6-1 M ERCHANDISING T RANSACTIONS CHAPTER 6

6-2 Service Organizations vs. Merchandising Companies time Service organizations sell time to earn revenue u Examples include accounting firms, law firms, and plumbing services u These have been our emphasis up to now Service Company Income Statement For the Year Ended December 31, 1999 Service revenues150,000$ Expenses137,500 Net income12,500$ Not a plumber!

6-3 Service Organizations vs. Merchandising Companies products Merchandising companies sell products to earn revenue u Examples include sporting goods, clothing, and auto parts stores u These will be our emphasis for the rest of the semester Merchandising Company Income Statement For the Year Ended December 31, 1999 Sales revenues150,000$ Cost of goods sold80,000 Gross margin70,000 Expenses46,500 Net income23,500$

6-4 SellerCustomer/ Buyer Transfers Products Cash or Promise to Pay Merchandising Companies

6-5 l Inventory u Products held for sale u Classified as asset l Sales u Exchange of merchandise for an asset u Classified as revenue l Cost of Goods Sold (COGS) u Cost of inventory sold during the period u Classified as expense Merchandising Companies

6-6 CLASSIFIED INCOME STATEMENT a/k/a MULTIPLE STEP INCOME STATEMENT a/k/a “SATURDAY NIGHT” PAGE 226 Merchandising Companies

6-7 ROLL ‘EM ! Video #1 (Approx. 6 min.) Video #2 (Approx. 8 min.)

6-8 Merchandising Companies ManufacturerWholesalerRetailer Final Customer “Channel of Distribution” (5 points on next test) 210 Can manufacturer sell direct to final customer? (i.e., can green box be skipped?)

6-9 Who cares? Accounting Terminology Sales Invoice vs. Purchase Invoice What’s the difference? 211 prepares?

6-10 Recording and Reporting Sales Gross sales Less: Sales discounts Less: Sales returns and allowances Net sales

6-11 Recording Gross Sales On May 13, TCom sold $25,000 of merchandise for cash. GENERAL JOURNALPage 74 DateDescriptionPRDebitCredit May 13Cash25,000 Sales25,000 To record the sale of merchandise for cash If the sale had been on account, we would debit Accounts Receivable instead of Cash.

6-12 Two Types of Discounts ¶ Trade Discounts u A percentage deduction from the list or catalog price to arrive at the gross selling (invoice) price u Know the three reasons for using (p. 213) u Not recorded on either seller’s or buyer’s books!! Example FastBan, Inc. offers a 30% trade discount if you purchase at least 1,000 of their most popular product known as Zippy. Each Zippy has a list price of $5.25. Example FastBan, Inc. offers a 30% trade discount if you purchase at least 1,000 of their most popular product known as Zippy. Each Zippy has a list price of $5.25. Quantity sold1,000 Price per unit5.25$ Total5,250 Less 30% discount(1,575) Invoice price3,675$

6-13 Two Types of Discounts · Cash Discounts u A deduction from the invoice price granted to induce early payment of the amount due u Two other names for cash discounts Sales discounts Purchase discounts u Recorded on whose books? Both seller’s and buyer’s books u They are pervasive

6-14 Two Types of Discounts · Cash Discounts u A deduction from the invoice price granted to induce early payment of the amount due u Two other names for cash discounts Sales discounts Purchase discounts u Recorded on whose books? Both seller’s and buyer’s books u They are pervasive 3/15,n/30 Number of Days Discount is Available Otherwise, Net (or All) is Due In This Number of Days Discount Percent

6-15 Cash (Sales) Discount Example On November 8, Borey Co. sold merchandise to West, Inc. for $6,000 on account; credit terms 2/10, n/30. General Journal Page 61 DateDescriptionPRDebitCredit Nov. 8Accounts Receivable6,000 Sales6,000 To record the sale on account

6-16 Cash (Sales) Discount Example On November 14, West, Inc. paid its account in full. General JournalPage 68 DateDescriptionPRDebitCredit Nov. 14Cash5,880 Sales Discount120 Accounts Receivable6,000 To record cash received on account Discount = $6,000 × 2% = $120

6-17 Other Deductions from Sales l Sales Return Merchandise returned by the buyer as unsatisfactory or defective. l Sales Allowance A deduction from the original invoice price when the customer keeps merchandise but is dissatisfied with it.

