Chapter 4 T.Haya Alajaji

 Nature of Businesses.  Special terms of Merchandising businesses.  Analysis of merchandising transactions.  Multiple-Step Income Statement

Ch4 Merchandising businesses Service businesses compute Net income Selas Revenues Cost of goods Sold Gross Profit Merchandisin g Inventory Analyze Merchandising transactions

 Nature of Businesses : 1. Service Businesses  provide services rather than products to customers. 2. Merchandising businesses  sell products they purchase from other business to customers.

Service Business Fees earned$XXX Operating expenses–XXX Net income$XXX : Objective 1. Nature of Businesses

Merchandising Business Sales$XXX Cost of Merchandise Sold–XXX Gross Profit$XXX Operating Expenses–XXX Net Income$XXX :Objective 1. Nature of Businesses

Service business: Fees earned – operating expenses = net income Merchandise business: Sales – cost of merchandise sold = gross profit Gross profit – operating expenses = net income Compute the net income

Income Statement Comparison Fees earned$150,000 Operating expenses(-)120,000 Net income$ 30,000 Service Business Sales revenue$600,000 Cost of mdse. Sold - 450,000 Gross profit$150,000 Operating expenses - 120,000 Net income$ 30,000 Merchandising Business

Objective 2. Special terms of Merchandising businesses sales revenue or sales : the amount that a business earns from selling merchandise inventory is called sales revenue, or sales. cost of merchandise sold : the major expense of a merchandiser is cost of goods sold. Gross margin or Gross profit : The excess of sales over cost of sales is called gross margin. Merchandise inventory Merchandise on hand at the end of an account period

Objective 3 Analyze Merchandising transactions

Every merchandise sale has two components, each of which requires an entry in a perpetual inventory system. Selling Price Cost 6-12

On January 3, NetSolutions sold $1,800 of merchandise for cash. Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on January 3 is $1,200 DateDescriptionDebitCredit Jan. 3 Cash Sales 1,800 Jan. 3Cost of merchandise sold Merchandise inventory 1,200

On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280. DateDescriptionDebitCredit Jan. 12 Account receivable Sales 510 Jan. 12Cost of merchandise sold Merchandise inventory 280

When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory, the customer can (1) return them for a full refund or (2) keep them and ask for a reduction in the selling price, called an allowance.

On January 13, issued Credit Memo No. 32 to Alsaud Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. DateDescriptionDebitCredit Jan. 13 Sales returns and allowances Account receivable – Krier Co. 225 Jan. 13Merchandise inventory Cost of merchandise sold 140

A sales discount is a sales price reduction given to customers for prompt payment of their account balance.

To encourage the buyer to pay before the end of the credit period, the seller may offer a discount, such as 2/10, n/30. These terms indicate that a two percent discount can be taken if the invoice is paid within ten days. After ten days the full amount is due by the thirtieth day from the invoice date On January 17, NetSolutions receives the amount due within ten days, so the buyer deducted $30 ($1,500 x 2%) from the invoice amount DateDescriptionDebitCredit Jan. 22 Cash Sales discounts Account receivable 1, ,500

The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts.

DateDescriptionDebitCredit Jan. 3 Merchandise inventory Cash 2,510 Jan. 4Merchandise inventory Account payable - Thomas Corporation 9,250 Purchase Transactions On January 3, NetSolutions purchased merchandise for cash. On January 4, NetSolutions purchased merchandise on account from Thomas Corporation

DateDescriptionDebitCredit Mar. 12 Merchandise inventory Account payable - Alpha Technologies 3,000 Mar. 22Account payable - Alpha Technologies Cash Merchandise inventory 3,000 2, Purchases Discounts : Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within the discount period. Based on the calculation in the previous slide, NetSolutions pays the amount due, less the discount, on March 22.

DateDescriptionDebitCredit Mar. 7Account payable - Maxim Systems Merchandise inventory Purchases Returns and Allowances : NetSolutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems. NetSolutions records the return of the merchandise as follows:

Multiple-Step Income Statement

Revenue from sales: Sales$720,185 Less:Sales returns and allowances$ 6,140 Sales discounts 5,790 11,930 Net sales$708,255 Cost of merchandise sold525,305 Gross profit$182,950 Continued

Operating expenses: Selling expenses: Sales salaries expense$56,230 Advertising expense10,860 Depr. Expense–store equipment3,100 Miscellaneous selling expense 630 Total selling expenses$ 70,820 Administrative expenses: Office salaries expense$21,020 Rent expense8,100 Depr. expense–office equipment2,490 Insurance expense1,910 Office supplies expense610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations$ 77,240 Continued

Other income and expenses: Rent revenue$ 600 Interest expense(2,440) (1,840) Net income $75,400 Concluded

M6-11 Calculating Shrinkage in a Perpetual Inventory System Corey’s Campus Store has $50,000 of inventory on hand at the beginning of the month. During the month, the company buys $8,000 of merchandise and sells merchandise that had cost $30,000. At the end of the month, $25,000 of inventory is on hand. How much shrinkage occurred during the month? 6-27