Merchandising Operations Chapter 5

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Highlights – Chpt 5 Merchandise vs. Services Companies Calculating Cost of Goods Sold (COGS) Periodic vs. Perpetual Inventory Syst.’s Freight – FOB (ship point vs. destination) Discounts – recording transactions Single Step vs. Multi Step – Stmnt of Earnings Ratios – Gross Profit/Profit Margin

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Differences Between Service and Merchandising Companies Service Companies - primary source of revenue from services (e.g accounting firm, law office). Merchandising Companies - buy and sell merchandise (e.g. Wal-Mart). Operating Cycle – cash to cash - usually longer for a merch. comp. because of the lapse of time in purchasing and selling inventory.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Primary source of revenues: –Sales revenue (sale of merchandise) Expenses for a merchandising company are divided into two categories –Cost of goods sold –Operating expenses Merchandising Company Revenues and Expenses

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Illustration 5-1 Earnings Process Measurement for Merchandiser

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Formula for Cost of Goods Sold + = Beginning Inventory Cost of Goods Purchased (page 244) Ending Inventory Cost of Goods Sold _ Cost of Goods Available for Sale

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Practice Problem: Brief Exercise – 8 Page 256 Question: 18 Page 254

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Inventory Systems

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Inventory Systems Merchandising companies may use either (or both) of the following inventory systems –Perpetual –Periodic

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Perpetual System CONSTANTLY UPDATES inventory for purchases and sales. Must still do a PHYSICAL COUNT at least once a year (to adjust perpetual records to actual). Enables the EFFECTIVE CONTROL of inventory (important asset for a merchandiser).

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Periodic System Does not keep an updated record of all goods bought, sold and on hand. In a periodic system cost of goods sold is only DETERMINED AT THE END of the accounting period once inventory is counted. This system is not as widely used as the perpetual system.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Freight

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Freight Freight paid by the buyer is part of the cost of the merchandise purchased. FOB (Free on Board) – this is a legal term referring to the title or ownership of goods. Two types: 1.FOB shipping point 2.FOB destination

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. FOB Shipping Point Ownership of the goods passes from the seller to the buyer as soon as the goods are shipped. At the point of shipping, the seller can recognize the revenue and the goods should no longer be included in the seller’s inventory.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. FOB Destination Ownership of the goods does not pass from the seller to the buyer until the goods are received by the buyer (i.e. they receive their destination point). When the goods are received by the buyer, the seller can recognize the revenue and the goods should no longer be included in the seller’s inventory.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Discounts

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Discounts Quantity discounts may be offered for bulk purchases. A quantity discount gives a price reduction according to the volume of the purchase. A quantity discount is different from a purchase discount which is offered for early payment of a balance due.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Purchase discount –Credit terms specify the amount of cash discount available to encourage early payment and the time period during which it is offered –Example: 2/10, n/30 ( a 2% discount can be taken if the invoice is paid in 10 days, otherwise the total invoice amount is due in 30 days) Discounts

Entries - Example

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Recording Inventory Purchases Follow along on pages 225 to 227:

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Recording Inventory Sales

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Problem – 3 Page 261 Practice Problems: Exercise – 11 Page 259 Practice!

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Two Forms of Statements of Earnings Single-step Multiple-step

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Service Company Single-Step Statement of Earnings Revenues Expenses Earnings before income taxes Income taxes Net earnings $10,000 2,000 8,000 1,000 $ 7,000

PW AUDIO SUPPLY, INC. Single-Step Statement of Earnings (Perpetual) Year Ended December 31, 2006 Sales Interest revenue Gain on sale of equipment Total revenues Expenses Cost of goods sold Operating expenses Interest expense Casualty loss from vandalism Total expenses Earnings before income taxes Income tax expense Net earnings $460,000 3, , , ,000 1, ,000 31,600 10,100 $ 21,500

PW AUDIO SUPPLY, INC. Multiple-Step Statement of Earnings (Perpetual) Year Ended December 31, 2006 Sales revenue Sales Less: Sales returns and allowances Sales discounts Net sales Cost of goods sold Gross profit Operating expenses Store salaries expense Advertising expense Amortization expense Freight out Salaries expense Utilities expense Insurance expense Total operating expenses Earnings from operations $12,000 8,000 $45,000 16,000 8,000 7,000 19,000 17,000 2,000 $480,000 20, , , , ,000 30,000

PW AUDIO SUPPLY, INC. Multiple-Step Statement of Earnings (Perpetual) Year Ended December 31, 2006 Earnings from operations (continued) Other revenues Interest revenue Gain on sale of equipment Other expenses Interest expense Casualty loss from vandalism Earnings before income taxes Income tax expense Net earnings $3, ,600 $1, ,000 $30,000 1,600 31,600 10,100 $21,500

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. PW AUDIO SUPPLY, INC. Multiple-Step Statement of Earnings (Periodic) Year Ended December 31, 2006 Sales revenue Sales Less: Sales returns Sales discounts Net sales Cost of goods sold Inventory, January 1 Purchases Less: Purchase returns Purchase discounts Net purchases Add: Freight in Cost of goods purchased Cost of goods available for sale Inventory, December 31 Cost of goods sold $325,000 10,400 6, ,800 12,200 $12,000 8,000 $36, , ,000 40,000 $480,000 20, , ,000

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. PW AUDIO SUPPLY, INC. Multiple-Step Statement of Earnings (Periodic) Year Ended December 31, 2006 Gross profit Operating expenses Store salaries expense Advertising expense Amortization expense Freight out Salaries expense Utilities expense Insurance expense Total operating expenses Earnings from operations $45,000 16,000 8,000 7,000 19,000 17,000 2, , ,000 30,000

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. PW AUDIO SUPPLY, INC. Multiple-Step Statement of Earnings (Periodic) Year Ended December 31, 2006 Earnings from operations (continued) Other revenues Interest revenue Gain on sale of equipment Other expenses Interest expense Casualty loss from vandalism Earnings before income taxes Income tax expense Net earnings $3, ,600 $1, ,000 $30,000 1,600 31,600 10,100 $21,500

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Evaluating Profitability Gross profit margin Profit margin

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Gross Profit Margin Gross Profit Margin = Gross Profit Net Sales Company’s gross profit expressed as a percentage of net sales

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Profit Margin Profit Margin = Net Earnings Net Sales Company’s net earnings expressed as a percentage of net sales

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting: Tools for Business Decision-Making, Third Canadian Edition © 2006 John Wiley & Sons Canada, Ltd. Practice: Exercise – 14 Page 260