1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 5 Accounting for Merchandise Operations

2 SERVICE VS. MERCHANDISING BUSINESS Service firms sell services Examples: Family Health Care, PC H&R Block Merchandising firms sell products Must buy products to sell Gross profit = Net sales – Cost of Goods Sold Service firms sell services Examples: Family Health Care, PC H&R Block Merchandising firms sell products Must buy products to sell Gross profit = Net sales – Cost of Goods Sold LG 1

3 EXHIBIT 1 Service firm income statement

4 LG 1 EXHIBIT 2 Merchandising firm income statement

5 MULTI-STEP INCOME STATEMENT Multi-step Isolates Cost of Goods Sold Subtracts CGS from Net sales to get Gross Profit Multi-step Isolates Cost of Goods Sold Subtracts CGS from Net sales to get Gross Profit LG 2 Continued

6 LEARNING GOALS 3 Describe accounting for sale of merchandise.

7 ENTRY 1/3: Cash Sale Sold merchandise for cash Increases operating cash flow Increases assets, equity Increases revenue LG 3 1/3 Cash Sales 1,800 SCFBSIS R

8 ENTRY 1/3: CMS Merchandise charged to expense (CMS) Has no effect on cash flow Decreases assets, equity on balance sheet Increases expense on income statement LG 3 1/3 CMS Inventory 1,200 SCFBSIS E

9 ENTRY 1/12: Credit Sale Sale on account, 2/10, n/30 Has no effect on cash flows Increases assets, equity on balance sheet Increases revenue on income statement LG 3 1/12 Acct Receivable Sales 1,500 SCFBSIS R

10 ENTRY 1/12: CMS Charged inventory to expense (CMS) Has no effect on cash flows Decreases assets, equity on balance sheet Increases expense on income statement LG 3 1/12 CMS Inventory 850 SCFBSIS E

11 ENTRY 1/22: Discount Received payment within discount period Increases operating cash flows Net decrease assets, decreases equity on balance sheet Decreases revenue on income statement 1/22 Cash Sales Discount Acct Receivable 1, ,500 Click button to skip to purchase entries SCFBSIS R

12 ENTRY 1/13: Sales Returns Accepted sales returns, reduction of receivables No effect cash flows Decreases assets, equity on balance sheet Decreases revenue on income statement LG 3 1/13 Sales R&A Acct Receivable 2,000 SCFBSIS R

13 ENTRY 1/13: Inventory Returns Returned merchandise put back in inventory No effect cash flows Increases assets, equity on balance sheet Decreases expenses on income statement LG 3 1/13 Inventory CMS 1,200 SCFBSIS E

14 LEARNING GOALS 4 Describe accounting for purchase of merchandise.

15 ENTRY 1/6: Purchase Purchased inventory on account Has no effect on cash flows Increases assets, liabilities on balance sheet Has no effect on income statement LG 4 1/6 Inventory Acct Payable 1,800 SCFBSIS

16 ENTRY 1/21: Purchase Discounts Paid account within discount period Decreases operating cash flow Decreases assets, liabilities on balance sheet No effect income statement LG 4 1/21 Acct Payable Inventory Cash 1, ,782 SCFBSIS

17 ENTRY 2/5: No Discounts Payment made after discount period Decreases operating cash flows Decreases assets, liabilities on balance sheet No effect on income statement LG 4 2/5 Acct Payable Cash 1,800 Click button to skip returns SCFBSIS

18 ENTRY 1/19: Returning Inventory Returning merchandise inventory to vendor Has no effect on cash flows Decreases assets, liabilities on balance sheet Has no effect on income statement LG 4 1/19 Acct Payable Inventory 5,000 SCFBSIS

19 LEARNING GOALS 5 Describe accounting for transportation costs, sales taxes.

20 ENTRY 1/19 FOB: Shipping Point Inventory purchased FOB shipping point Decreases cash flows, operations from payment of shipping costs Increases assets, liabilities on balance sheet from purchase No effect income statement LG 5 1/19 Inventory Acct Payable 1/19 Inventory Cash 2, Click button to skip entry SCFBSIS SCFBSIS

21 ENTRY 1/24: Delivery Costs Sold and delivered merchandise Decrease operating cash flows from delivery Net increase assets, equity on balance sheet Net increase income on income statement LG 5 1/24 Acct Receivable Sales 1/24 CMS Inventory 4,700 2,750 1/24 Transportation costs Cash 350 SCFBSIS E SCFBSIS E SCFBSIS R

22 INVENTORY MISSTATEMENTS When inventory is misstated –Income statement effects Gross profit, net income equally misstated –Balance sheet effects Total assets equally misstated Equity equally misstated When inventory is misstated –Income statement effects Gross profit, net income equally misstated –Balance sheet effects Total assets equally misstated Equity equally misstated LG 8

23 GROSS PROFIT RATIO Gross profit as a percent of sales Gross profit/Net Sales For $1 sales, X cents of gross profit, after covering cost of merchandise LG 9

24 OPERATING PROFIT RATIO Operating profit as a percent of sales Operating Income/Net Sales For $1 sales, X cents of operating profit after covering operating expenses LG 9

25 LG 9 EXHIBIT 13 Fiscal yr end GP as % of Sales 38.7%37.2%35.9%37.9% Op Income as % of Sales 5.5%3.1%2.4%3.0% J.C. PENNEYSAKS

26 "When we long for life without difficulties, remind us that oaks grow strong in contrary winds and diamonds are made under pressure." - Peter Marshall