Accounting for Merchandising Activities Accounting for Merchandising Activities C H A P T E R 5 Part 2

Learning Objectives 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 ) 5-2

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 ) 5-3

Learning Objectives 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), Goods and Services Tax (GST) and Harmonized Sales Tax (HST). (Appendix 5B) ( LO 8 ) 5-4

Primary Objective Financial statements are intended to provide useful information for decision-making Accurate Clear Timely 5-5

Income Statement Formats Typical formats are: Single-Step Multiple-Step Classified, Multiple-Step LO 5 5-6

Single- step Format (for external reporting) LO 5 Single Step: Revenues minus Expenses 5-7

Multi-step Format (for external reporting) LO 5 5-8

Gross Profit Ratio Expressed as a percentage of net sales May be tracked over time and/or compared to similar businesses May be calculated for whole business, departments, products Gross profit Net sales Gross profit ratio = X 100% LO 5 5-9

Classified Multi-step Format (for internal reporting) LO 5 Practice: QS

Operating expenses are classified into two categories: selling expenses and cost of goods sold. A)True B)False 5-11

Adjustments: Perpetual Inventory Perpetual systems keep a running total of inventory levels by recording sales and purchase transactions. Occasional adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory). LO

Merchandising Cost Flow Beginning Merchandise Inventory Merchandise available for sale Ending Merchandise inventory Cost of goods sold Net cost of Purchases LO

Inventory per accounting records: $21,250 Inventory per physical count: $21,000 Difference (shrinkage) $250 Adjustment required: Perpetual System–Example Dec.31 Cost of Goods Sold 250 Merchandise Inventory 250 To record inventory shrinkage revealed by physical count. LO

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 Closing Entries - Perpetual System LO

Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold are closed to Income Summary with debits. A)True B)False 5-16

Perpetual systems Merchandise Inventory is updated after each sale or purchase. Periodic systems Merchandise Inventory is updated at the end of the period based on a physical count. Appendix 5A: Periodic and Perpetual Merchandise Inventory Systems Compared LO

Purchases1,200Merchandise Inv.1,200 Accounts Payable1,200 Accounts Payable1,200 Purchase of Merchandise Return of Merchandise Accounts Payable300Accounts Payable300 Purchase Returns 300 Merchandise Inv. 300 Periodic SystemPerpetual System Appendix 5A - Example LO

Accounts Payable900Accounts Payable900 Purchase Discounts 18 Merchandise Inv. 18 Cash882 Cash 882 Purchase Discount Taken (2/10, n30) Transportation Charges Transportation-in 75Merchandise Inv.75 Accounts Payable 75 Accounts Payable 75 Periodic SystemPerpetual System Appendix 5A - Example LO

Merchandising Cost Flow Beginning Merchandise Inventory Merchandise available for sale Ending Merchandise inventory Cost of goods sold Net cost of Purchases LO

Cost of Goods Sold Beginning Inventory Plus: Purchases Plus: Transportation and other costs Minus: Returns, Discounts and Allowances Equals: Goods AVAILABLE for Sale Minus: Ending Inventory Cost of Goods Sold Equals: Cost of Goods Sold Periodic System 5-21 Practice: QS 5-20

The periodic inventory system is superior to the perpetual inventory system in preventing shrinkage. A)True B)False 5-22

Accounts Receivable2,400Accounts Receivable2,400 Sales 2,400 Sales2,400 Cost of Goods Sold1,600 Merchandise Inv.1,600 Sale of merchandise Periodic SystemPerpetual System Appendix 5A - Example LO 7 Us Customer 5-23

Sales Returns800Sales Returns800 Accounts Receivable800 Accounts Receivable800 Merchandise Inv.600 Cost of Goods Sold600 Sales Return Periodic SystemPerpetual System Appendix 5A - Example LO 7 Us Customer 5-24

Doug's Wholesale Income Statement 30-Apr-11 Sales (net) $ 125,000 Cost of Goods Sold: Beginning Inventory $ 14,000 Purchases 78,000 Freight charges 6,000 Returns and allowances 1,250 Goods available for sale 96,750 Ending Inventory 16,500 Cost of Goods Sold 80,250 Gross Profit 44,750 Operating Expenses 37,900 Net Income $ 6,850 Practice: QS 5-16, Practice: QS 5-16, 5-17