Accounting for Merchandising Businesses Chapter 4

Service Businesses vs. Merchandise Operations Merchandise Operations –Revenue activities involve the buying and selling of merchandise. –Example: Home Depot Inc. Service Businesses Revenue activities involve providing services to customers. Example: Family Health Care, P.C.

H&R BLOCK Condensed Income Statement For the Year Ending April 30, 2007 (in millions) Revenue$3,002 Operating expenses 2,537 Operating income$ 465 Other income 8 Income before taxes$ 473 Income taxes 196 Net income$ 277 H&R BLOCK Condensed Income Statement For the Year Ending April 30, 2007 (in millions) Revenue$3,002 Operating expenses 2,537 Operating income$ 465 Other income 8 Income before taxes$ 473 Income taxes 196 Net income$ 277

Best Buy Condensed Income Statement For the Year Ending December 28, 2007 (in millions) Net sales$45,738 Cost of merchandise sold 32,057 Gross profit$13,681 Operating expenses 9,490 Operating income$ 4,191 Other income 26 Income before taxes$ 4,217 Income taxes 1,636 Net income$ 2,581 Best Buy Condensed Income Statement For the Year Ending December 28, 2007 (in millions) Net sales$45,738 Cost of merchandise sold 32,057 Gross profit$13,681 Operating expenses 9,490 Operating income$ 4,191 Other income 26 Income before taxes$ 4,217 Income taxes 1,636 Net income$ 2,581 What’s different on a merchandising income statement?

PurchasesPurchases Purchases$521,980 Less: Purchases returns and allowances $9,100 Purchases discounts 2,525 11,625 Net purchases$510,355 Add transportation-in 17,400 Cost of merchandise purchased$527,755

Detailed Cost of Merchandise Sold Section Merchandise inventory, Jan. 1, 2010$ 59,700 Purchases$521,980 Less: Pur. returns and allow. $9,100 Purchases discounts 2,525 11,625 Net purchases$510,355 Add transportation-in 17,400 Cost of merchandise purchased 527,755 Merchandise available for sale$587,455 Less merchandise inventory, Dec. 31, ,150 Cost of merchandise sold$525,305

Sales Transactions On January 3 Fisher Company sells merchandise costing $3,000 for $5,000. The sale is made a. For cash b. On account

Sales Discounts 3/10, n/30 Credit Terms The buyer is allowed a 3% discount if… …the account is paid within 10 days. The net (full) amount is due by the 30 th day.

Sales Discounts On January 12 Fisher Company sells merchandise on account to Omega Tech for $4,000. Credit terms are 3/10, n/30. Omega Tech pays within the discount period.

4-14 Sales Returns and Allowances On January 13 Fisher Company issues a $1,000 credit memorandum to Krier Company for merchandise that was returned. The merchandise (cost $600) was sold on account.

Purchase Transactions On January 6 Fisher Company purchased $6,000 of merchandise on account (terms: 2/10, n/30) from Quantum Company. Recall that Fisher Company uses the perpetual system.

4-16 Purchase Returns and Allowances On January 9 Fisher Company returns $2,000 of merchandise purchased from Quantum Inc.

Purchase Discounts On January 15, Fisher Company pays the amount due to Quantum

Sales and Purchase Transactions Based on the information below, illustrate the effects on the accounts and financial statements (Balance Sheet and Income Statement) of the seller and buyer: (a)Seller sells Buyer on account merchandise costing $300 for $500, terms 2/10, net 30. (b) Buyer returns as defective $100 worth of the $500 merchandise received. The seller’s cost of this merchandise is $60. (c) Buyer pays within the discount period.

Freight

Transportation Costs On January 19 Fisher Company buys merchandise from Data Max on account, $2,900, terms FOB shipping point, and prepays the transportation cost of $150. Illustrate the effect on the accounts and financial statements related to these transactions.

Sales Taxes When sale is made, liability for sales tax is recorded as an obligation by the seller Payment is made to state taxing authority to satisfy obligation

Fisher Company’s records on December 31, 2007 show that the book inventory of merchandise is $70,100. The physical inventory taken on that date indicates that the value of the inventory is $69,800. What is the effect of this shrinkage on the accounts and financial statements? Inventory Shrinkage

Nocturnal Company’s perpetual inventory records indicate that $417,200 of merchandise should be on hand on October 31, The physical inventory indicates that $400,680 of merchandise is actually on hand. Illustrate the effects on the accounts and financial statements of the inventory shrinkage for Nocturnal Company for the year ended October 31, 2011.