1. Accounting for Merchandising Operations
Chapter 5
Chapter 5: Accounting for Merchandising Operations

2. Service Companies Service organizations sell time to earn revenue.
Examples: Accounting firms, law firms, and plumbing services
So far, we have been using examples that mainly consist of service companies, like accounting firms, law firms, and plumbing services. These companies all sell different services, but they have one thing in common: They do not sell inventory.
This makes their income statements rather simple. The income statements of a service organization typically consist of revenues minus expenses to arrive at net income.

3. Merchandiser Merchandising Companies Manufacturer Wholesaler Retailer
Consumers
Merchandising companies are different from service organizations because they sell inventory. Merchandising companies can sell inventory in the wholesale market or to consumers in the retail market.
A wholesaler is an intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers.
A retailer is an intermediary that buys products from manufacturers or wholesalers and sells them to consumers.

4. Reporting Income for a Merchandiser
Merchandising companies sell products to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
Net income for a merchandiser equals revenues from selling merchandise minus both the cost of merchandise sold to customers and the cost of other expenses for the period. The usual accounting term for revenues from selling merchandise is sales, and the term used for the expense of buying and preparing the merchandise is cost of goods sold. (Some service companies use the term sales instead of revenues; and cost of goods sold is also called cost of sales.)
The income statement for Z-Mart illustrates the key components of a merchandiser’s net income. The first two lines show that products are acquired at a cost of $230,400 and sold for $314,700. The third line shows an $84,300 gross profit, also called gross margin, which equals net sales less cost of goods sold. Additional expenses of $71,400 are reported, which leaves $12,900 in net income.

5. Operating Cycle for a Merchandiser
Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise.
The operating cycle of a business is the time it takes the business to start with cash, purchase inventory, sell the inventory, and finally collect the cash from customers.
The operating cycle of a business that sells inventory on credit is typically longer than that of a business that sells only on a cash basis. This additional time is due to time between when the customer buys the inventory and the time the customer pays off the account receivable.

6. Inventory Systems
C 2
This slide illustrates the flow of costs in an inventory system. If we take what we start the period with and add the net purchases during the period, we have the total merchandise available for sale during the period. At the end of the period, one of two things must happen to the merchandise available for sale. It is either still in inventory or it is sold. If it is in inventory, the cost will appear on the balance sheet as Ending Inventory. If it is sold, the cost will appear on the income statement as cost of goods sold.
Learning this flow of inventory costs will help you apply new material you will learn later.

7. Inventory Systems Perpetual systems Periodic 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
Two alternative inventory accounting systems can be used to collect information about cost of goods sold and cost of inventory: perpetual system or periodic system.
The perpetual inventory system continually updates accounting records for merchandising transactions.
The periodic inventory system updates the accounting records for merchandise transactions only at the end of a period.

8. Merchandise Purchases
On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash.
On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash.
When we purchase inventory, we debit the asset Merchandise Inventory for the cost of the inventory purchased and credit Cash. This entry is similar to the entry we would make if we purchased any asset, like a truck or land.

9. units or more on its popular Racer has a list price of $5.25.
Trade Discounts P1
Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.
Example
Z-Mart offers a 30% trade
discount for orders of 1,000
units or more on its popular
product Racer. Each
Racer has a list price of $5.25.
Trade discounts are offered based on quantities purchased. In this example, a trade discount of 30% is offered when a customer orders 1,000 units or more.
Trade discounts are not recorded in the accounting records. This transaction would be recorded at the price of $3,675, which reflects the trade discount given.

10. Accounting for Merchandise Purchases
This is an example of an invoice that would support the purchase of merchandise inventory. Notice all the different information on the invoice such as the seller, invoice date, purchaser, order date, credit terms, freight terms, goods purchased, and total invoice amount.
The invoice helps provide much of the information needed when recording the entry to purchase inventory.

