1. Chapter 5-1

2. Chapter 5-2 Accounting for Merchandising Operations Financial Accounting, Sixth Edition Chapter 5

3. Chapter 5-3 1. 1.Identify the differences between service and merchandising companies. 2. 2.Explain the recording of purchases under a perpetual inventory system. 3. 3.Explain the recording of sales revenues under a perpetual inventory system. 4. 4.Explain the steps in the accounting cycle for a merchandising company. 5. 5.Distinguish between a multiple-step and a single-step income statement. 6. 6.Explain the computation and importance of gross profit. 7. 7.Determine cost of goods sold under a periodic system. Study Objectives

4. Chapter 5-4 Accounting for Merchandising Operations Freight costs Purchase returns and allowances Purchase discounts Summary of purchasing transactions MerchandisingOperationsMerchandisingOperations Recording Purchases of Merchandise Recording Sales of Merchandise Completing the Accounting Cycle Forms of Financial Statements Operating cycles Inventory systems— perpetual and periodic Sales returns and allowances Sales discounts Adjusting entries Closing entries Summary of merchandising entries Multiple-step income statement Single-step income statement Classified balance sheet Determining cost of goods sold under a periodic system

5. Chapter 5-5 Merchandising Operations SO 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 or sales.

6. Chapter 5-6 Merchandising Operations SO 1 Identify the differences between service and merchandising companies. Income Measurement Illustration 5-1 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

7. Chapter 5-7 The operating cycle of a merchandising company ordinarily is longer than that of a service company. Operating Cycles Illustration 5-2 SO 1 Identify the differences between service and merchandising companies.

8. Chapter 5-8 Features: Perpetual System 1. Purchases increase Merchandise Inventory. 2. Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory. 3. Cost of goods sold is increased and Merchandise Inventory is decreased for each sale. 4. Physical count done to verify Inventory balance. The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold. Inventory Systems SO 1 Identify the differences between service and merchandising companies.

9. Chapter 5-9 Features: Periodic System 1. Purchases of merchandise increase Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold: Inventory Systems Beginning inventory$ 100,000 Add: Purchases, net800,000 Goods available for sale900,000 Less: Ending inventory125,000 Cost of goods sold$ 775,000 SO 1 Identify the differences between service and merchandising companies.

10. Chapter 5-10 Made using cash or credit (on account). Normally recorded when goods are received. Purchase invoice should support each credit purchase. Recording Purchases of Merchandise SO 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 terms 2/10, net/30, FOB shipping point. Merchandise inventory25,000April 5 Accounts payable 25,000 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

12. Chapter 5-12 Not all purchases increase Merchandise Inventory. E5-2 E5-2 Prepare the journal entry to record the transaction under a perpetual inventory system. 3. On April 7, purchased equipment on account for $26,000. Equipment26,000April 7 Accounts payable 26,000 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

13. Chapter 5-13 Terms 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. Freight Costs Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller (Freight-out or Delivery Expense).

14. Chapter 5-14 E5-2Continued 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 SO 2 Explain the recording of purchases under a perpetual inventory system.

15. Chapter 5-15 Purchaser may be dissatisfied because goods damaged or defective, of inferior quality, or do not meet specifications. Purchase Returns and Allowances Recording Purchases of Merchandise Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price. Purchase Return Purchase Allowance SO 2 Explain the recording of purchases under a perpetual inventory system.

16. Chapter 5-16 In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting: a.Purchases b.Purchase Returns c.Purchase Allowance d.Merchandise Inventory Review Question Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

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, returned damaged merchandise to Bryant Company and was granted a $4,000 credit for returned merchandise. Accounts payable4,000April 8 Merchandise inventory 4,000 Recording Purchases of Merchandise SO 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: Purchaser saves money. Seller shortens the operating cycle. Purchase Discounts Recording Purchases of Merchandise Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days. SO 2 Explain the recording of purchases under a perpetual inventory system.

