Chapter 5

2 CO. A CO. B REVENUE30,000100,000 OPERATING EXPENSES25,000 25,000

3 SERVICERETAIL REVENUE30,000100,000 OPERATING EXPENSES25,000 25,000

4 SERVICERETAIL REVENUE30,000SALES100,000 COGS(70,000) OPERATING EXPENSES25,000 25,000 NET INCOME 5,000 5,000 THE DIFFERENCES BETWEEN A SERVICE ENTERPRISE AND A MERCHANDISING COMPANY

Merchandising companies buy and sell merchandise Service enterprises perform services as their primary source of revenue

6 Differences Between a Service Enterprise and a Merchandising Company zIn a merchandising company, the primary source of revenues is the sale of merchandise, referred to as sales revenue or sales. zUnlike expenses for a service company, expenses for a merchandising company are divided into two categories: yCost of goods sold - the total cost of merchandise sold during the period. yOperating expenses - selling and administrative expenses.

7 Page 202 in book Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Income (Loss) Less Equals How Income is Measured in a Merchandising Company Illustration 5-1

8 Operating cycle of a company is... the average time it takes to go from cash to cash in producing revenues. TO

9 Operating cycle of a merchandising company is... zordinarily longer than than that of a service company; zpurchase of merchandise and its sale lengthens the cycle.

10 Receive Cash Perform Services Buy Inventory Sell Inventory Service Company Merchandising Company Cash Accounts Receivable Accounts Receivable Merchandise Inventory Illustration 5-2

11 Inventory Systems zPerpetual - detailed inventory system in which the cost of inventory is maintained and the records continuously show the inventory that should be on hand zPeriodic -inventory system in which detailed records are not maintained and the cost is goods sold is determined only at end of accounting period

electronic scanners have enabled many companies to install perpetual inventory systems

13 What Is Charged to Merchandise Inventory? zAll Costs of getting the inventory to the company and ready to sell y+Freight-In y+Special Permits zOnly costs associated with merchandise purchased for resale - not assets acquired for use, such as supplies

14 Merchandise Purchases On May 4 the company bought $ 3,800 worth of merchandise from PW Audio Supply, Inc. Task:Record the purchase by getting information from the Purchase Invoice. The Purchase Invoice is a copy of the sales invoice.

15 1. Seller 2.Invoice Date 3.Purchaser 4.Salesperson 5.Credit terms 6.Freight terms 7.Goods sold: catalog no.,description, quantity, price per unit 8.Total invoice price Invoice No. 731 Address 125 Main Street Attention o f James Hoover, Purchasing Agent Firm Name: Sauk Stero City Chelsea State Illinois Zip Date5/4/01 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer Catalog No. Description QTY Price Amount Illustration 5-4 IMPORTANT : ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800 1, Production Model Circuits A2547Z48

16 Merchandise Purchases On May 4 the company bought $ 3,800 worth of merchandise from PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 4 Merchandise Inventory 3,800 Accounts Payable 3,800 To record goods purchased on account Accounts Payable Merchandise Inventory May 4 3,800

17 Purchases Returns and Allowances On May 8 the company returned $300 worth of merchandise to PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account Accounts Payable Merchandise Inventory May 4 3,800 May 8 300

18 Freight Costs - On Incoming Inventory

19 Freight Costs - On Incoming Inventory On May 6 the company paid $ 150 to have the merchandise inventory delivered to them. GENERAL JOURNAL Debit Credit May 6 Merchandise Inventory 150 Cash 150 To record payment of freight. Merchandise Inventory May 4 3,800 Cash May 6 150May May 6 150

20 Freight Costs - On Outgoing Inventory

21 Freight Costs-on outgoing inventory On May 6 the seller company paid $ 150 to have merchandise inventory delivered to the buyer. GENERAL JOURNAL Debit Credit May 6 Freight-Out 150 Cash 150 To record payment of freight on goods sold. Freight-OutCash May 6 150

22 Purchase Discounts Credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment. Credit terms specify the amount of cash discounts and the time period during which it is offered. 2/10,n/30 1/10 EOM

23 Purchases Discounts Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period Original Invoice $3,800 -Returns 300 Amount due before discount $3,500 2% discount 70 Net due $3,430

Purchases Discounts Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period. GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period. Accounts Payable Merchandise Inventory May 4 3,800 Cash May 4 3,800May May May 14 3,500 May May 6 150

25 Sales Invoice... a business document that provides written evidence of a credit sale.

26 1. Seller 2.Invoice Date 3.Purchaser 4.Salesperson 5.Credit terms 6.Freight terms 7.Goods sold: catalog no.,description, quantity, price per unit 8.Total invoice price Invoice No. 731 Address 125 Main Street Attention o f James Hoover, Purchasing Agent Firm Name: Sauk Stero City Chelsea State Illinois Zip Date 5/4/01 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer Catalog No. Description QTY Price Amount Illustration 5-4 IMPORTANT : ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800 1, Production Model Circuits A2547Z48