11. Purchase Discounts P1
A deduction from the invoice price granted to induce early payment of the amount due.
Purchase discounts are provided to customers as an incentive for them to pay early. The credit period is the normal period of time the company allows for customers to extend their account receivable, typically 30 or 60 days. The discount period is a much shorter period of time, typically 10 or 15 days. If payment is received during the discount period, a discount may be taken. If payment is made after the discount period expires, then the full payment is due on or before the end of the credit period.

12. 2/10,n/30 Purchase Discounts Discount Percent
Number of Days Discount Is Available
Otherwise, Net (or All) Is Due in 30 Days
Credit Period
Purchase discount terms are typically written as this slide shows. This particular discount term would be read as “two ten, net thirty.”
The first number represents the discount percentage.
The second number represents the discount period (in days).
The letter “n” stands for the word net.
The last number represents the entire credit period (in days).
In this case, if the customer pays within 10 days, then a 2% discount may be taken. If not, then all of the amount is due within 30 days.

13. Purchase Discounts P1
On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30.
Now, let’s see how a purchase discount works. On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30. In this entry we debit Merchandise Inventory and credit Accounts Payable for $1,200.

14. Purchase Discounts P1
On November 12, Z-Mart paid the amount due on the purchase of November 2.
If Z-Mart pays the account within the discount period, the amount would qualify for the discount of 2% because it is within the ten-day discount period. In this entry, the entire Accounts Payable of $1,200 is paid off with a cash payment of $1,176. The difference of $24 is the purchase discount, which is recorded as a reduction in the cost of the Merchandise Inventory.

15. After we post these entries, the accounts involved look like these:
Purchase Discounts P1
After we post these entries, the accounts involved look like these:
If we look at the accounts after posting the payment entry, we can see that the current balance in Accounts Payable is zero, indicating that the total liability has been satisfied. We can also see that the current balance of $1,176 in the Merchandise Inventory account reflects the actual cash price of the merchandise purchased.

16. Purchase Returns and Allowances
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.
In addition to purchase discounts, merchandisers also have to deal with returns of inventory and allowances. A purchase return is the return of merchandise by the purchaser to the supplier. An allowance is a price reduction granted to the customer because of some quality issue. An allowance may be given because of a slight defect in the merchandise or because a shipment was late. In these cases, the customer keeps the merchandise and just receives a price reduction as the allowance.

17. Purchase Returns and Allowances
On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise.
Assume that on November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. Z-Mart’s November 15 entry to update its Merchandise Inventory account to reflect the purchase allowance is a debit to Accounts Payable and a credit to Merchandise Inventory for $300. The buyer’s allowance for defective merchandise is usually offset against the buyer’s current account payable balance to the seller. When cash is refunded, the Cash account is debited instead of Accounts Payable.

18. Purchase Returns and Allowances
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.
Returns are recorded at the net costs charged to buyers. To illustrate the accounting for returns, suppose 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. When goods are returned, a buyer can take a purchase discount on only the remaining balance of the invoice. The resulting discount is $18 (2% x $900) and the cash payment is $882 ($900 - $18). The entries to account for these transactions are illustrated on this slide.

19. Transportation Costs and Ownership Transfer
Transportation costs are sometimes included in the cost of Merchandise Inventory. For example, when buyers pay transportation costs to get merchandise inventory to them, the transportation costs are included in the Merchandise Inventory cost. FOB terms designate when title passes and who pays the transportation cost.
FOB stands for “Free On Board.” So, if the shipping terms are Free On Board shipping point, that means that ownership transfers from the seller to the buyer when the seller provides the goods to the carrier. It also means that the buyer will pay the transportation cost. This transportation cost will be added to the merchandise inventory account in a journal entry that debits merchandise inventory and credits cash. On the other hand, if the shipping terms are Free On Board destination, that means that ownership transfers from the seller to the buyer when the buyer receives the goods. It also means that the seller will pay the transportation cost and will record the entry with a debit to delivery expense and a credit to cash.