19. Chapter 5-19 Purchase DiscountsTerms Purchase Discounts Terms Recording Purchases of Merchandise 2% discount if paid within 10 days. 1% discount if paid within first 10 days of next month. 2/101/10 EOM Net amount due in 30 days, 60 days, or within the first 10 days of the next month. n/30, n/60, or n/10 EOM SO 2 Explain the recording of purchases under a perpetual inventory system.

20. Chapter 5-20 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. Accounts payable21,000April 15 Merchandise inventory 420 Recording Purchases of Merchandise Cash 20,580 (Discount = $21,000 x 2% = $420) SO 2 Explain the recording of purchases under a perpetual inventory system.

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, paid the amount due to Bryant Company in full. Accounts payable21,000April 16 or later Cash 21,000 Recording Purchases of Merchandise What entry would be made if the company failed to pay within 10 days? SO 2 Explain the recording of purchases under a perpetual inventory system.

22. Chapter 5-22 Should discounts be taken when offered? Purchase Discounts Recording Purchases of Merchandise Example: 2% for 20 days = Annual rate of 36.5% (365/20 = 18.25 twenty-day periods x 2% = 36.5%) Passing up the discount offered equates to paying an interest rate of 2% on the use of $25,000 for 20 days. SO 2 Explain the recording of purchases under a perpetual inventory system.

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

24. Chapter 5-24 Made for cash or credit (on account). Normally recorded when earned, usually when goods transfer from seller to buyer. Sales invoice should support each credit sale. Recording Sales of Merchandise SO 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 SO 3 Explain the recording of sales revenues under a perpetual inventory system. #1 Cost of goods soldXXX Merchandise inventory XXX #2 Selling Price Cost

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 SO 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 SO 3 Explain the recording of sales revenues under a perpetual inventory system. Accounts receivable500,000Dec. 3 Sales500,000 Cost of goods sold350,000 Merchandise inventory350,000

28. Chapter 5-28 “Flipside” of purchase returns and allowances. Contra-revenue account (debit). Sales not reduced (debited) because:  would obscure importance of sales returns and allowances as a percentage of sales.  could distort comparisons between total sales in different accounting periods. Sales Returns and Allowances Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

29. Chapter 5-29 E5-5 E5-5 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 SO 3 Explain the recording of sales revenues under a perpetual inventory system. Sales returns and allowances 27,000Dec. 8 Accounts receivable27,000

30. Chapter 5-30 E5-5 E5-5 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 SO 3 Explain the recording of sales revenues under a perpetual inventory system. Sales returns and allowances 27,000Dec. 8 Accounts receivable27,000 Merchandise inventory 19,800 Cost of goods sold19,800

31. Chapter 5-31 The cost of goods sold is determined and recorded each time a sale occurs in: a.periodic inventory system only. b.a perpetual inventory system only. c.both a periodic and perpetual inventory system. d.neither a periodic nor perpetual inventory system. Review Question Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

32. Chapter 5-32 Offered to customers to promote prompt payment. “Flipside” of purchase discount. Contra-revenue account (debit). Sales Discount Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

33. Chapter 5-33 E5-5 E5-5 Prepare the journal entries for Wheeler Company. 3. On December 13, Wheeler Company received the balance due from Hashmi Co. Recording Sales of Merchandise SO 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)

34. Chapter 5-34 E5-5 E5-5 Variation Prepare the sales revenue section of the income statement for Wheeler Company. Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

35. Chapter 5-35 Q5-9 Joan Roland believes revenues from credit sales may be earned before they are collected in cash. Do you agree? Explain. Discussion Question See notes page for discussion Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

36. Chapter 5-36 Generally the same as a service company. One additional adjustment to make the records agree with the actual inventory on hand. Involves adjusting Merchandise Inventory and Cost of Goods Sold. Adjusting Entries Completing the Accounting Cycle SO 4 Explain the steps in the accounting cycle for a merchandising company.

37. Chapter 5-37 Close all accounts that affect net income. Closing Entries Completing the Accounting Cycle SO 4 Explain the steps in the accounting cycle for a merchandising company. E5-8 E5-8 Presented is information related to Rogers Co. for the month of January 2008. Rogers uses the perpetual inventory method. Required: (a) Prepare the necessary adjusting entry for inventory. (b) Prepare the necessary closing entries.

