1. Accounting for Merchandising Businesses
Chapter 6

2. Learning Objectives
Distinguish between the activities and financial statements of service and merchandising businesses.
Describe and illustrate the financial statements of a merchandising business.
Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions.
Describe the adjusting and closing process for a merchandising business.

3. Learning Objectives
Describe and illustrate the use of the ratio of net sales to assets in evaluating a company’s operating performance.

4. Learning Objective 1
Distinguish between the activities and financial statements of service and merchandising businesses.

5. Nature of Merchandising Businesses
LO 1
Nature of Merchandising Businesses
Service Business
Fees earned $XXX
Operating expenses –XXX
Net income $XXX

6. Nature of Merchandising Businesses
LO 1
Nature of Merchandising Businesses
Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX

7. Nature of Merchandising Businesses
LO 1
Nature of Merchandising Businesses
When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold.
GrossProfit

8. Nature of Merchandising Businesses
LO 1
Nature of Merchandising Businesses
The cost of merchandise sold is subtracted from sales to arrive at gross profit. It is the profit before deducting operating expenses.
GrossProfit

9. Nature of Merchandising Businesses
LO 1
Nature of Merchandising Businesses
Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

10. EE 6-1

11. Nature of Merchandising Businesses
LO 1
Nature of Merchandising Businesses

12. Learning Objective 2
Distinguish between the activities and financial statements of service and merchandising businesses.
Describe and illustrate the financial statements of a merchandising business.

13. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement
The multiple-step income statement contains several sections, subsections, and subtotals.

14. LO 2
Revenue from Sales

15. LO 2
Revenue from Sales
Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account.

16. LO 2
Revenue from Sales
Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.

17. LO 2
Revenue from Sales
Sales discounts are granted by the seller to customers for early payment of amounts owed.

18. LO 2
Revenue from Sales
Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

19. Cost of Merchandise Sold
LO 2
Cost of Merchandise Sold
The cost of merchandise sold is the cost of the merchandise sold to customers. Merchandise costs consist of all the costs of acquiring the merchandise and readying it for sale, such as purchase and freight costs.

20. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement

21. Cost of Merchandise Sold
LO 2
Cost of Merchandise Sold
The buyer may return merchandise to the seller (purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (purchase allowance).

22. Cost of Merchandise Sold
LO 2
Cost of Merchandise Sold
You have seen that sellers may offer customers sales discounts for early payment of their bills. From the buyer’s perspective, such discounts are referred to as purchase discounts.

23. Cost of Merchandise Sold
LO 2
Cost of Merchandise Sold
If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodic inventory system is being used.

24. Cost of Merchandise Sold
LO 2
Cost of Merchandise Sold
Under the perpetual inventory system, the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records.

25. LO 2
Gross Profit
Gross profit is computed by subtracting the cost of merchandise sold from net sales.
GrossProfit

26. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement

27. Income from Operations
LO 2
Income from Operations
Selling expenses are incurred directly in the selling of merchandise.
Sales salaries
Store supplies used
Depreciation of store equipment
Delivery expense
Advertising expense

28. Income from Operations
LO 2
Income from Operations
Administrative expenses, sometimes called general expenses, are incurred in the administration or general operations of the business.
Office salaries
Depreciation of office equipment
Office supplies used

29. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement

30. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement
Income from operations, sometimes called operating income, is determined by subtracting operating expenses from gross profit.

31. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement

32. Other Income and Expense
LO 2
Other Income and Expense
Other income is revenue from sources other than the primary operating activity of a business.
Other expense is an expense that cannot be traced directly to the normal operations of the business.

33. Multiple-Step Income Statement
LO 2
Multiple-Step Income Statement

34. Single-Step Income Statement
LO 2
Single-Step Income Statement
An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.

35. Single-Step Income Statement
LO 2
Single-Step Income Statement

36. Statement of Owner’s Equity
LO 2
Statement of Owner’s Equity

37. LO 2
Balance Sheet
The form of balance sheet with the assets on the left-hand side and the liabilities and owner’s equity on the right-hand side is called the account form.

38. LO 2
Balance Sheet
When the balance sheet is presented in a downward sequence in three sections, it has been prepared using the report form. This is the form used in the next two slides.

39. LO 2
Balance Sheet
(continued)

40. LO 2
Balance Sheet

41. Learning Objective 3
Distinguish between the activities and financial statements of service and merchandising businesses.
Describe and illustrate the financial statements of a merchandising business.
Describe and illustrate the accounting for merchandising transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions.

42. LO 3
Chart of Accounts

43. On January 3, NetSolutions sold $1,800 of merchandise for cash.
LO 3
Cash Sales
On January 3, NetSolutions sold $1,800 of merchandise for cash.

