Accounting for Merchandising Activities PowerPoint Slides to accompany Fundamental Accounting Principles, 14ce Prepared by Joe Pidutti, Durham College CHAPTER 5 © 2013 McGraw-Hill Ryerson Limited.

1. Describe merchandising and identify and explain the important income statement and balance sheet components for a merchandising company. (LO 1 ) 2. Describe both periodic and perpetual merchandise inventory systems. (LO 2 ) 3. Analyze and record transactions for merchandise purchases and sales using a perpetual system. (LO 3 ) 2 © 2013 McGraw-Hill Ryerson Limited. Learning Objectives

4. Prepare adjustments for a merchandising company. (LO 4 ) 5. Define, prepare, and use merchandising income statements. ( LO 5 ) 6. Prepare closing entries for a merchandising company. ( LO 6 ) © 2013 McGraw-Hill Ryerson Limited. Learning Objectives 3

7. Record and compare merchandising transactions using both periodic and perpetual inventory systems. (Appendix 5A) ( LO 7 ) 8. Explain and record Provincial Sales Tax (PST) and Goods and Services Tax (GST). (Appendix 5B) ( LO 8 ) © 2013 McGraw-Hill Ryerson Limited. Learning Objectives 4

Merchandiser: A company that earns net income by buying and selling merchandise. Wholesaler: A company that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers. © 2013 McGraw-Hill Ryerson Limited. Merchandising Activities LO 1 5

Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Operating Expenses Revenues MerchandiserService Company Computing Net Income © 2013 McGraw-Hill Ryerson Limited. LO 1 6

Products a company owns for the purpose of selling to customers. It is often referred to as Merchandise Inventory. Is classified as a current asset. © 2013 McGraw-Hill Ryerson Limited. Inventory LO 1 7

Cost of merchandise inventory includes: Costs incurred to purchase the goods. Shipping costs. Other costs required to make goods ready for sale. © 2013 McGraw-Hill Ryerson Limited. Merchandise Inventory LO 1 8

Merchandising Cost Flow © 2013 McGraw-Hill Ryerson Limited. Beginning Merchandise Inventory Ending Merchandise inventory Cost of goods sold LO 1 9 Net cost of Purchases Merchandise available for sale

Perpetual Provides a continuous record of: The amount of merchandise inventory on hand. Cost of goods sold to date. Periodic Requires a physical count of goods to determine: The amount of merchandise inventory on hand. Cost of goods sold. © 2013 McGraw-Hill Ryerson Limited. Merchandise Inventory Systems LO 2 10

© 2013 McGraw-Hill Ryerson Limited. Nov. 2 Merchandise Inventory 1,200 Accounts Payable 1,200 Purchased merchandise inv. on account Nov.5 Accounts Payable 300 Merchandise Inventory 300 Purchase allowance re: debit memo Purchases Purchase Returns and Allowances Perpetual System-Example LO 3 11

Terms Time Due Discount Period = 10 days (Full amount minus 2% discount) due between Nov.2 and Nov.12 Credit Period = 30 days Full amount due anytime between Nov.13 and Dec.2 Purchase or Sale Nov.2 Nov.12Dec.2 Purchase/Sales Discounts © 2013 McGraw-Hill Ryerson Limited. LO 3 A deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30 12

Purchase Discounts- Assume the purchase of merchandise inventory on November 2 was on the terms 2/10,n30. Case 1-Discount taken © 2013 McGraw-Hill Ryerson Limited. Nov.12 Accounts Payable 900 Merchandise Inventory 18 Cash 882 2% x (1, ) = 18 Case 2-Discount not taken Nov.12 Accounts Payable 900 Cash 900 Perpetual System — Example LO 3 13

FOB Shipping Point (Buyer pays shipping charges) FOB Destination (Seller pays for shipping charges) Goods Seller Buyer Carrier Transportation Charges – Perpetual System © 2013 McGraw-Hill Ryerson Limited. LO 3 14

Transportation Costs © 2013 McGraw-Hill Ryerson Limited. Nov.24 Merchandise Inventory 75 Cash 75 Paid freight charges on purchased merchandise. Perpetual System — Example LO 3 15

Sales of Merchandise © 2013 McGraw-Hill Ryerson Limited. Nov.12 Accounts Receivable 1,000 Sales 1,000 Sold merchandise on terms 2/10,n60 Cost of goods sold 600 Merchandise Inventory 600 To record cost of merchandise sold Perpetual System — Example LO 3 16

Customer Payment Case 1-Customer pays in 60 days Case 2-Customer pays in 10 days © 2013 McGraw-Hill Ryerson Limited. Jan.11 Cash 1,000 Accounts receivable 1,000 Received payment for Nov. 12 sale Perpetual System — Example LO 3 Nov.22 Cash 980 Sales discounts 20 Accounts receivable 1,000 Received payment less the discount 17

