1. Chapter 5-1 CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS Accounting Principles, Eighth Edition

2. Chapter 5-2 Merchandising Operations LO 1 Identify the differences between service and merchandising companies. Merchandising Companies Buy and Sell Goods WholesalerRetailerConsumer The primary source of revenues is referred to as sales revenue.

3. Chapter 5-3 Measuring Net Income Expenses for a merchandiser are divided into two categories: 1Cost of goods sold 1Cost of goods sold 2Operating expenses

4. Chapter 5-4 Merchandising Operations LO 1 Identify the differences between service and merchandising companies. Income Measurement Cost of goods sold is the total cost of merchandise sold during the period. Not used in a Service business. Net Income (Loss) Less Equals Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses

5. Chapter 5-5 The operating cycle of a merchandising company ordinarily is longer than that of a service company. Operating Cycles LO 1 Identify the differences between service and merchandising companies. Illustration 5-2

6. Chapter 5-6 Inventory Systems LO 1 Identify the differences between service and merchandising companies. Merchandising entities may use either: 1) Perpetual Inventory 2) Periodic Inventory

7. Chapter 5-7 Features: 1. Any purchases… increase Merchandise Inventory. 2. Freight costs, are included Purchase Returns and Allowances in and Purchase Discounts Merchandise Inventory. 3. For each sale… Cost of Goods Sold is increased and Merchandise Inventory is decreased. 4. Physical count done to verify Merchandise Inventory balance. The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold. Inventory Systems - Perpetual System LO 1 Identify the differences between service and merchandising companies.

8. Chapter 5-8 Features: 1. Purchases of merchandise increase Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold: Inventory Systems - Periodic System LO 1 Identify the differences between service and merchandising companies. Beginning inventory (Oct 1) $ 400,000 + Purchases, net (Oct1-31)500,000 = Goods available for sale900,000 - Ending inventory (Oct 31)200,000 = Cost of goods sold$ 700,000

9. Chapter 5-9 The accounting is different for each !

10. Chapter 5-10 Made using cash or credit (on account). Normally recorded when Purchase invoice Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system. Illustration 5-4

11. Chapter 5-11 E5-2 E5-2 Information related to Steffens Co. is presented below. Prepare the journal entry to record the transaction under a perpetual inventory system. 1.On April 5, purchased merchandise from Bryant Company for $25,000 on account, 2/10, n/30, FOB shipping point. Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system.

12. Chapter 5-12 E5-2 Continued E5-2 Continued Prepare the journal entry to record the transaction under a perpetual inventory system. 2. On April 6, paid freight costs of $900 on merchandise purchased from Bryant. Merchandise inventory900April 6 Cash 900 Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system.

13. Chapter 5-13 Features: 1. Any purchases… increase Merchandise Inventory. 2. Freight costs, are included Purchase Returns and Allowances in and Purchase Discounts Merchandise Inventory. 3. Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale. 4. Physical count done to verify Merchandise Inventory balance. The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold. Inventory Systems - Perpetual System LO 1 Identify the differences between service and merchandising companies.

14. Chapter 5-14 Not all purchases increase Merchandise Inventory. E5-2 Continued E5-2 Continued Prepare the journal entry to record the transaction under a perpetual inventory system. 3. On April 7, purchased equipment on account for $26,000. Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system.

15. Chapter 5-15 Recording Purchases of Merchandise Freight Costs FOB shipping point - seller places goods Free On Board the carrier, and buyer pays freight costs. FOB destination - seller places the goods Free On Board to the buyer’s place of business, and seller pays freight costs… buyer doesn’t. B.P. B.D. Nate Cruz Sam Gisonni

16. Chapter 5-16 Goods can be returned for because: damaged or defective, of inferior quality, or do not meet specifications. Purchase Returns and Allowances Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system. Buyer returns goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. Buyer chooses to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price. Purchase Return Purchase Allowance

17. Chapter 5-17 E5-2Continued E5-2 Continued Prepare the journal entry to record the transaction under a perpetual inventory system. 4. On April 8, we returned damaged merchandise to Bryant Company and was granted a $4,000 credit for returned merchandise. Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system.

18. Chapter 5-18 Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Purchase Discounts Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system. Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.”

19. Chapter 5-19 Purchase DiscountsTerms Purchase Discounts Terms Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system. 2/10, n/301/10 EOMn/10 EOM

20. Chapter 5-20 Features: 1. Any purchases… increase Merchandise Inventory. 2. Freight costs, are included Purchase Returns and Allowances in and Purchase Discounts Merchandise Inventory. 3. Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale. 4. Physical count done to verify Merchandise Inventory balance. The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold. Inventory Systems - Perpetual System LO 1 Identify the differences between service and merchandising companies.

