© PHI Learning, All rights reserved.1 Financial Accounting: A Managerial Perspective Third Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

© PHI Learning, All rights reserved.2 Accounting for Merchandising Transactions Chapter 5

© PHI Learning, All rights reserved.3 Income Measurement for a Merchandising Company Revenue from Sales Cost of goods sold Gross profit Operating expenses Operating profit or profit before interest and tax Interest income and interest expense Net profit Chapter 5

© PHI Learning, All rights reserved.4 Revenue from Sales Gross sales Net sales Conditions for revenue recognition 1.The seller has passed the legal ownership of the goods to the buyer. 2.The selling price of the goods has been established. 3.The buyer has paid the purchase price of the goods or it is certain that the buyer will pay the price. Invoice Chapter 5

© PHI Learning, All rights reserved.5 Revenue from Sales continued Trade discounts Sales returns and allowances Sales return Sales allowance Sales discounts or cash discounts on sales Understanding standard credit terms Chapter 5

© PHI Learning, All rights reserved.6 Cost of Goods Sold Beginning inventory or opening inventory Ending inventory or closing inventory Cost of goods available for sale Cost of goods sold The periodic inventory system Net cost of purchases Purchases Purchases returns and allowances Chapter 5

© PHI Learning, All rights reserved.7 Cost of Goods Sold continued Purchases discounts or cash discounts on purchases The gross price method The net price method Deciding on discounts Freight in FOB shipping point FOB destination Inventory losses Chapter 5

© PHI Learning, All rights reserved.8 Operating Expenses Selling expenses Expenses of –storing and preparing goods for sale –promoting sales –actually making sales –delivering goods to customers Administrative expenses Expenses incurred in the overall management of a business Chapter 5

© PHI Learning, All rights reserved.9 Work Sheet for a Merchandising Company Trial Balance columns Adjustments columns Adjusted Trial Balance columns Profit and Loss Account and Balance Sheet columns Inventory accounts Determining net profit Chapter 5

© PHI Learning, All rights reserved.10 Classified Profit and Loss Account Multiple-step vs. single-step profit and loss account Key relationships: Net sales Net purchases Net cost of purchases Cost of goods sold Gross profit Operating expenses Profit before interest and tax Net profit Chapter 5

© PHI Learning, All rights reserved.11 Classified Balance Sheet Shareholders funds Loan funds Fixed assets Investments Current assets, loans and advances Current liabilities and provisions Contingent liabilities Chapter 5