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3. Homework assignment  Using Connect – 8 Questions for 60 Points For Chapter 3. 10 2/15/2016  Log in Connect web site and do “Connect Orientation” for 10 Points before 2/15/2016.  Prepare chapters 4 “ Accounting for Merchandising Operations.” 1, 2, and 3 Exam # 01 02/17/2016  Prepare chapters 1, 2, and 3 for Exam # 01 on 02/17/2016 in class. Happiness is having all homework up to date Atef Abuelaish3

4. Chapter 03 Review

5. Recording Closing Entries 5  Close Credit Balances in Revenue Accounts to Income Summary.  Close Debit Balances in Expense accounts to Income Summary.  Close Income Summary account to Retained Earnings.  Close Dividends to Retained Earnings. P 4

6. NEED-TO-KNOW DebitCredit Magic Company Trial Balance December 31, 20X2 Use the adjusted trial balance of Magic Company to prepare its closing entries. P 4 6 DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Dividends 20,000 Fees earned 79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 Magic Company Adjusted Trial Balance December 31, 2015 Retained Earnings45,000

7. DateDebitCredit Dec. 31Fees earned79,000 Income summary79,000 Dec. 31Income summary64,000 Salaries expense56,000 Office supplies expense8,000 Dec. 31Income summary15,000 Retained earnings15,000 Dec. 31Retained earnings20,000 Dividends20,000 General Journal Expenses64,000Revenues79,000 Net income15,000 Closing15,000 0 12/31/201445,000 Dividends 20,000Net income15,000 12/31/201540,000 Income summary Retained earnings DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Retained earnings45,000 Dividends20,000 Fees earned79,000 Salaries expense56,000 Office supplies expense8,000 Totals$199,000 P 4 7 Common stock30,000

8. Cash$13,000Accounts payable$12,000 Accounts receivable17,000Long-term notes payable33,000 Land85,000Total liabilities45,000 Common stock30,000 Total assets$115,000Total liabilities and equity115,000 AssetsLiabilities Equity Magic Company Balance Sheet December 31, 2015 Expenses64,000Revenues79,000 Net income15,000 Closing15,000 0 12/31/201445,000 Dividends 20,000Net income15,000 12/31/201540,000 Income Summary Retained Earnings P 4 8 Retained earnings DebitCredit Cash$13,000 Accounts receivable17,000 Land85,000 Accounts payable$12,000 Long-term notes payable33,000 Common Stock 30,000 Totals$115,000 Retained earnings40,000 Total equity75,000

9. Post-Closing Trial Balance 9  List of permanent accounts and their balances after posting closing entries.  Total debits and credits must be equal. P 5

10. Post-Closing Trial Balance 10 P 5

11. Accounting Cycle 11 C 2

12. Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle. Classified Balance Sheet 12 C 3

13. Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle. C 3 Current Assets 13

14. Long-term investments are expected to be held for more than one year or the operating cycle. C 3 Long-Term Investments 14

15. Plant assets are tangible long-lived assets used to produce or sell products and services. C 3 Plant Assets 15

16. Intangible assets are long-term resources used to produce or sell products and services and that lack physical form. C 3 Intangible Assets 16

17. Current liabilities are obligations due within the longer of one year or the company’s operating cycle. Current Liabilities 17 C 3

18. Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle. C 3 Long-Term Liabilities 18

19. Equity is the owner’s claim on the assets. C 3 Equity 19

20. 3) Profit Margin 20 The profit margin ratio measures the company’s net income to net sales. Profit Margin = A 1 Limited Brands, Inc. Net Income Net Sales

21. 4) Current Ratio 21 Helps assess the company’s ability to pay its debts in the near future Current ratio = Current assets Current liabilities Limited Brands, Inc. A 2

22. Chapter 04 Accounting for

23. Chapter 04 Accounting for Merchandising Operations

24. Describe merchandising activities and identify income components for a merchandising company. Describe merchandising activities and identify income components for a merchandising company. 24

25. Service Companies vs. Merchandising Companies 25 sell time Service organizations sell time to earn revenue. Examples: Accounting firms and plumbing services buying and selling merchandise A merchandiser earns net income by buying and selling merchandise. C 1