38. Chapter 5-38 E5-8 E5-8 (a) Prepare the necessary adjusting entry for inventory. Completing the Accounting Cycle SO 4 Explain the steps in the accounting cycle for a merchandising company. Cost of goods sold600 Merchandise inventory600

39. Chapter 5-39 Sales350,000 Income summary350,000 Income summary341,600 Cost of goods sold218,600 Freight-out7,000 Insurance expense12,000 Income summary8,400 Retained earnings8,400 Rent expense20,000 E5-8 E5-8 (b) Prepare the necessary closing entries. Completing the Accounting Cycle SO 4 Explain the steps in the accounting cycle for a merchandising company. Salary expense61,000 Sales discounts10,000 Sales returns13,000

40. Chapter 5-40 Shows several steps in determining net income. Two steps relate to principal operating activities. Distinguishes between operating and non- operating activities. Multiple-Step Income Statement Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.

41. Chapter 5-41 SO 5 Distinguish between a multiple-step and a single-step income statement. SO 6 Explain the computation and importance of gross profit. Forms of Financial Statements Illustration 5-11 Key Items: Net sales Gross profit Gross profit rate Illustration 5-8

42. Chapter 5-42 SO 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

43. Chapter 5-43 Forms of Financial Statements SO 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

44. Chapter 5-44 The multiple-step income statement for a merchandiser shows each of the following features except: a.gross profit. b.cost of goods sold. c.a sales revenue section. d.investing activities section. Review Question Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.

45. Chapter 5-45 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 SO 5 Distinguish between a multiple-step and a single-step income statement.

46. Chapter 5-46 Single- Step Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement. Illustration 5-12

47. Chapter 5-47 Forms of Financial Statements Illustration 5-13 Classified Balance Sheet SO 5 Distinguish between a multiple-step and a single-step income statement.

48. Chapter 5-48 Periodic System Separate accounts used to record purchases, freight costs, returns, and discounts. Company does not maintain a running account of changes in inventory. Ending inventory determined by physical count. Determining Cost of Goods Sold Under a Periodic System SO 7 Determine cost of goods sold under a periodic system.

49. Chapter 5-49 Determining Cost of Goods Sold Under a Periodic System SO 7 Determine cost of goods sold under a periodic system. Calculation of Cost of Goods Sold $316,000 Illustration 5-14

50. Chapter 5-50 “When is a sale not really a sale?” “Why does it matter?” All About You When Is a Sale a Sale? Some Facts: In early 2005 the shareholders of Krispy Kreme Doughnuts filed a lawsuit against management, alleging the company was shipping twice as many doughnuts to wholesale customers than ordered. The SEC investigated claims that Harley-Davidson was shipping motorcycles to dealers in excess of dealer requests, to give appearance of strong sales.

51. Chapter 5-51 All About You When Is a Sale a Sale? Some Facts: In a recent lawsuit settlement, pharmaceutical company Bristol-Myers Squibb paid a $150 million fine for an alleged channel stuffing scheme. An SEC investigation concluded that The Coca-Cola Company shipped $1.2 of excessive beverage concentrate to bottlers in Japan during a three-year period. The bottlers’ inventories surged 62% during this time, while their sales increased only 11%.

52. Chapter 5-52 All About You Chart to illustrate that revenue recognition issues often require companies to correct—restate—their financial statements. Source: Terry Baldwin and Daniel Yoo, Restatements— Traversing Shaky Ground: An Analysis for Investors,” Glass Lewis & Co., June 2, 2005, p. 9, Graph 7.

53. Chapter 5-53 What Do You Think? “Is channel stuffing an ethical business practice?” All About You YES: Motorcycles and pharmaceuticals can’t be sold if they are sitting in the manufacturer’s warehouse. NO: If goods are intentionally shipped to customers when the customer hasn’t requested them, and the seller has a high expectation that the goods will be returned, then this clearly is not a real sale. X

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