2. Merchandising Operations CHAPTER 5

3. Differences Between Service and Merchandising Companies Service enterprises perform services as their primary source of revenue Merchandising companies buy and sell merchandise

4. Primary source of revenues is the sale of merchandisePrimary source of revenues is the sale of merchandise –Sales revenue Expenses for a merchandising company are divided into two categoriesExpenses for a merchandising company are divided into two categories –Cost of goods sold –Operating expenses Merchandising Company Revenues and Expenses

5. Illustration 5-1 Earnings Process Measurement for Merchandiser

6. Inventory Systems Merchandising entities may use either (or both) of the following inventory systemsMerchandising entities may use either (or both) of the following inventory systems –Perpetual –Periodic

7. Inventory Systems The periodic inventory system is covered in Appendix 5A.The periodic inventory system is covered in Appendix 5A. See slides later in this presentation on the periodic system.See slides later in this presentation on the periodic system.

8. Perpetual Inventory This type of inventory system constantly updates inventory for purchases and salesThis type of inventory system constantly updates inventory for purchases and sales When a perpetual system is used, it is still necessary to do a physical count at least once a year to adjust perpetual records to actualWhen a perpetual system is used, it is still necessary to do a physical count at least once a year to adjust perpetual records to actual This system is used for many types of productsThis system is used for many types of products

9. Cost of Merchandise Inventory All costs of getting the inventory to the company and ready for saleAll costs of getting the inventory to the company and ready for sale Only costs associated with merchandise purchased for resale, not assets acquired for use, such as suppliesOnly costs associated with merchandise purchased for resale, not assets acquired for use, such as supplies

10. Merchandise Purchases On May 4, the company bought $ 3,800 worth of merchandise from PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 4 Merchandise Inventory 3,800 Accounts Payable 3,800 To record goods purchased on account Accounts Payable Merchandise Inventory May 43,800 May 4 3,800 May 4 3,800

11. Freight Costs—On Incoming Inventory On May 4, the company paid $150 to have the merchandise inventory delivered to them. GENERAL JOURNAL Debit Credit May 4 Merchandise Inventory 150 Cash 150 To record payment of freight Freight-Out Merchandise Inventory May 4 3,800 Cash May 4 150

12. Freight Costs—On Outgoing Inventory Or, assume that on May 4 the seller paid $150 to have merchandise inventory delivered to the buyer. GENERAL JOURNAL Debit Credit May 4 Freight-Out 150 Cash 150 To record payment of freight on goods sold Freight-Out Merchandise Inventory Cash May 4 150 May 4 3,800

13. Purchases Returns and Allowances On May 8 the company returned $300 worth of merchandise to PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account Accounts Payable Merchandise Inventory May 4 3,800 May 8 300 May 4 150

14. Purchase Discounts Credit terms specify the amount of cash discount available to encourage early payment and the time period during which it is offeredCredit terms specify the amount of cash discount available to encourage early payment and the time period during which it is offered 2 /10, n/30 ( a 2% discount can be taken if the invoice is paid in 10 days, otherwise the total invoice amount is due in 30 days)2 /10, n/30 ( a 2% discount can be taken if the invoice is paid in 10 days, otherwise the total invoice amount is due in 30 days)

15. Company purchased $3,800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period. Purchase Discounts Original invoice Less: Returns Amount due before discount 2% discount Net due $3,800 300 3003,500 70 70$3,430

16. Purchase Discounts Company purchased $3,800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period. GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period Accounts Payable Merchandise Inventory May 4 3,800 Cash May 8 300 May 14 70 May 143,500 May 14 3,500 May 143,430 May 14 3,430 May 4 150

17. Sales Revenue—Perpetual System Recorded when earnedRecorded when earned –Revenue recognition principle Two entries are made for each saleTwo entries are made for each sale –To record sale –To record cost of merchandise sold

18. Sales Assume a cash sale of $2,200 for merchandise that cost $1,400 Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales May 4 2,200 May 4 1,400

19. Sales Assume a sale of $3,800 on account for merchandise that cost $2,400 Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales May 4 3,800 May 4 2,400