44. LO 3
Cash Sales
Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on January 3 is $1,200.

45. LO 3
Cash Sales
Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 31.

46. LO 3
Sales on Account
On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.

47. LO 3
Sales Discounts
The terms for when payments for merchandise are to be made are called credit terms. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay.

48. LO 3
Invoice

49. LO 3
Credit Terms
To encourage the buyer to pay before the end of the credit period, the seller may offer a discount. Credit terms of 2/10, n/30 are summarized in the next slide (Exhibit 7).

50. LO 3

51. LO 3
Receipts on Account
On January 17, NetSolutions receives the amount due within ten days, so the buyer deducted $30 ($1,500 x 2%) from the invoice amount.

52. LO 3
Credit Memo
A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable. An example of a credit memo issued by NetSolutions is shown in Exhibit 8 (next slide).

53. LO 3
Credit Memo

54. LO 3
Credit Memo
On January 13, issued Credit Memo No. 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.

55. EE 6-2

56. Purchase Transactions
LO 3
Purchase Transactions
On January 3, NetSolutions purchased merchandise for cash. *
NOTE: We will assume a perpetual inventory system is used.

57. Purchase Transactions
LO 3
Purchase Transactions
On January 4, NetSolutions purchased merchandise on account from Thomas Corporation. *

58. LO 3
Purchases Discounts
A buyer may receive a discount from the seller (sales discount) for early payment of the amount owed. From the buyer’s perspective, such discounts are called purchases discounts.

59. Purchase Transactions
LO 3
LO 3
Purchase Transactions
Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within the discount period.

60. YES Purchase Transactions
LO 3
Purchase Transactions
If NetSolutions can borrow cash at an annual interest rate of 6%, should the firm borrow cash to pay the invoice within the discount period?
Discount of 2% on $3,000 $60.00
Interest for 20 days at the rate
of 6% on $2,940 – 9.80
Savings from borrowing $50.20
YES

61. Purchase Transactions
LO 3
Purchase Transactions
Alpha Technologies issued an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. Based on the calculation in the previous slide, NetSolutions pays the amount due, less the discount, on March 22.

62. LO 3
Discount Not Taken
Assume that, instead of paying the invoice within the discount period, NetSolutions pays the invoice on April 11.

63. Purchases Returns and Allowances
A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. From a buyer’s perspective, such returns are called purchases returns and allowances.

64. LO 3
Debit Memo
A debit memorandum, often called a debit memo, informs the seller of the amount the buyer proposes to debit to the account payable due the seller.

65. LO 3
Debit Memo
NetSolutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems.

66. LO 3
Debit Memo

67. LO 3
Debit Memo
NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 9 as follows:

68. Merchandise Purchased
LO 3
Merchandise Purchased
On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.

69. LO 3
Merchandise Returned
On May 4 , NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link.

70. LO 3
Invoice Paid
On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.

71. EE 6-3

72. LO 3
Freight
If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, the terms are said to be FOB (free on board) shipping point.

73. LO 3
Freight
On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the shipping cost of $50.

74. LO 3
Freight
If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination.

75. LO 3
Sale Plus Freight Cost
On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480.

76. LO 3
Sale Plus Freight Cost
On June 15, NetSolutions pays freight of $40 on the sale of June 15.

77. Seller Prepays Freight
LO 3
Seller Prepays Freight
On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the merchandise sold is $360.

78. Seller Prepays Freight
LO 3
Seller Prepays Freight

79. LO 3
Freight Terms

80. LO 3
Freight Terms

81. EE 6-4

82. Summary: Recording Merchandise Inventory
LO 3
Summary: Recording Merchandise Inventory

83. LO 3
Sales Taxes
On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.

84. LO 3
Sales Taxes
On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected.

85. LO 3
Trade Discounts
When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.

86. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Each merchandising transaction affects a buyer and a seller. In the following illustrations, we show how the same transactions would be recorded by both the seller and the buyer.

87. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500.

88. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co. 7,500
Sales 7,500
Cost of Merchandise Sold 4,500
Merchandise Inventory 4,500
Burton Company (Buyer)
Merchandise Inventory 7,500
Accounts Payable—Scully Co. 7,500

89. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from Scully Company.

90. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
No entry.
Burton Company (Buyer)
Merchandise Inventory 150
Cash 150

91. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.

92. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co. 5,000
Sales 5,000
Cost of Merchandise Sold 3,500
Merchandise Inventory 3,500
Burton Company (Buyer)
Merchandise Inventory. 5,000
Accounts Payable—Scully Co. 5,000

93. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.

94. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
Delivery Expense 250
Cash 250
Burton Company (Buyer)
No entry.

95. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 13. Scully Company issued Burton Company a credit memorandum for merchandise returned, $1,000. The cost of the merchandise returned was $700.

96. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
Sales Returns and Allowances 1,000
Accounts Receivable—Burton Co. 1,000
Merchandise Inventory 700
Cost of Merchandise Sold 700
Burton Company (Buyer)
Accounts Payable—Scully Co. 1,000
Merchandise Inventory 1,000

97. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 15. Scully Company received payment from Burton Company for purchase of July 5.

98. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
Cash 4,000
Accounts Receivable—Burton Co. 4,000
Burton Company (Buyer)
Accounts Payable—Scully Co. 4,000
Cash 4,000

99. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.

100. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co. 12,000
Sales 12,000
Accounts Receivable—Burton Co. 500
Cash 500
Cost of Merchandise Sold 7,200
Merchandise Inventory 7,200
Burton Company (Buyer)
Merchandise Inventory 12,500
Accounts Payable—Scully Co. 12,500

101. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
July Scully Company received payment from Burton Company for purchase of July 18, less discount (2% × $12,000).

102. Dual Nature of Merchandise Transactions
LO 3
Dual Nature of Merchandise Transactions
Scully Company (Seller)
Cash 12,260
Sales Discounts 240
Accounts Receivable—Burton Co. 12,500
Burton Company (Buyer)
Accounts Payable—Scully Co. 12,500
Merchandise Inventory 240
Cash 12,260

103. EE 6-5

104. Learning Objective 4
Distinguish between the activities and financial statements of service and merchandising businesses.
Describe and illustrate the financial statements of a merchandising business.
Describe and illustrate the accounting for merchandising transactions including: sale of merchandise, purchase of merchandise; freight, sales taxes, and trade discounts; dual nature of merchandising transactions.
Describe the adjusting and closing process for a merchandising business.

105. Adjusting Entry for Inventory Shrinkage
LO 4
Adjusting Entry for Inventory Shrinkage
Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory.

106. Adjusting Entry for Inventory Shrinkage
LO 4
Adjusting Entry for Inventory Shrinkage
If the balance of the Merchandise Inventory account is larger than the total amount of the merchandise count, the difference is often called inventory shrinkage or inventory shortage.

107. LO 4
Inventory Shrinkage
NetSolutions’ inventory records indicate the following on December 31, 2013:
Dec. 31, 2013
Account balance of Merchandise Inventory $63,950
Physical merchandise inventory on hand 62,150
Inventory shrinkage $ 1,800

108. LO 4
Inventory Shrinkage
At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry:

109. EE 6-6

110. LO 4
Step 1: Closing Entries
Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary.

111. LO 4
Step 2: Closing Entries
Credit each temporary account with a debit balance, such as an expense, for its balance and debit Income Summary.

112. LO 4
Step 3: Closing Entries
Debit Income Summary for the amount of its balance (net income) and credit the owner’s capital account.

113. LO 4
Step 4: Closing Entries
Debit the owner’s capital account for the balance of the drawing account and credit the drawing account.

114. LO 4
Closing Entries
NetSolutions’ Income Summary account after the closing entries have been posted is as follows:

115. Learning Objective 5
Describe and illustrate the use of the ratio of net sales to assets in evaluating a company’s operating performance.

116. Ratio of Net Sales to Assets
LO 5
Ratio of Net Sales to Assets
The ratio of net sales to assets measures how effectively a business is using its assets to generate sales.
Ratio of Net Sales to Assets
Net Sales
Average Total Assets =

117. Ratio of Net Sales to Assets
LO 4
Ratio of Net Sales to Assets
The following data (in millions) were taken from the annual reports of Dollar Tree, Inc.:

118. Ratio of Net Sales to Assets
LO 4
Ratio of Net Sales to Assets
The ratio of net sales to assets for each year are as follows:

119. EE 6-7

120. The Periodic Inventory System
Appendix
The Periodic Inventory System

121. Periodic Inventory System
Appendix
Periodic Inventory System

122. App 1

123. Recording Merchandise Transactions
Appendix
Recording Merchandise Transactions
Purchases. Purchases of inventory are recorded in a purchases account rather than in the merchandise inventory account.

124. Recording Merchandise Transactions
Appendix
Recording Merchandise Transactions
Purchases Discounts. Purchases discounts are normally recorded in a separate purchases discounts account. The balance of the purchases discounts account is reported as a deduction from Purchases for the period.

125. Recording Merchandise Transactions
Appendix
Recording Merchandise Transactions
Purchases Returns and Allowances. Purchases returns and allowances are recorded in a similar manner as purchase discounts.

126. Recording Merchandise Transactions
Appendix
Recording Merchandise Transactions
Freight In. When merchandise is purchased FOB shipping point, the buyer pays for the freight. Under the periodic inventory system, freight paid when purchasing merchandise FOB shipping point is debited to Freight In.

127. Appendix
(continued)

128. Appendix
(concluded)

129. Appendix
Closing Entries
(continued)

130. Appendix
Closing Entries
(continued)

131. Appendix
Closing Entries
(concluded)

132. Accounting for Merchandising Businesses
The End