27 Sales Revenues - Under a Perpetual System zare recorded when earned-revenue recognition principle zmust be supported by a business document- written evidence z2 entries are made for each sale yone to record sale yone to record cost of merchandise sold

Sales - under a perpetual system Assume a CASH sale of $ 2,200 For merchandise having a cost of $ 1,400 Cash2,200 Sales 2,200 Cost of Goods Sold1,400 Merch Inventory 1,400

Sales - under a perpetual system Assume a CASH sale of $ 2,200 Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales May 4 2,200 May For merchandise having a cost of $ 1,400

30 Sales Returns and Allowances Flip side of purchase returns and allowance On buyer’s books GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account On seller’s books GENERAL JOURNAL Debit Credit May 8 Sales Returns and Allowance 300 Accounts Receivable 300 To record return of goods delivered to Sauk Stero

31 Sales Returns and Allowances On seller’s books GENERAL JOURNAL Debit Credit May 8 Sales Returns and Allowance 300 Accounts Receivable 300 To record return of goods delivered to Sauk Stero May 8Inventory 150 Cost of Goods Sold 150 Record cost of goods returned

Sales - under a perpetual system Assume a sale of $ 3,800 ON ACCOUNT Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales May 4 3,800 May 4 2,400 May 2,400 For merchandise having a cost of $2,400 May 4 3,800

33 What Is the Sales Returns and Allowances Account? zContra Revenue Account to sales zUsed to show how much came in on returns and allowances Excessive returns and allowances suggest: zinferior merchandise zinefficiencies in filing orders zerrors in billing customers zmistakes in delivery or shipment of goods

34 What Is the Sales Discount Account? zContra Revenue Account to sales zUsed to disclose amount of cash discounts taken by customers

35 Sales Discounts Flip side of purchase discounts On buyer’s books GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period On seller’s books GENERAL JOURNAL Debit Credit May 14Cash 3,430 Sales Discounts 70 Accounts Receivable 3500 To record collection within discount period

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37 Two Forms Of Income Statements zSingle-step income statement  Multiple-step income statement

38 Single-Step Income Statement One step… subtract total expenses from total revenues Revenues $10,000 Expenses 3,000 Net income$ 7,000

PW AUDIO, Inc. Single-step Income Statement For the Year Ended December 31, 2001 Sales $460,000 Interest Revenue 3,000 Gain on Sale of equipment 600 Total Revenues$463,600 Expenses Cost of goods sold$316,000 Selling expenses 76,000 Administrative expenses 38,000 Interest expense 1,800 Casualty Loss from vandalism 200 Income tax expense 10,100 Total expenses 442,100 Net income $ 21,500 Illustration 5-9

Sales revenues Sales$ 480,000 Less: Sales returns and allowance$12,000 Sales discounts 8,000 20,000 Net sales 460,000 Cost of goods sold 316,000 Gross profit $ 144,000Operating expenses Selling expenses:$76,000 Administrative expenses 38,000 Total operating expenses114,000 Income from operations $ 30,000 Net Income $21,500 PW AUDIO SUPPLY, INC. Multi-step Income Statement For the Year Ended December 31, 2001 Illustration 5-9 Etc.

41 32 Companies that use periodic inventory take a physical count to... zdetermine ending inventory zcompute cost of goods sold Companies that use perpetual inventory must take a physical inventory to check accuracy of “book inventory” to actual inventory.

42 33 Taking a Physical Inventory zDetermining inventory quantities by counting, weighting or measuring each type of inventory. zDetermining ownership of goods, including goods in transit,consigned goods. zQuantity of each kind of inventory is listed on inventory summary sheets where unit costs are applied.

43 34 Questions Concerning Ownership zDo all the goods included in the count belong to the company? zDoes the company own any goods not included in the count?

44 35 Goods in Transit These are goods on board a truck, train, ship, or plane at the end of the period.

45 36 Goods in Transit Who includes these in inventory? zBuyer? zSeller? The Company with Legal Title

46 38 Shipping Terms zFOB (free on board) shipping point- ownership of goods passes to buyer when public carrier accepts the goods zFOB (free on board) destination- ownership of goods remains with the seller until the goods reach the buyer

Ownership passes to owner here Ownership passes to buyer here Public Carrier Co Public Carrier Co Seller Buyer FOB Shipping Point FOB Destination Point Illustration 6-4

48 39 Consigned Goods Goods in your store that you don’t pay for until they sell… the company does not take ownership.

49 Gross Profit Rate= Gross Profit Net Sales Company’s gross profit expressed as a percentage

50 Operating Expenses To Sales Ratio= Operating Expenses Net Sales Many companies have improved the efficiency of their operations, thus reducing the ratio of operating expenses to sales.

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