26. ManufacturerWholesalerRetailerConsumers Merchandising Companies Merchandiser 26 C 1

27. Reporting Income for a Merchandiser 27 products Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores

28. Identify and explain the inventory asset and cost flows of a merchandising company. Identify and explain the inventory asset and cost flows of a merchandising company. 28

29. Operating Cycle for a Merchandiser 29 Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. C 2

30. Inventory Systems 30 C 2

31. Inventory Systems 31  Perpetual systems  continually update accounting records for merchandising transactions  Periodic systems  accounting records relating to merchandise transactions are updated only at the end of the accounting period C 2

32. Analyze and record transactions for merchandise purchases using a perpetual system. Analyze and record transactions for merchandise purchases using a perpetual system. 32

33. Merchandise Purchases 33 On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash. P1

34. Trade Discounts 34 P1

35. Purchase Discounts 35 A deduction from the invoice price granted to induce early payment of the amount due. A deduction from the invoice price granted to induce early payment of the amount due. P1

36. 2/10, n/30 Discount Percent Number of Days Discount Is Available Otherwise, Net (or All) Is Due in 30 Days Credit Period Purchase Discounts 36 P1

37. Purchase Discounts 37 On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30. On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30. P1

38. Purchase Discounts 38 On November 12, Z-Mart paid the amount due on the purchase of November 2. On November 12, Z-Mart paid the amount due on the purchase of November 2. P1 Since payment was made within the discount period, a $24 discount ($1,200 x 2%) is taken. Since payment was made within the discount period, a $24 discount ($1,200 x 2%) is taken.

39. Purchase Discounts 39 After we post these entries, the accounts involved look like these: After we post these entries, the accounts involved look like these: P1

40. Purchase Returns and Allowances 40 Purchase Return... Merchandise returned by the purchaser to the supplier. Merchandise returned by the purchaser to the supplier. Purchase Allowance... A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. Purchase Return... Merchandise returned by the purchaser to the supplier. Merchandise returned by the purchaser to the supplier. Purchase Allowance... A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. P1

41. Purchase Returns and Allowances 41 On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. P1

42. Purchase Returns and Allowances 42 Z Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes the 2% discount only on the $900 remaining balance. P1

43. Transportation Costs and Ownership Transfer 43 P1

44. Transportation Costs 44 Z-Mart purchased merchandise on terms of FOB shipping point. The transportation charge is $75. P1 Since freight terms were FOB shipping point, Z-mart is responsible for the freight charges. We increase Merchandise Inventory for the cost of the freight.

45. Accounting for Merchandise 45 P1

46. NEED-TO-KNOW (4-1) Oct. 1 Oct. 3Paid $30 cash for freight charges from UPS for the October 1 purchase. Oct. 7Returned 50 defective units from the October 1 purchase and received full credit. Oct. 11Paid the amount due from the October 1 purchase, less the return on October 7. Oct. 31 Prepare journal entries to record each of the following purchases transactions of a merchandising company. Assume a perpetual inventory system. Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1. Assume the October 11 payment was never made and, instead, payment of the amount due on the October 1 purchase, less the return on October 7, occurred on October 31. P1 46

47. NEED-TO-KNOW (4-1) Oct. 1 Oct. 3Paid $30 cash for freight charges from UPS for the October 1 purchase. Oct. 7Returned 50 defective units from the October 1 purchase and received full credit. Oct. 11Paid the amount due from the October 1 purchase, less the return on October 7. Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1. Oct. 1500Oct. 1500 Oct. 330Oct. 7200 Oct. 7200Oct. 11300 Oct. 116 Oct. 31324 DateDebitCredit Oct. 1Merchandise inventory (125 units @ $4)500 Accounts payable500 Oct. 3Merchandise inventory30 Cash30 Oct. 7Accounts payable (50 units @ $4)200 Merchandise inventory (50 units @ $4)200 Oct. 11Accounts payable300 Merchandise inventory ($300 x.02)6 Cash294 General Journal Merchandise inventoryAccounts payable P1 47

