1. Certified General Accountants
Module 1
Certified General Accountants
Financial Accounting Fundamentals (FA1) Module 4 Accounting for Merchandising Activities
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Accounting for Merchandising Activities
C H A P T E R 6
Slides Content
1-4 Learning objectives
5-9 Inventory and cost flow
10-15 Purchases, returns and discounts
16-20 Sales, returns and transportation charges
21-22 Inventory adjustments
23-26 Income statement formats
Gross profit and closing entries
29-30 Review
31-35 Appendix –Periodic vs. perpetual
36-40 Appendix- Sales taxes
41 End of chapter
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Learning Objectives
Explain merchandising activities and analyze their effects on financial statements. (Level 2)
Determine the cost of merchandise inventory purchases using a perpetual inventory accounting system. (Level 1)
Explain the ethical issues related to cash discounts. (Level 1)
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Learning Objectives
Record the revenue from merchandise sales, the collection of payment, and accompanying cost of the goods sold. (Level 1)
Record adjustments for a merchandiser. (Level 1)
Prepare income statements in alternative formats and prepare closing entries for a merchandising company. (Level 1)
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Learning Objectives
Determine the ending merchandise inventory and cost of goods sold using both a periodic and a perpetual inventory accounting system. (Level 2)
Calculate the gross profit ratio and interpret and apply this ratio in decision-making scenarios including using the ratio to determine a merchandiser’s profitability before operating expenses.(Level 2)
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Merchandising Activities
Merchandiser: A company that earns net income by buying and selling merchandise.
Wholesaler: A company that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers.
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Computing Net Income
Merchandiser
Service Company
Net Sales
Revenues
Cost of Goods
Sold
Gross Profit
Operating
Expenses
Operating
Expenses
Net Income
Net Income
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Inventory
Products a company owns for the purpose of selling to customers.
It is often referred to as Merchandise Inventory.
Is classified as a current asset.
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Merchandise Inventory
Cost of merchandise inventory includes:
Costs incurred to purchase the goods.
Shipping costs.
Other costs required to make goods ready for sale.
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10. Merchandising Cost Flow
Beginning
Merchandise
Inventory
Net cost of
Purchases
Merchandise
available for
sale
Ending
Merchandise
inventory
Cost of goods
sold
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Merchandise Inventory Systems
Perpetual
Provides a continuous record of:
The amount of merchandise inventory on hand.
Cost of goods sold to date.
Periodic
Requires a physical count of goods to determine:
Cost of goods sold.
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Perpetual System-Example
Purchases
Nov Merchandise Inventory 1,200
Accounts Payable ,200
Purchased merchandise inv. on account
Purchase Returns and Allowances
Nov Accounts Payable
Merchandise Inventory
Purchase allowance re: debit memo
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13. Purchase/Sales Discounts
A deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30
Terms
Time
Due
Credit Period = 30 days
Discount Period = 10 days
Nov.2
Nov.12
Dec.2
(Full amount minus 2% discount) due between Nov.2 and Nov.12
Full amount due anytime between Nov.13 and Dec.2
Purchase or Sale
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Perpetual System — Example
Purchase Discounts- Assume the purchase of merchandise inventory on November 2 was on the terms 2/10,n30.
Case 1-Discount taken
Nov Accounts Payable
Merchandise Inventory
Cash
2% x (1, ) = 18
Case 2-Discount not taken
Nov Accounts Payable
Cash
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15. Transportation Charges – Perpetual System
Seller
Buyer
Goods
FOB Shipping Point
(Buyer pays shipping charges)
Carrier
FOB Destination
(Seller pays for shipping charges)
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Perpetual System — Example
Transportation Costs
Nov.24 Merchandise Inventory
Cash
Paid freight charges on purchased merchandise.
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Perpetual System — Example
Sales of Merchandise
Nov Accounts Receivable ,000
Sales ,000
Sold merchandise on terms 2/10,n60
Cost of goods sold
Merchandise Inventory
To record cost of merchandise sold
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Perpetual System — Example
Customer Payment
Case 1-Customer pays in 60 days
Case 2-Customer pays in 10 days
Jan Cash ,000
Accounts receivable ,000
Received payment for Nov. 12 sale
Nov Cash
Sales discounts
Accounts receivable ,000
Received payment less the discount
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Perpetual System — Example
Sales Returns and Allowances
Nov.6 Sales Returns & Allowance
Accounts Receivable
Customer returned merchandise
Merchandise Inventory
Cost of Goods Sold
Returned goods to merchandise inventory
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Adjustments-
Perpetual Merchandise Inventory
Perpetual merchandise inventory systems keep a running total of inventory levels by recording sales and purchase transactions.
Periodic adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory).
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Perpetual System — Example
Inventory per accounting records: $21,250
Inventory per physical count: $21,000
Difference (shrinkage) $250
Adjustment required:
Dec Cost of Goods Sold
Merchandise Inventory
To record inventory shrinkage revealed by physical count.
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Income Statement Formats
Income statements may be formatted in a variety of ways.
Typical formats are:
Classified, Multiple-Step
Multiple-Step
Single-Step
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23. Classified Multi-step Format
(for internal reporting)
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24. (for external reporting) © 2010 McGraw-Hill Ryerson Limited.
Multi-step Format
(for external reporting)
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25. (for external reporting) © 2010 McGraw-Hill Ryerson Limited.
Single- step Format
(for external reporting)
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26. Gross profit from sales
Gross Profit Ratio
The amount of gross profit expressed as a percentage of net sales.
May be tracked over time and/or compared to similar businesses.
May be calculated for whole business, departments, products.
Gross profit from sales
Net sales
Gross profit ratio =
X 100%
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Closing Entries-Perpetual System
The closing process is similar for merchandising and service companies.
Merchandising companies have additional temporary accounts that must be closed.
These include:
Sales
Sales Returns & Allowances
Sales Discounts
Cost of Goods Sold
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Appendix 6A- Periodic and Perpetual Merchandise Inventory Systems Compared
Periodic systems
Merchandise Inventory is updated at the end of the period based on a physical count.
Perpetual systems
Merchandise Inventory is updated after each sale or purchase.
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Appendix 6A - Example
Periodic System
Perpetual System
Purchase of Merchandise
Purchases
1,200
Merchandise Inv.
Accounts Payable
Return of Merchandise
Accounts Payable
300
Purchase Returns
Merchandise Inv.
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Appendix 6A - Example
Periodic System
Perpetual System
Purchase Discount Taken (2/10, n30)
Accounts Payable
900
Purchase Discounts 18
Merchandise Inv.
Cash
882
Transportation Charges
Transportation-in 75
Merchandise Inv.
Accounts Payable
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Appendix 6A - Example
Periodic System
Perpetual System
Sale of merchandise
Accounts Receivable
2,400
Sales
Cost of Goods Sold
1,600
Merchandise Inv.
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Appendix 6A - Example
Periodic System
Perpetual System
Sales Return
Sales Returns
800
Accounts Receivable
Merchandise Inv.
600
Cost of Goods Sold
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End of Module
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