20. Transportation Costs P1
Z-Mart purchased merchandise on terms of FOB shipping point. The transportation charge is $75.
When a buyer is responsible for paying transportation costs (FOB shipping point), the payment is made to a carrier or directly to the seller depending on the agreement. The cost principle requires that any necessary transportation costs of a buyer (often called transportation-in or freight-in) be included as part of the cost of purchased merchandise. To illustrate, Z-Mart’s entry to record a $75 freight charge from an independent carrier for merchandise purchased FOB shipping point is a debit to Merchandise Inventory and a credit to Cash for $75.

21. Accounting for MerchandiseP1
The accounting system described in this chapter does not provide separate records (accounts) for total purchases, total purchase discounts, total purchase returns and allowances, and total transportation-in. Yet nearly all companies collect this information in supplementary records because managers need this information to evaluate and control each of these cost elements. Supplementary records, also called supplemental records, refer to information outside the usual general ledger accounts.

22. Accounting for Merchandise SalesP2
Merchandise companies also must account for sales, sales discounts, sales returns and allowances, and cost of goods sold. A merchandising company such as Z-Mart reflects these items in its gross profit computation.

23. Sales of Merchandise 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.
Each sales transaction for a seller of merchandise involves two parts:
Revenue received in the form of an asset from a customer; and
Recognition of the cost of merchandise sold to a customer.
Accounting for a sales transaction under the perpetual system requires recording information about both parts. This means that each sales transaction for merchandisers, whether for cash or on credit, requires two entries: one for revenue and one for cost.

24. Sales of Merchandise P2
On November 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of $1,600.
First, let’s see how to record a sale of merchandise inventory for Z-Mart. On November 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of $1,600. Whenever a sale is made, the seller must make two entries: one for revenue and one for cost. The revenue entry includes a debit to Accounts Receivable (or Cash if it is a cash sale) and a credit to Sales. This entry is made for the sales price charged the customer, which in this example is $2,400. The cost entry includes a debit to Cost of Goods Sold and a credit to Merchandise Inventory for the cost of the goods sold to the customer, which in this example is $1,600.

25. Sales Discounts P2
Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts.
Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts. At the time of a credit sale, a seller does not know whether a customer will pay within the discount period and take advantage of a discount. This means the seller usually does not record a sales discount until a customer actually pays within the discount period.

26. Sales Discounts P2
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.
The account was paid in full within the 60-day period.
On November 12, Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60. The entry is to debit Accounts Receivable and credit Cash for $1,000.
Assume the account was paid in full within the 60-day period. The entry to record the sale is to debit Accounts Receivable and credit Sales for $1,000.
Now assume that the account was paid within the 10-day discount period. To record the receipt of cash on this account within the discount period we debit Cash for $980, debit Sales Discount for $20 (2% times $1,000), and credit Accounts Receivable for the full $1,000. Sales Discounts is a contra revenue account, meaning the Sales Discounts account is deducted from the Sales account when computing a company’s net sales. Management monitors Sales Discounts to assess the effectiveness and cost of its discount policy.
The account was paid in full within the 10-day discount period.

27. Sales Returns and AllowancesP2
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.
Sales returns refer to merchandise that customers return to the seller after a sale. Many companies allow customers to return merchandise for a full refund. Sales allowances refer to reductions in the selling price of merchandise sold to customers. This can occur with damaged or defective merchandise that a customer is willing to purchase with a decrease in the selling price. Sales returns and allowances usually involve dissatisfied customers which can lead to possible lost future sales, therefore, managers monitor information about returns and allowances.