48. NEED-TO-KNOW Oct. 1 Oct. 3Paid $30 cash for freight charges from UPS for the October 1 purchase. Oct. 7Returned 50 defective units from the October 1 purchase and received full credit. Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1. Oct. 31Assume the October 11 payment was never made and, instead, payment of the amount due on the October 1 purchase, less the return on October 7, occurred on October 31. Oct. 1500Oct. 1500 Oct. 330Oct. 7200 Oct. 7200Oct. 31300 Oct. 31330 DateDebitCredit Oct. 1Merchandise inventory (125 units @ $4)500 Accounts payable500 Oct. 3Merchandise inventory30 Cash30 Oct. 7Accounts payable200 Merchandise inventory (50 units @ $4)200 Oct. 31Accounts payable300 Cash300 General Journal Merchandise inventoryAccounts payable P1 48

49. Analyze and record transactions for merchandise sales using a perpetual system. Analyze and record transactions for merchandise sales using a perpetual system. 49

50. Accounting for Merchandise Sales 50 P2 Exhibit 4.9

51. Sales of Merchandise 51 P2 Each sales transaction for a seller of merchandise involves two parts: Revenue received in the form of an asset from a customer. Recognition of the cost of merchandise sold to a customer.

52. Sales of Merchandise 52 Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of $1,600. P2 Two entries are required: 1) Records the revenue 2) Records the cost

53. Sales Discounts 53 P2 Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts.

54. Sales Discounts 54 Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60. P2 Option 1: The account was paid in full within the 60-day period.Option 2: The account was paid in full within the 10-day discount period.

55. Sales Returns and Allowances 55 P2 Sales returns and allowances usually involve dissatisfied customers and the possibility of lost future sales. Sales returns refer to merchandise that customers return to the seller after a sale. Sales allowances refer to reductions in the selling price of merchandise sold to customers.

56. Sales Returns and Allowances 56 Recall Z-Mart’s sale for $2,400 that had a cost of $1,600. Assume the customer returns part of the merchandise. The returned items sell for $800 and cost $600. P2 Two entries are required: 1) Records the reduction in revenue 2) Records the return of goods to inventory

57. Sales Allowances 57 Assume that $800 of the merchandise Z-Mart sold on November 3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction. P2 One entry is required: 1) Records the reduction in revenue Contra Revenue account

58. NEED-TO-KNOW (4-2) Jun. 1 Jun. 7 Jun. 8 Jun. 11 The customer returns 20 units because those units did not fit the customer’s needs. The seller restores those units to its inventory. The customer discovers that 30 units are damaged but are still of some use and, therefore, keeps the units because the seller sends the buyer a credit memorandum for $90 to compensate for the damage. Prepare journal entries to record each of the following sales transactions of a merchandising company. Assume a perpetual inventory system. Sold 500 units of merchandise to a customer for $14 per unit under credit terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The merchandise had cost $10 per unit. The customer discovers that 10 units are the wrong color, but keeps 8 of these units because the seller sends a $12 credit memorandum to compensate. The customer returns the remaining 2 units to the seller. The seller restores the 2 returned units to its inventory P2 58

59. NEED-TO-KNOW (4-2) Jun. 1 Jun. 7 DateDebitCredit Jun. 1Accounts receivable7,000 Sales (500 @ $14)7,000 Jun. 1Cost of goods sold (500 @ $10)5,000 Merchandise inventory5,000 Jun. 7Sales returns and allowances (20 @ $14)280 Accounts receivable280 Jun. 7Merchandise inventory (20 @ $10)200 Cost of goods sold200 General Journal The customer returns 20 units because those units did not fit the customer’s needs. The seller restores those units to its inventory. Sold 500 units of merchandise to a customer for $14 per unit under credit terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The merchandise had cost $10 per unit. P2 59

