Chapter 4 Accounting for Merchandising Businesses

Learning Objectives After studying this chapter, you should be able to…  Distinguish the activities and financial statements of a service business from those of a merchandising business  Describe and illustrate the financial statements of a merchandising business  Describe the accounting for the sale of merchandise  Describe the accounting for the purchase of merchandise  Describe the accounting for transportation costs and sales taxes  Illustrate the dual nature of merchandising transactions  Describe the accounting for merchandise shrinkage

Learning Objective 1 Distinguish the activities and financial statements of a service business from those of a merchandising business

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.

Gross Profit for a Merchandise Operation Gross Profit = Net Sales – COGS Net Sales: revenue less returns and discounts Cost of Goods Sold: cost paid for merchandise

Learning Objective 2 Describe and illustrate the financial statements of a merchandising business

NetSolutions – Multiple-Step Income Statement Measures income/loss from the core operations of the business Assume a perpetual inventory system Considers customer returns and discounts

NetSolutions – Cost of Merchandise Sold – Periodic Inventory

NetSolutions – Income Statement

NetSolutions – Retained Earnings Statement

NetSolutions – Balance Sheet Value of units on hand, not sold

NetSolutions – Statement of Cash Flows Equals cash on balance sheet

Learning Objective 3 Describe the accounting for the sale of merchandise

NetSolutions - Sales Transactions

Sample Sales Invoice Credit terms

Sales Discounts

NetSolutions - Sales Discounts

Sales Returns and Allowances

NetSolutions - Sales Returns and Allowances

Learning Objective 4 Describe the accounting for the purchase of merchandise

Purchase Transaction - Using the Perpetual System

Purchase Discounts

Purchase Returns and Allowances

NetSolutions - Return of Merchandise

Learning Objective 5 Describe the accounting for transportation costs and sales taxes

Transportation Costs

NetSolutions - Transportation Costs

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

Learning Objective 6 Illustrate the dual nature of merchandising transactions

Dual Nature of Merchandise Transactions Company A records a sale Company B records a purchase

Learning Objective 7 Describe the accounting for merchandise shrinkage

Merchandise Shrinkage

NetSolutions - Merchandise Shrinkage

End of Chapter 4