28. Sales Returns and AllowancesP2
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.
Recall Z-Mart’s sale of merchandise on November 3 for $2,400 that had cost $1,600. Assume that the customer returns part of the merchandise on November 6, and the returned items sell for $800 and cost $600. The revenue part of this transaction must reflect the decrease in sales from the customer’s return of merchandise by a debit to Sales Returns and Allowances and a credit to Accounts Receivable for $800. If the merchandise returned to Z-Mart is not defective and can be resold to another customer, Z-Mart returns these goods to its inventory. The entry to restore the cost of such goods to the Merchandise Inventory account is a debit to Merchandise Inventory and a credit to Cost of Goods Sold for $600.
This entry changes if the goods returned are defective. In this case, the returned inventory is recorded at its estimated value, not its cost. To illustrate, if the goods (costing $600) returned to Z-Mart are defective and estimated to be worth $150, the following entry is made: Debit Merchandise Inventory for $150, debit Loss from Defective Merchandise for $450, and credit Cost of Goods Sold for $600.

29. Sales Allowances P2
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.
To illustrate sales allowances, 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. Z-Mart records this allowance with a debit to Sales Returns and Allowances and credit to Accounts Receivable for $100.

30. Merchandising Cost Flow in the Accounting CycleP2
This slide shows the flow of merchandise costs during a period and where these costs are reported at period-end. Specifically, beginning inventory plus net cost of purchases is the merchandise available for sale. As inventory is sold, its cost is recorded in cost of goods sold on the income statement; what remains is ending inventory on the balance sheet. Note that a period’s ending inventory becomes the next period’s beginning inventory.

31. Adjusting Entries for MerchandisersP3
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.
Z-Mart’s Merchandise Inventory account at the end of year 2013 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists.
Adjusting entries are generally the same for merchandising companies and service companies, including those for prepaid expenses (including depreciation), accrued expenses, unearned revenues, and accrued revenues. However, a merchandiser using a perpetual inventory system is usually required to make another adjustment to update the Merchandise Inventory account to reflect any loss of merchandise, including theft and deterioration. Shrinkage is the term used to refer to the loss of inventory and it is computed by comparing a physical count of inventory with recorded amounts. A physical count is usually performed at least once annually.
To illustrate, Z-Mart’s Merchandise Inventory account at the end of year 2013 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists. The adjusting entry to record this shrinkage is a debit to Cost of Goods Sold and a credit to Merchandise Inventory for $250.

32. Closing Entries for MerchandisersP3
Closing entries are similar for service companies and merchandising companies using a perpetual system. The difference is that we must close some new temporary accounts that arise from merchandising activities.
Z-Mart has several temporary accounts unique to merchandisers: Sales (of goods), Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold.
Their existence in the ledger means that the first two closing entries for a merchandiser are slightly different from the ones described in the prior chapter for a service company. These differences are set in red boldface in the closing entries on this slide.

33. P4
A multiple-step income statement format shows detailed computations of net sales and other
costs and expenses, and reports subtotals for various classes of items.
Generally accepted accounting principles do not require companies to use any one presentation format for financial statements, so we see many different formats in practice. A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items. The graphic on this slide shows a multiple-step income statement for Z-Mart. The statement has three main parts: (1) gross profit, determined by net sales less cost of goods sold, (2) income from operations, determined by gross profit less operating expenses, and (3) net income, determined by income from operations adjusted for nonoperating items.
Operating expenses are classified into two sections. Selling expenses include the expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers. General and administrative expenses support a company’s overall operations and include expenses related to accounting, human resource management, and financial management. Nonoperating activities consist of other expenses, revenues, losses, and gains that are unrelated to a company’s operations. Other revenues and gains commonly include interest revenue, dividend revenue, rent revenue, and gains from asset disposals. Other expenses and losses commonly include interest expense, losses from asset disposals, and casualty losses. When a company has no reportable nonoperating activities, its income from operations is simply labeled net income.

34. Single-Step Income Statement
A single-step income statement is another widely used format, and is shown on this slide for Z-Mart. It lists cost of goods sold as another expense and shows only one subtotal for total expenses. Expenses are grouped into a few categories. Many companies use formats that combine features of both the single- and multiple-step statements. Provided that income statement items are shown sensibly, management can choose the format.
As you can see, net income is the same whether the multi-step or the single-step is used. The only difference is in the amount of detail that is provided on the income statement.