60. NEED-TO-KNOW (4-2) Jun. 8 Jun. 11 The customer discovers that 30 units are damaged but are still of some use and, therefore, keeps the units because the seller sends the buyer a credit memorandum for $90 to compensate for the damage. The customer discovers that 10 units are the wrong color, but keeps 8 of these units because the seller sends a $12 credit memorandum to compensate. The customer returns the remaining 2 units to the seller. The seller restores the 2 returned units to its inventory DateDebitCredit Jun. 1Accounts receivable7,000 Sales (500 @ $14)7,000 Jun. 01Cost of goods sold (500 @ $10)5,000 Merchandise inventory5,000 Jun. 07Sales returns and allowances (20 @ $14)280 Accounts receivable280 Jun. 07Merchandise inventory (20 @ $10)200 Cost of goods sold200 Jun. 08Sales returns and allowances90 Accounts receivable90 Jun. 1140 Accounts receivable40 Jun. 11Merchandise inventory (2 @ $10)20 Cost of goods sold20 General Journal Sales returns and allowances ($12 + (2 @ $14)) P2 60

61. NEED-TO-KNOW (4-2) DateDebitCredit Jun. 1Accounts receivable7,000 Sales (500 @ $14)7,000 Jun. 01Cost of goods sold (500 @ $10)5,000 Merchandise inventory5,000 Jun. 07Sales returns and allowances (20 @ $14)280 Accounts receivable280 Jun. 07Merchandise inventory (20 @ $10)200 Cost of goods sold200 Jun. 08Sales returns and allowances90 Accounts receivable90 Jun. 1140 Accounts receivable40 Jun. 11Merchandise inventory (2 @ $10)20 Cost of goods sold20 General Journal Sales$7,000 Sales returns and allowances$410 Sales discounts0(410) Net sales6,590 Cost of goods sold4,780 Gross profit on sales$1,810 Partial income statement Sales returns and allowances ($12 + (2 @ $14)) P2 61

62. Prepare adjustments and close accounts for a merchandising company. Prepare adjustments and close accounts for a merchandising company. 62

63. Merchandising Cost Flow in the Accounting Cycle 63 P3 Exhibit 4.10

64. Adjusting Entries for Merchandisers 64 P3 A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of merchandise, including theft and deterioration.

65. Closing Entries for Merchandisers 65 P3 Exhibit 4.11

66. NEED-TO-KNOW (4-3) Merchandise inventory$756Sales returns and allowances$130 Retained Earnings2,306Cost of goods sold2,100 Dividends140Depreciation expense206 Sales3,204Salaries expense650 Sales discounts94Other operating expenses100 DebitCredit Merchandise inventory$756 Retained Earnings$2,306 Dividends140 Sales3,204 Sales discounts94 Sales returns and allowances130 Cost of goods sold2,100 Depreciation expense206 Salaries expense650 Other operating expenses100 A merchandising company’s ledger on May 31, its fiscal year-end, includes the following selected accounts that have normal balances (it uses the perpetual inventory system). A physical count of its May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a) Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in temporary revenue and expense accounts. P3 66

67. NEED-TO-KNOW (4-3) DebitCredit Merchandise inventory$756 Retained Earnings$2,306 Dividends140 Sales3,204 Sales discounts94 Sales returns and allowances130 Cost of goods sold2,100 Depreciation expense206 Salaries expense650 Other operating expenses100 A merchandising company’s ledger on May 31, its fiscal year-end, includes the following selected accounts that have normal balances (it uses the perpetual inventory system). A physical count of its May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a) Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in temporary revenue and expense accounts. DateDebitCredit May 31Cost of Goods Sold38 Merchandise inventory ($756 - $718)38 General Journal $718 2,138 P3 67 To adjust for inventory shrinkage.

68. NEED-TO-KNOW (4-3) DebitCredit Merchandise inventory$756 Retained Earnings$2,306 Dividends140 Sales3,204 Sales discounts94 Sales returns and allowances130 Cost of goods sold2,100 Depreciation expense206 Salaries expense650 Other operating expenses100 $718 2,138 DateDebitCredit May 31Sales3,204 Income Summary3,204 May 31Income Summary3,318 Sales discounts94 Sales returns and allowances130 Cost of Goods Sold ($2,100 + $38)2,138 Depreciation expense206 Salaries expense650 Other operating expenses100 General Journal P3 68

69. Define and prepare multiple-step and single-step income statements. Define and prepare multiple-step and single-step income statements. 69

70. P4 70 Exhibit 4.13

71. Single-Step Income Statement 71 P4 Exhibit 4.14

72. Classified Balance Sheet 72 Highly Liquid Less Liquid P4 Exhibit 4.15

73. 73 Debit Credit Prepare a multiple-step income statement that includes separate categories for selling expenses and for general and administrative expenses. (b) Prepare a single-step income statement that includes these expense categories: cost of goods sold, selling expenses, and general and administrative expenses. NEED-TO-KNOW P4 Assume Target’s adjusted trial balance on April 30, 2015, its fiscal year-end, appears below.