6-18 Sales Returns and Allowances Example Before making a payment to you, a customer returns $135 of goods sold on account. General JournalPage 68 DateDescriptionPRDebitCredit Sales Returns and Allowances135 Accounts Receivable135 To record return of defective item.

6-19 Partial Income Statement Gross sales Less: Sales discounts Less: Sales returns and allowances Net sales Sales discounts and Sales returns and allowances are Contra Revenue accounts.

6-20 Inventory Methods ÊPerpetual Method ËPeriodic Method

6-21 Perpetual Method The inventory account is continuously up-dated as purchases and sales of inventory occur.

6-22 Perpetual Method The inventory account is continuously up-dated as purchases and sales of inventory occur. More on this method in Chapter 7.

6-23 Periodic Method This is the method used in this chapter. Entries are not made to the inventory account during the year. At the end of the accounting period, a physical count of inventory is needed to update the inventory account and calculate cost of goods sold. What is the mechanism for updating the inventory account? Closing entries

6-24 Closing Entries for Merchandising Company General Journal Page 88 DateDescription PRDebitCredit Sales Purchase Discounts Purchase Returns and Allowances Merchandising Inventory (ending) Income Summary To close accounts with credit balances and set up proper balance in ending inventory account. Dec. 31XXX Closing Entry #

6-25 Closing Entries for Merchandising Company General Journal Page 88 DateDescription PRDebitCredit Other accounts including all expenses Sales Discounts Sales Returns and Allowances Merchandising Inventory (beginning) Income Summary To close accounts with debit balances including the beginning inventory account. Dec. 31XXX Closing Entry #2

6-26 Cost of Goods Sold...is an expense representing the cost of the inventory sold during the period....appears on the income statement....must be calculated using a multiple-step process when using the periodic method.

6-27 Beginning Inventory + Purchases - Purchase Discounts - Purchase Returns and Allowances + Transportation-in = Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold Calculation of Cost of Goods Sold Multiple-Step Process

6-28 Cost of goods sold: Merchandise inventory, January 1, ,000$ Purchases:167,000$ Less: Purchase discounts3,000$ Purchase returns and allowances8,000 11,000 Net purchases156,000 Add: Transportation-in10,000 Net cost of purchases166,000 Cost of goods available for sale190,000 Less: Merchandise inventory, December 31, ,000 Cost of goods sold159,000$ Calculation of Cost of Goods Sold Formal Income Statement Presentation

6-29 Purchase of Merchandise One May 7, Barbee, Inc. purchased $27,000 of merchandise on account; terms 2/10, n/30. General Journal Page 26 DateDescriptionPRDebitCredit May 7Purchases27,000 Accounts Payable27,000 Purchase merchandise on account

6-30 Purchase of Merchandise One May 16, Barbee, Inc. paid for the purchase of May 7 in full. $27,000 × 2% = $540 discount General JournalPage 41 DateDescriptionPRDebitCredit May 16Accounts Payable27,000 Cash26,460 Purchase Discounts540 Payment on account

6-31 General JournalPage 41 DateDescriptionPRDebitCredit May 16Accounts Payable27,000 Cash26,460 Purchase Discounts540 Payment on account $27,000 × 2% = $540 discount Purchase of Merchandise One May 16, Barbee, Inc. paid for the purchase of May 7 in full. Purchase Discounts is a Contra Purchases account.

6-32 Purchase Returns and Allowances The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller. On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before payment is made to the supplier.

6-33 Purchase Returns and Allowances The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller. On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before payment is made to the supplier. General Journal Page 88 DateDescription PRDebitCredit May 27Accounts Payable200 Purchase Returns and Allowances200 Returned defective merchandise

6-34 Transportation Costs Transportation-In Inward freight costs of acquiring merchandise. Transportation-In is part of cost of goods sold!

6-35 Transportation Costs Transportation Out/Delivery Expense Outgoing freight costs that must be paid by the seller. Delivery Expense is a selling expense on the income statement!

6-36 Transportation Costs l Free on Board (FOB) Shipping Point. l FOB Destination. l Freight Prepaid l Freight Collect Who pays the freight charges?