35. Classified Balance Sheet
Highly Liquid
The merchandiser’s classified balance sheet reports merchandise inventory as a current asset, usually after accounts receivable according to an asset’s nearness to liquidity. Inventory is usually less liquid than accounts receivable because inventory must first be sold before cash can be received; but it is more liquid than supplies and prepaid expenses. This slide shows the current asset section of Z-Mart’s classified balance sheet (other sections are as shown in Chapter 4).
Less Liquid

36. Global View 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.
Financial Statement Differences
Order of expenses
Separate disclosures
Presentation of expenses
Classification of operating and nonoperating expenses
Alternative income
Order of current and noncurrent items on the balance sheet
Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales. Specifically, all of the transactions presented and illustrated in this chapter are accounted for identically under the two systems. The closing process for merchandisers also is identical for U.S. GAAP and IFRS.
Both U.S. GAAP and IFRS income statements begin with the net sales or net revenues 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:
U.S. GAAP offers little guidance about the presentation or order of expenses. IFRS requires separate disclosure for financing costs (interest expense), income tax expense, and some other special items.
Both systems require separate disclosure of items when their size, nature, or frequency are important.
IFRS permits expenses to be presented by their function or their nature. U.S. GAAP provides no direction but the SEC requires presentation by function.
Neither U.S. GAAP nor IFRS define operating income, which results in latitude in reporting.
IFRS permits alternative income measures on the income statement. U.S. GAAP does not.
Both U.S. GAAP and IFRS require current items to be separated from noncurrent items on the balance sheet. However, U.S. GAAP balance sheets report current items first. Assets are listed in order of liquidity whereas liabilities are listed from nearest to maturity to furthest from maturity. IFRS balance sheets normally present noncurrent items first (and equity before liabilities), but this is not a requirement.

37. Cash + S-T Investments + Receivables
Acid-Test Ratio A1 =
Quick Assets
Current Liabilities
Acid-Test
Ratio
Acid-Test
Ratio
Cash + S-T Investments + Receivables
Current Liabilities =
The Acid-Test Ratio is a common ratio that is used to determine the liquidity of a company. In other words, this ratio determines if the company has enough liquid assets to pay current liabilities. The ratio is calculated as quick assets divided by current liabilities.
Quick assets include cash, short-term investments and receivables. A common rule of thumb is for the Acid-Test Ratio to be at least 1.0, but this can vary from industry to industry.
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.

38. Net Sales - Cost of Goods Sold
Gross Margin Ratio A2
Gross
Margin
Ratio
Net Sales - Cost of Goods Sold
Net Sales =
Percentage of dollar sales available to cover expenses and provide a profit.
The Gross Margin Ratio is another common ratio that calculates the percentage of dollar sales available to cover expenses and provide a profit.
This ratio is calculated as Gross Margin divided by Net Sales. Remember that Gross Margin is calculated as Net Sales minus Cost of Goods Sold.
In most cases, the higher this ratio is, the better.

39. JCPenney
A1/A2
This slide shows information for JCPenney for The company’s current ratio, which had been in excess of 2.0 to 1, showed a marked decline in 2012 to 1.84 to 1. This decline suggests that its short-term obligations can be less confidently covered with short-term assets. JCPenney’s acid-test ratio shows a general increase from 2008 to 2011 that exceeds the industry average but then declines in 2012.
JCPenney’s gross profit in 2012 is 36%, which means that for each $1 in sales, the company has 36 cents in gross margin to cover all other expenses and produce a net income. The decrease in gross margin since 2008 is not favorable. Success for merchandisers, such as JCPenney, depends on adequate gross margin. Management’s discussion in the annual report attributes this decline on a “softer than expected selling environment and the resulting increased promotional activity and the costs associated with implementing our new pricing strategy.”