21. Chapter 5-21 E5-2Continued E5-2 Continued Prepare the journal entry to record the transaction under a perpetual inventory system. 5. On April 15, we paid the amount due to Bryant Company in full. Remember the return of $4,000 of merchandise. (terms were 2/10 net30) Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system. (Discount = $21,000 x 2% = $420)

22. Chapter 5-22 E5-2Continued E5-2 Continued Prepare the journal entry to record the transaction under a perpetual inventory system. 5. On April 15, paid the amount due to Bryant Company in full. April 16 or later Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system. What entry would be made if the company failed to pay within 10 days?

23. Chapter 5-23 $25,0008 th - Return$4,000 Balance 5 th - Purchase $21,480 42015 th - Discount Recording Purchases of Merchandise LO 2 Explain the recording of purchases under a perpetual inventory system. Summary of Purchasing Transactions 9006 th – Freight-in E5-2

24. Chapter 5-24 Made for cash or credit (on account). Normally recorded when Sales invoice should support each credit sale. Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system. Illustration 5-4

25. Chapter 5-25 Two Journal Entries to Record a Sale Cash or Accounts receivableXXX Sales XXX Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system. #1 Cost of goods soldXXX Merchandise inventory XXX #2 Selling Price Cost We have always done this! Now we ALSO do this!

26. Chapter 5-26 E5-5 E5-5 Presented are transactions related to Wheeler Company. 1. On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. The cost of the merchandise sold was $350,000. 2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. 3. On December 13,Wheeler Company received the balance due from Hashmi Co. Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system. Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system.

27. Chapter 5-27 E5-5 E5-5 Prepare the journal entries for Wheeler Company. 1. On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. Cost of merchandise sold was $350,000. Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system. Dec. 3

28. Chapter 5-28 People/Companies are returning items to us. _________________ account _________________ account (debit). Sales not reduced (debited) because: Sales Returns and Allowances Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system.

29. Chapter 5-29 E5-5 Continued E5-5 Continued Prepare the journal entries for Wheeler Company. 2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system. Dec. 8

30. Chapter 5-30 E5-5 Continued E5-5 Continued Prepare the journal entries for Wheeler Company. 2. Variation On Dec. 8, Hashmi Co. returned merchandise for credit of $27,000. The original cost of the merchandise to Wheeler was $19,800. Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system. Dec. 8

31. Chapter 5-31 Offered to customers to “Flipside” of purchase discount. _____________________ account (debit). Sales Discount Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system.

32. Chapter 5-32 E5-5 E5-5 Continued Prepare the journal entries for Wheeler Company. 3. On December 13, Wheeler Company received the balance due from Hashmi Co. Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system. Cash463,540Dec. 13 Accounts receivable473,000 Sales discounts9,460 ** [($500,000 – $27,000) X 2%] ** *** ($500,000 – $27,000) *** * * ($473,000 – $9,460)

33. Chapter 5-33 E5-5 Continued E5-5 Continued Prepare the sales revenue section of the income statement for Wheeler Company. Recording Sales of Merchandise LO 3 Explain the recording of sales revenues under a perpetual inventory system.

34. Chapter 5-34 LO 5 Distinguish between a multiple-step and a single-step income statement. Forms of Financial Statements Illustration 5-11 Key Items: Net sales Gross profit Gross profit rate Operating expenses

35. Chapter 5-35 Forms of Financial Statements LO 5 Distinguish between a multiple-step and a single-step income statement. Key Items: Net sales Gross profit Gross profit rate Operating expenses Nonoperating activities Net income Illustration 5-11

36. Chapter 5-36 Subtract total expenses from total revenues Two reasons for using the single-step format: 1) Company does not realize any type of profit until total revenues exceed total expenses. 2) Format is simpler and easier to read. Single-Step Income Statement Forms of Financial Statements LO 5 Distinguish between a multiple-step and a single-step income statement.

37. Chapter 5-37 Single- Step Forms of Financial Statements LO 5 Distinguish between a multiple-step and a single-step income statement. Illustration 5-12

38. Chapter 5-38 Forms of Financial Statements LO 5 Distinguish between a multiple-step and a single-step income statement. Illustration 5-13 Classified Balance Sheet

39. Chapter 5-39 Worksheet for a Merchandising Company LO 9 Prepare a worksheet for a merchandising company. LO 9 Prepare a worksheet for a merchandising company. Illustration 5B-1