Sales Returns and Allowances © 2013 McGraw-Hill Ryerson Limited. Nov.6 Sales Returns & Allowance 800 Accounts Receivable 800 Customer returned merchandise Merchandise Inventory 600 Cost of Goods Sold 600 Returned goods to merchandise inventory Perpetual System — Example LO 3 18

Perpetual merchandise inventory systems keep a running total of inventory levels by recording sales and purchase transactions. Periodic adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory). © 2013 McGraw-Hill Ryerson Limited. Adjustments- Perpetual Merchandise Inventory Perpetual Merchandise Inventory LO 4 19

Inventory per accounting records: $21,250 Inventory per physical count: -$21,000 Difference (shrinkage) $250 Adjustment required: © 2013 McGraw-Hill Ryerson Limited. Perpetual System — Example Dec.31 Cost of Goods Sold 250 Merchandise Inventory 250 To record inventory shrinkage revealed by physical count. LO 4 20

Income statements may be formatted in a variety of ways. Typical formats are: Classified, Multiple-Step Multiple-Step Single-Step © 2013 McGraw-Hill Ryerson Limited. Income Statement Formats LO 5 21

Classified Multi-step Format (for internal reporting) © 2013 McGraw-Hill Ryerson Limited. LO 5 22

Multi-step Format (for external reporting) © 2013 McGraw-Hill Ryerson Limited. LO 5 23

Single- step Format (for external reporting) © 2013 McGraw-Hill Ryerson Limited. LO 5 24

The closing process is similar for merchandising and service companies. Merchandising companies have additional temporary accounts that must be closed. These include: Sales Sales Returns & Allowances Sales Discounts Cost of Goods Sold © 2013 McGraw-Hill Ryerson Limited. Closing Entries-Perpetual System LO 6 25

Periodic systems Merchandise Inventory is updated at the end of the period based on a physical count. Perpetual systems Merchandise Inventory is updated after each sale or purchase. © 2013 McGraw-Hill Ryerson Limited. Appendix 5A- Periodic and Perpetual Merchandise Inventory Systems Compared LO 7 26

Appendix 5A - Example © 2013 McGraw-Hill Ryerson Limited. Purchase of Merchandise Return of Merchandise Periodic SystemPerpetual System LO 7 27 Purchases 1200 Merchandise Inventory 1200 Accounts Payable 1200 Accounts Payable 1200 Accounts Payable 300 Purchase Returns 300 Merchandise Inventory 300

Appendix 5A - Example © 2013 McGraw-Hill Ryerson Limited. Purchase Discount Taken (2/10, n30) Transportation Charges Periodic SystemPerpetual System LO 7 28 Accounts Payable 900 Purchase Discounts 18 Merchandise Inventory 18 Cash 882 Cash 882 Transportation-in 75 Merchandise Inventory 75 Cash 75 Cash 75

Appendix 5A - Example © 2013 McGraw-Hill Ryerson Limited. Sale of merchandise Periodic SystemPerpetual System LO 7 29 Accounts Receivable 2400 Sales 2400 Sales 2400 Cost of Goods Sold 1600 Merchandise Inventory 1600

Appendix 5A - Example © 2013 McGraw-Hill Ryerson Limited. Sales Return Periodic SystemPerpetual System LO 7 30 Sales Returns & Allow. 800 Accounts Receivable 800 Accounts Receivable 800 Merchandise Inventory 600 Cost of Goods Sold 600

Provincial Sales Tax (PST) A consumption tax applied on sales to the final consumers of products or services. Is not applicable to all sales. Varies from province to province. Amount collected is a liability. Appendix 5B – Sales Tax © 2013 McGraw-Hill Ryerson Limited. LO 8 31

Goods and Services Tax (GST) A 5% tax on almost all goods and services provided in Canada. Is ultimately paid by the final consumer. Is uniform from province to province. Amount collected by a business is a liability. Amount paid by a business offsets the GST owing. Appendix 5B - Sales Tax © 2013 McGraw-Hill Ryerson Limited. LO 8 32

Harmonized Sales Tax (HST) Is a combined GST and PST rate applied to taxable supplies. Appendix 5B - Sales Tax © 2013 McGraw-Hill Ryerson Limited. LO 8 33

Appendix 5B - Example Purchase of Merchandise Assume: Perpetual system and 5% GST. © 2013 McGraw-Hill Ryerson Limited. Merchandise Inventory 600 GST Receivable 30 Accounts Payable 630 LO 8 34

Appendix 5B - Example Sale of Merchandise Assume: Perpetual system, 7% PST and 5% GST. © 2013 McGraw-Hill Ryerson Limited. Accounts Receivable 1,008 Sales 900 PST Payable 63 GST Payable 45 To record sale of merchandise Cost of goods sold 600 Merchandise Inventory 600 To record cost of merchandise sold LO 8 35