1. McGraw-Hill/IrwinCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Merchandising Activities Chapter 6

2. Learning objectives: After studying this chapter, you should be able to: Operating cycle of a merchandising company Understand the components of a merchandising company’s income statement Perpetual inventory system Periodic inventory system The facts to be considered in selecting an inventory system Account for additional merchandising transactions related to purchases and sales Define special journals and explain their usefulness Measure the performance of a merchandising business

3. 6-3 Merchandising Companies The operating cycle of a merchandising company Merchadising Activities VS Manufacturing Activities Retailers and Wholesalers

4. 6-4 Income Statement of a Merchandising Company Cost of goods sold represents the expense of goods that are sold to customers. Gross profit is a useful means of measuring the profitability of sales transactions.

5. 6-5 Income Statement of a Merchandising Company Cost of goods sold Gross profit

6. 6-6 Two approaches used in accounting for merchandise inventories A perpetual inventory system A periodic inventory system Comparison of the two systems Factors suggesting the two systems

7. 6-7 What is the Perpetual Inventory Control Method? A continuous record of all inventory transactions is maintained A ledger account called Inventory records all inflows and outflows of inventory The amount of inventory that should be on hand is known at all times This is compared with the amount actually on hand to see if there is a stock loss/gain ◦ Actual inventory on hand determined by physical count

8. 6-8 What are the Journal Entries under the Perpetual Method? PURCHASE OF INVENTORY DateParticularsDRCR Inventory Bank/Accounts payable Purchase of inventory for cash/credit XX RETURN OF PURCHASED INVENTORY DateParticularsDRCR Bank/Accounts payable Inventory Cash refund/credit note received for inventory returned XX

9. 6-9 SALE OF INVENTORY DateParticularsDRCR Bank/Accounts receivable Sales Cash/credit sale of inventory (recorded at selling price) Cost of goods sold Inventory Cost of goods sold (recorded at cost price) XX XX

10. 6-10 RETURN OF SOLD INVENTORY DateParticularsDRCR Sales returns and allowances Bank/Accounts receivable Cash refund/credit note issued for inventory returned (recorded at selling price) Inventory Cost of goods sold Cost of goods returned (recorded at cost price) XX XX

11. 6-11 PHYSICAL COUNT OF INVENTORY DateParticularsDRCR COGS/Inventory shortage expense Inventory Recording stock loss Inventory COGS/Inventory gain income Recording stock gain XX XX

12. 6-12 What is the Periodic Count Method? There is no continuous record of inventory transactions ◦ There is no record of inventory that should be on hand Purchases of inventory is recorded in a ledger account called Purchases Inventory on hand is known only after a physical count ◦ Cannot determine whether there is an inventory shortage/gain

13. 6-13 What are the Journal Entries under the Periodic Method? DateParticularsDRCR Purchases Bank/Accounts payable Purchase of inventory for cash/credit XX PURCHASE OF INVENTORY RETURN OF PURCHASED INVENTORY DateParticularsDRCR Bank/Accounts payable Purchases returns and allowances Cash refund/credit note received for inventory returned XX XX

14. 6-14 SALE OF INVENTORY DateParticularsDRCR Bank/Accounts receivable Sales Cash/credit sale of inventory (recorded at selling price) XX RETURN OF SOLD INVENTORY DateParticularsDRCR Sales returns and allowances Bank/Accounts receivable Cash refund/credit note issued for inventory returned (recorded at selling price) XX

15. 6-15 PHYSICAL COUNT OF INVENTORY DateParticularsDRCR COGS Inventory(beginning bal.) Purchase (To close the purchase and inventory balances to the COGS) Inventory(ending balance) COGS (To create the year-end balance in the inventory account) XX

16. 6-16 Credit Terms and Cash Discounts 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due Read as: “Two ten, net thirty” When manufacturers and wholesalers sell their products on account, the credit terms are stated in the invoice.

17. 6-17 Recording Purchases at Net Cost $4,000  98% = $3,920 On July 6, Jack & Jill, Inc. purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Jack & Jill, Inc.

18. 6-18 On July 15, Jack & Jill, Inc. pays the full amount due to Kid’s Clothes. Prepare the journal entry for Jack & Jill, Inc. Recording Purchases at Net Cost

19. 6-19 Now, assume that Jack & Jill, Inc. waited until July 20 to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Jack & Jill, Inc. Recording Purchases at Net Cost Nonoperating Expense

20. 6-20 Credit terms and merchandise returns affect the amount of revenue earned by the seller. Transactions Related to Sales

21. 6-21 On August 2, Kid’s Clothes sold $2,000 of merchandise to Jack & Jill, Inc. on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Sales

22. 6-22 Contra-revenue On August 5, Jack & Jill, Inc. returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Sales Returns and Allowances

23. 6-23 On July 6, Kid’s Clothes sold $4,000 of merchandise to Jack & Jill, Inc. on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2,000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Sales Discounts

24. 6-24 $4,000  98% = $3,920 Contra-revenue On July 15, Kid’s Clothes receives the full amount due from Jack & Jill, Inc. for the July 6 sale. Prepare the journal entry for Kid’s Clothes. Sales Discounts

25. 6-25 Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Jack & Jill, Inc. from the July 6 sale. Prepare the journal entry for Kid’s Clothes. Sales Discounts