74. NEED-TO-KNOW Sales$4,512 Less: Sales discounts$45 Sales returns and allowances240285 Net sales4,227 Cost of goods sold1,490 Gross profit2,737 Expenses Selling expenses Sales salaries expense640 Rent expense - Selling space160 Store supplies expense30 Advertising expense260 Total selling expenses1,090 General and administrative expenses Office salaries expense570 Rent expense - Office space72 Office supplies expense8 Total general and administrative expenses650 Total expenses1,740 Net income$997 TARGET For Year Ended April 30, 2015 Income Statement P4 74 Debit Credit

75. NEED-TO-KNOW Sales$4,512Net sales$4,227 Less: Sales discounts$45Expenses Sales returns and allowances240285Cost of goods sold1,490 Net sales4,227Selling expenses1,090 Cost of goods sold1,490General and administrative expenses650 Gross profit2,737Total expenses3,230 ExpensesNet income$997 Selling expenses Sales salaries expense640 Rent expense - Selling space160 Store supplies expense30 Advertising expense260 Total selling expenses1,090 General and administrative expenses Office salaries expense570 Rent expense - Office space72 Office supplies expense8 Total general and administrative expenses650 Total expenses1,740 Net income$997 TARGET For Year Ended April 30, 2015 Income Statement TARGET Income Statement For Year Ended April 30, 2015 P4 75

76. Global View 76 Accounting for Merchandise Purchases and Sales Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales. Income Statement Presentation Both U.S. GAAP and IFRS income statements begin with the net sales or net revenues ( top line ) item. For merchandisers and manufacturers, this is followed by cost of goods sold. The presentation is similar for the remaining items with the following differences. 1.Order of expenses 2.Separate disclosures 3.Presentation of expenses 4.Operating Income 5.Alternative income

77. Compute the acid-test ratio and explain its use to assess liquidity. Compute the acid-test ratio and explain its use to assess liquidity. 77

78. A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future. = Quick assets Current liabilities Acid-test ratio Acid-test ratio = Cash + short term investments+ Receivables Current liabilities Cash + short term investments+ Receivables Current liabilities 5) Acid-Test (Quick) Ratio 78 A1

79. JCPenney’s Acid Test and Current Ratios 79 A1

80. Compute the gross margin ratio and explain its use to assess profitability. Compute the gross margin ratio and explain its use to assess profitability. 80

81. Percentage of dollar sales available to cover expenses and provide a profit. 6) Gross Margin Ratio 81 A2

82. JC Penny’s Gross Margin Ratio 82 Exhibit 4.19 A2

83. Record and compare merchandising transactions using both periodic and perpetual inventory systems. Record and compare merchandising transactions using both periodic and perpetual inventory systems. 83

84. Periodic Inventory System Periodic Inventory System 84 P5 A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold. (a) (b) (c) (d) (e) (f) (g)

85. Comparison of Adjusting and Closing Entries-- Periodic vs. Perpetual Inventory System Comparison of Adjusting and Closing Entries-- Periodic vs. Perpetual Inventory System 85 P5 Exhibit 4 A.1

86. 86 The worksheet--perpetual inventory systems. The worksheet--perpetual inventory systems.

87. Work Sheet—Perpetual System Work Sheet—Perpetual System 87 P5 Exhibit 4 B.1

88. Homework assignment Using Connect – LS 20 Points, and EX. 60 Points. 5Inventories & Cost of Sales Prepare chapter 5 “ Inventories & Cost of Sales.” Happiness is having all homework up to date Atef Abuelaish88

89. Thank you and See You Next Week at the Same Time, Take Care Thank you and See You Next Week at the Same Time, Take Care Atef Abuelaish89