accounting Fundamentals (FA1) Module 4 Accounting for Merchandising Activities © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Accounting for Merchandising Activities C H A P T E R 6 Slides Content 1-4 Learning objectives 5-9 Inventory and cost flow 10-15 Purchases, returns and discounts 16-20 Sales, returns and transportation charges 21-22 Inventory adjustments 23-26 Income statement formats 27-28 Gross profit and closing entries 29-30 Review 31-35 Appendix –Periodic vs. perpetual 36-40 Appendix- Sales taxes 41 End of chapter © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Learning Objectives Explain merchandising activities and analyze their effects on financial statements. (Level 2) Determine the cost of merchandise inventory purchases using a perpetual inventory accounting system. (Level 1) Explain the ethical issues related to cash discounts. (Level 1) © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Learning Objectives Record the revenue from merchandise sales, the collection of payment, and accompanying cost of the goods sold. (Level 1) Record adjustments for a merchandiser. (Level 1) Prepare income statements in alternative formats and prepare closing entries for a merchandising company. (Level 1) © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Learning Objectives Determine the ending merchandise inventory and cost of goods sold using both a periodic and a perpetual inventory accounting system. (Level 2) Calculate the gross profit ratio and interpret and apply this ratio in decision-making scenarios including using the ratio to determine a merchandiser’s profitability before operating expenses.(Level 2) © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Merchandising Activities Merchandiser: A company that earns net income by buying and selling merchandise. Wholesaler: A company that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Computing Net Income Merchandiser Service Company Net Sales Revenues Cost of Goods Sold Gross Profit Operating Expenses Operating Expenses Net Income Net Income © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Inventory Products a company owns for the purpose of selling to customers. It is often referred to as Merchandise Inventory. Is classified as a current asset. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Merchandise Inventory Cost of merchandise inventory includes: Costs incurred to purchase the goods. Shipping costs. Other costs required to make goods ready for sale. © 2010 McGraw-Hill Ryerson Limited.

Merchandising Cost Flow Beginning Merchandise Inventory Net cost of Purchases Merchandise available for sale Ending Merchandise inventory Cost of goods sold © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Merchandise Inventory Systems Perpetual Provides a continuous record of: The amount of merchandise inventory on hand. Cost of goods sold to date. Periodic Requires a physical count of goods to determine: Cost of goods sold. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Perpetual System-Example Purchases Nov. 2 Merchandise Inventory 1,200 Accounts Payable 1,200 Purchased merchandise inv. on account Purchase Returns and Allowances Nov.5 Accounts Payable 300 Merchandise Inventory 300 Purchase allowance re: debit memo © 2010 McGraw-Hill Ryerson Limited.

Purchase/Sales Discounts A deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30 Terms Time Due Credit Period = 30 days Discount Period = 10 days Nov.2 Nov.12 Dec.2 (Full amount minus 2% discount) due between Nov.2 and Nov.12 Full amount due anytime between Nov.13 and Dec.2 Purchase or Sale © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Perpetual System — Example Purchase Discounts- Assume the purchase of merchandise inventory on November 2 was on the terms 2/10,n30. Case 1-Discount taken Nov.12 Accounts Payable 900 Merchandise Inventory 18 Cash 882 2% x (1,200 - 300) = 18 Case 2-Discount not taken Nov.12 Accounts Payable 900 Cash 900 © 2010 McGraw-Hill Ryerson Limited.

Transportation Charges – Perpetual System Seller Buyer Goods FOB Shipping Point (Buyer pays shipping charges) Carrier FOB Destination (Seller pays for shipping charges) © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Perpetual System — Example Transportation Costs Nov.24 Merchandise Inventory 75 Cash 75 Paid freight charges on purchased merchandise. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Perpetual System — Example Sales of Merchandise Nov.12 Accounts Receivable 1,000 Sales 1,000 Sold merchandise on terms 2/10,n60 Cost of goods sold 600 Merchandise Inventory 600 To record cost of merchandise sold © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Perpetual System — Example Customer Payment Case 1-Customer pays in 60 days Case 2-Customer pays in 10 days Jan.11 Cash 1,000 Accounts receivable 1,000 Received payment for Nov. 12 sale Nov.22 Cash 980 Sales discounts 20 Accounts receivable 1,000 Received payment less the discount © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Perpetual System — Example Sales Returns and Allowances Nov.6 Sales Returns & Allowance 800 Accounts Receivable 800 Customer returned merchandise Merchandise Inventory 600 Cost of Goods Sold 600 Returned goods to merchandise inventory © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Adjustments- Perpetual Merchandise Inventory Perpetual merchandise inventory systems keep a running total of inventory levels by recording sales and purchase transactions. Periodic adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory). © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Perpetual System — Example Inventory per accounting records: $21,250 Inventory per physical count: $21,000 Difference (shrinkage) $250 Adjustment required: Dec.31 Cost of Goods Sold 250 Merchandise Inventory 250 To record inventory shrinkage revealed by physical count. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Income Statement Formats Income statements may be formatted in a variety of ways. Typical formats are: Classified, Multiple-Step Multiple-Step Single-Step © 2010 McGraw-Hill Ryerson Limited.

Classified Multi-step Format (for internal reporting) © 2010 McGraw-Hill Ryerson Limited.

(for external reporting) © 2010 McGraw-Hill Ryerson Limited. Multi-step Format (for external reporting) © 2010 McGraw-Hill Ryerson Limited.

(for external reporting) © 2010 McGraw-Hill Ryerson Limited. Single- step Format (for external reporting) © 2010 McGraw-Hill Ryerson Limited.

Gross profit from sales Gross Profit Ratio The amount of gross profit expressed as a percentage of net sales. May be tracked over time and/or compared to similar businesses. May be calculated for whole business, departments, products. Gross profit from sales Net sales Gross profit ratio = X 100% © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Closing Entries-Perpetual System The closing process is similar for merchandising and service companies. Merchandising companies have additional temporary accounts that must be closed. These include: Sales Sales Returns & Allowances Sales Discounts Cost of Goods Sold © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Appendix 6A- Periodic and Perpetual Merchandise Inventory Systems Compared Periodic systems Merchandise Inventory is updated at the end of the period based on a physical count. Perpetual systems Merchandise Inventory is updated after each sale or purchase. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Appendix 6A - Example Periodic System Perpetual System Purchase of Merchandise Purchases 1,200 Merchandise Inv. Accounts Payable Return of Merchandise Accounts Payable 300 Purchase Returns Merchandise Inv. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Appendix 6A - Example Periodic System Perpetual System Purchase Discount Taken (2/10, n30) Accounts Payable 900 Purchase Discounts 18 Merchandise Inv. Cash 882 Transportation Charges Transportation-in 75 Merchandise Inv. Accounts Payable © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Appendix 6A - Example Periodic System Perpetual System Sale of merchandise Accounts Receivable 2,400 Sales Cost of Goods Sold 1,600 Merchandise Inv. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Appendix 6A - Example Periodic System Perpetual System Sales Return Sales Returns 800 Accounts Receivable Merchandise Inv. 600 Cost of Goods Sold © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. End of Module © 2010 McGraw-Hill Ryerson Limited.