40. Appendix 5A: Periodic Inventory System
(b)
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.
(c)
(d)
(e)
Appendix 5A: Periodic Inventory System
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. Thus, during the period, the Merchandise Inventory balance remains unchanged. It reflects the beginning inventory balance until it is updated at the end of the period. During the period, the cost of merchandise is recorded in a temporary Purchases account. When a company sells merchandise, it records revenue but not the cost of the goods sold. At the end of the period when a company prepares financial statements, it takes a physical count of inventory by counting the quantities and costs of merchandise available. The cost of goods sold is then computed by subtracting the ending inventory amount from the cost of merchandise available for sale.
The periodic system uses a temporary Purchases account that accumulates the cost of all purchase transactions during each period. Z-Mart’s November 2 entry to record the purchase of merchandise for $1,200 on credit with terms of 2/10, n/30 is illustrated in entry a.
The periodic system uses a temporary Purchase Discounts account that accumulates discounts taken on purchase transactions during the period. If payment in (a) is delayed until after the discount period expires, the entry is to debit Accounts Payable and credit Cash for $1,200 each. However, if Z-Mart pays the supplier for the previous purchase in (a) within the discount period, the required payment is $1,176 ($1,200 x 98%) and is recorded as illustrated in entry b.
Z-Mart returned merchandise purchased on November 2 because of defects. In the periodic system, the temporary Purchase Returns and Allowances account accumulates the cost of all returns and allowances during a period. The recorded cost (including discounts) of the defective merchandise is $300, and Z-Mart records the November 15 return with entry c.
Z-Mart paid a $75 freight charge to transport merchandise to its store. In the periodic system, this cost is charged to a temporary Transportation-In account as illustrated in entry d.
Under the periodic system, the cost of goods sold is not recorded at the time of each sale. Z-Mart’s November 3 entry to record sales of $2,400 in merchandise on credit (when its cost is $1,600) is illustrated in entry e.
A customer returned part of the merchandise from the transaction in (e), where the returned items sell for $800 and cost $600. Z-Mart restores the merchandise to inventory and records the November 6 return as illustrated in entry f.
To illustrate sales discounts, assume that the remaining $1,600 of receivables (computed as $2,400 from e less $800 for f ) has credit terms of 3/10, n/90 and that customers all pay within the discount period. Z-Mart records this payment as illustrated in entry g.
(f)
(g)

41. Appendix 5A: Periodic Inventory System
The periodic and perpetual inventory systems have slight differences in adjusting and closing entries. The period-end Merchandise Inventory balance (unadjusted) is $19,000 under the periodic system and $21,250 under the perpetual system. Since the periodic system does not update the Merchandise Inventory balance during the period, the $19,000 amount is the beginning inventory. However, the $21,250 balance under the perpetual system is the recorded ending inventory before adjusting for any inventory shrinkage.
A physical count of inventory taken at the end of the period reveals $21,000 of merchandise available. The adjusting and closing entries for the two systems are shown on this slide. The periodic system records the ending inventory of $21,000 in the Merchandise Inventory account (which includes shrinkage) in the first closing entry, and removes the $19,000 beginning inventory balance from the account in the second closing entry.

42. Appendix 5B: Worksheet—Perpetual System
This slide shows the work sheet for preparing financial statements of a merchandiser. It differs slightly from the work sheet layout in Chapter 4—the differences are in red boldface. Also, the adjustments in the work sheet reflect the following: (a) Expiration of $600 of prepaid insurance; (b) Use of $3,000 of supplies; (c) Depreciation of $3,700 for equipment; (d) Accrual of $800 of unpaid salaries; and (e) Inventory shrinkage of $250. Once the adjusted amounts are extended into the financial statement columns, the information is used to develop financial statements.

43. End of Chapter 5
End of Chapter 5.