1 © Copyright Doug Hillman 1999 Merchandising Business

2 © Copyright Doug Hillman 1999 Merchandising Income Statement l Net Sales l Cost of Goods Sold l Gross Margin l Operating Expenses l Net Operating Margin

3 © Copyright Doug Hillman 1999 Merchandising Income Statement l Other Revenues and Expenses l Net Income before Taxes l Income Tax Expense l Net Income

4 © Copyright Doug Hillman 1999 Net Sales l Sales ›Total or gross sales of merchandise l Trade discounts ›Percentage reduction from list price l Sales returns and allowances ›Reduction of price after sale ›Return of unacceptable merchandise

5 © Copyright Doug Hillman 1999 Net Sales l Sales Discounts ›Discount for payment within a stated period l 2/10, n/30 ›2% discount if paid within 10 days ›Gross amount due in 30 days

6 © Copyright Doug Hillman 1999 Net Sales Gross sales revenue Deduct:Sales returns and allowances Sales discounts Net sales revenues

7 © Copyright Doug Hillman 1999 Merchandise Inventory Systems l Periodic inventory system ›Determine cost of goods sold and inventory balance only at end of each accounting period l Perpetual inventory system ›Determine cost of goods sold and inventory balance after each sale.

8 © Copyright Doug Hillman 1999 Cost of Goods Sold: Periodic Merchandise inventory, beginning Purchases Transportation in Gross delivered cost of purchases Deduct:Purchases returns and allowances Purchases discounts Net cost of purchases Cost of goods available for sale Deduct:Merchandise inventory, ending Cost of goods sold

9 © Copyright Doug Hillman 1999 Purchases l Records the cost of all merchandise bought for resale l Recorded at invoice cost

10 © Copyright Doug Hillman 1999 Transportation In l FOB shipping point ›Buyer is owner during transit and is responsible for transportation costs l FOB destination ›Seller is owner during transit and is responsible for transportation costs

11 © Copyright Doug Hillman 1999 Purchases Returns and Allowances l Contra account to purchases l Records ›Price concessions after purchase ›Returns of merchandise

12 © Copyright Doug Hillman 1999 Purchases Discounts l Contra account to purchases l Records ›Cash discounts allowed for payments within discount period

13 © Copyright Doug Hillman 1999 Net Cost of Purchases Purchases Transportation in Gross delivered cost of purchases Deduct:Purchases returns and allow Purchases discounts Net cost of purchases

14 © Copyright Doug Hillman 1999 Merchandise Inventory l Cost of merchandise on hand l Amount determined by ›Physical count of units on hand ›Pricing at respective costs

15 © Copyright Doug Hillman 1999 Cost of Goods Sold: Periodic Merchandise inventory, beginning Purchases Transportation in Gross delivered cost of purchases Deduct:Purchases returns and allowances Purchases discounts Net cost of purchases Cost of goods available for sale Deduct:Merchandise inventory, ending Cost of goods sold

16 © Copyright Doug Hillman 1999 Gross Margin on Sales l Difference between net sales and cost of goods sold l Gross means must still deduct expenses

17 © Copyright Doug Hillman 1999 Operating Expenses l Selling expenses ›Expenses incurred in advertising, selling, and delivering l General and administrative expenses ›Other operating expenses such as office expenses, computer services, and executive salaries

18 © Copyright Doug Hillman 1999 Net Operating Margin l Gross margin l Less operating expenses

19 © Copyright Doug Hillman 1999 Other Revenue and Expenses l Revenues and expenses that do not relate to the principal activity of the business l Separation permits calculation of net operating margin without influence of these nonoperating items

20 © Copyright Doug Hillman 1999 Income Tax Expense l Corporations must pay taxes on income l Calculation prescribed by federal and state laws

21 © Copyright Doug Hillman 1999 Net Price Method l Purchases discounts lost method l Record the purchase at invoice price less cash discount l If paid after discount period lapses, extra cost recorded as Purchases Discount Lost

22 © Copyright Doug Hillman 1999 Analyzing Information l Are net sales increasing or decreasing? l What is percentage change in net sales? l Is percentage of cost of goods sold to net sales increasing or decreasing?

23 © Copyright Doug Hillman 1999 Analyzing Information l Is gross margin percent increasing or decreasing? l Is percentage of operating expenses to net sales increasing or decreasing? l Is gross margin percent increasing or decreasing?