6-37 FOB Points ABC Wholesalers FOB what? (Pick one) Shipping Point Destination

6-38 l FOB Shipping Point u “Free on board” at the shipping (selling) point u Title passes to buyer upon shipment u Buyer owns en route and... Ultimately bears the cost of the freight Assumes risk of loss in transit l FOB Destination u “Free on board” at the destination point u Seller owns en route and... Ultimately bears the cost of the freight Assumes risk of loss in transit FOB Points

6-39 Transportation Cost Summary Terms Initially Pays Ultimately Bears Expense FOB Shipping Point - Freight CollectBuyer FOB Destination - Freight PrepaidSeller FOB Destination - Freight CollectBuyerSeller FOB Shipping Point - Freight PrepaidSellerBuyer 223

6-40 Transportation Cost Summary Terms Initially Pays Ultimately Bears Expense FOB Shipping Point - Freight CollectBuyer FOB Destination - Freight PrepaidSeller FOB Destination - Freight CollectBuyerSeller FOB Shipping Point - Freight PrepaidSellerBuyer

6-41 Prepare the journal entries for Jackson Co. Use the periodic inventory method. July 5, 1998Purchased 1,000 units of inventory for $25,000 cash. July 9, 1998 Sold 300 units of inventory to a customer on account for $35 per unit. Periodic Method

6-42 Periodic Method GENERAL JOURNALPage 1 DateDescriptionPRDebitCredit July 5Purchases25,000 Cash25,000 To record inventory purchases At Cost

6-43 Periodic Method GENERAL JOURNALPage 1 DateDescriptionPRDebitCredit July 5Purchases25,000 Cash25,000 To record inventory purchases July 9Accounts Receivable10,500 Sales10,500 To record inventory sales 300 units × $35 = $10,500 At Retail

6-44 Saturday Night Page, Again P. 226

6-45 Classified Income Statement: Revenue Sales250,000$ Less:Sales Discounts3,000$ Sales Ret. & Allow.1,5004,500 Net Sales245,500$ Earned from the sale of inventory 227 Alternative way to express income statement relationships? (Hint: 8th Grade) Net sales = Gross sales - (Sales disc.+ SR&A)

6-46 Classified Income Statement: Cost of Goods Sold Beginning Inventory (BI)55,000$ “Purchases” (P)176,500 Cost of Goods Avail. for Sale (GAS)231,500 Less:Ending Inventory (EI)64,000 Cost of Goods Sold (COGS)167,500$ Three approaches to Cost of Goods Sold: (1) Simplified Income Statement Approach (2) Equation Approach COGS = BI + P - EI

6-47 Classified Income Statement: Cost of Goods Sold Beginning Inventory55,000$ Purchases175,000$ Less:Purchase Discounts6,000$ Purchase Ret. & Allow.2,5008,500 Net Purchases166,500$ Add:Transportation-in10,000 Net Cost of Purchases176,500 Cost of Goods Avail. for Sale231,500$ Less:Ending Inventory64,000 Cost of Goods Sold167,500$ (3) Formal Income Statement Approach

6-48 Classified Income Statement: Gross Margin Net Sales245,500$ Cost of Goods Sold167,500 Gross Margin78,000$ Gross Margin = Net Sales - COGS Gross Profit Gross Margin is also called Gross Profit

6-49 Classified Income Statement: Types of Operating Expenses  Selling Expenses  Administrative Expenses

6-50 Gross margin78,000$ Operating expenses: Selling expenses: Sales salaries26,000$ Delivery expense3,000 Advertising expense2,000 Rent - store building4,000 Depreciation - store equip.2,500 37,500 Administrative expenses: Executive salaries29,000 Rent - office building1,600 Insurance expense1,500 Supplies expense1,100 33,200 Total operating expenses70,700 Income from operations7,300$ Classified Income Statement: Income from Operations

6-51 Classified Income Statement: Types of Nonoperating Items  Nonoperating Revenues  Nonoperating Expenses Income from operations7,300$ Nonoperating revenues and expenses Nonoperating revenues: Interest revenue400 Rent Revenue2,000 Nonoperating expenses: Interest expense(700) Safe deposit box rental100 Net income9,100$

6-52 Work Sheet and Closing Entries Appx. 231

6-53 Gross Margin Percentage Percentage of each sales dollar available to cover expenses and a profit GROSS MARGIN NET SALES GM% =

6-54 WE CAN LOOK FORWARD TO A CLOSER INSPECTION OF INVENTORY IN CHAPTER 7! THE END