20. Sales Returns and Allowances Contra revenue account to salesContra revenue account to sales Separate account used contrary to purchase returns and allowancesSeparate account used contrary to purchase returns and allowances Used to show how much came in on returns and allowancesUsed to show how much came in on returns and allowances Excessive returns and allowances suggestExcessive returns and allowances suggest –Errors in billing customers –Mistakes in delivery or shipment of goods

21. Flip side of purchase returns and allowance EXCEPT two entries are required: one to record return (at sale price) and one to restore goods to inventory, assuming goods resaleable (at cost) On seller’s books GENERAL JOURNAL Debit Credit May 8 Sales Returns and Allowance 300 Accounts Receivable 300 To record return of goods delivered to Sauk Stereo Merchandise Inventory 140 Cost of Goods Sold 140 Cost of Goods Sold 140 To restore returns to inventory Sales Returns and Allowances

22. Sales Discounts Contra revenue account to salesContra revenue account to sales Separate account used contrary to purchase discountsSeparate account used contrary to purchase discounts Used to disclose amount of cash discounts taken by customersUsed to disclose amount of cash discounts taken by customers

23. Sales Discounts On buyer’s books General Journal May 14 Accounts Payable Cash Cash Merchandise Inventory Merchandise Inventory To record payment within discount period To record payment within discount periodDebit3,500Credit3,43070 On seller’s books General Journal May 14 Cash Sales Discounts Sales Discounts Accounts Receivable Accounts Receivable To record collection within discount period To record collection within discount periodDebit3,43070Credit3,500

24. Two Forms of Statements of Earnings Single-step statement of earnings Multiple-step statement of earnings

25. Single-Step Statement of Earnings RevenuesExpenses Earnings before income taxes Income taxes Net earnings $10,000 2,000 2,0008,000 1,000 1,000 $ 7,000

26. Single-Step PW AUDIO SUPPLY, INC. Single-Step Statement of Earnings Year Ended December 31, 2004 Sales Interest revenue Gain on sale of equipment Total revenues Total revenuesExpenses Cost of goods sold Operating expenses Interest expense Casualty loss from vandalism Total expenses Total expenses Earnings before income taxes Income tax expense Net earnings Net earnings$460,0003,000 600 600$463,600 $316,000 114,000 1,800 200 200432,00031,600 10,100 10,100 $ 21,500

27. Multiple-Step PW AUDIO SUPPLY, INC. Multiple-Step Statement of Earnings Year Ended December 31, 2004 Sales revenue Sales Sales Less: Sales returns and allowances Less: Sales returns and allowances Sales discounts Sales discounts Net sales Cost of goods sold Gross profit Operating expenses Store salaries expense Store salaries expense Advertising expense Advertising expense Amortization expense Amortization expense Freight-out Freight-out Salaries expense Salaries expense Utilities expense Utilities expense Insurance expense Insurance expense Total operating expenses Total operating expenses Earnings from operations Earnings from operations$12,000 8,000 8,000$45,00016,000 7,00019,00017,000 2,000 2,000$480,000 20,000 20,000 460,000 316,000 144,000114,00030,000

28. Multiple-Step PW AUDIO SUPPLY, INC. Multiple-Step Statement of Earnings Year Ended December 31, 2004 Earnings from operations (continued) Other revenues Interest revenue Interest revenue Gain on sale of equipment Gain on sale of equipment Other expenses Interest expense Interest expense Casualty loss from vandalism Casualty loss from vandalism Earnings before income taxes Income tax expense Net earnings $3,000 600 600 3,600 3,600$1,800 200 200 2,000 2,000$30,000 1,600 1,60031,600 10,100 10,100$21,500

29. Evaluating Profitability Gross profit marginGross profit margin Profit marginProfit margin

30. Gross Profit Margin Gross Profit Margin = Gross Profit Net Sales Company’s gross profit expressed as a percentage

31. Profit Margin Profit Margin = Net Earnings Net Sales

32. Appendix 5A: Periodic System Merchandising entities may use either (or both) of the following inventory systemsMerchandising entities may use either (or both) of the following inventory systems –Perpetual –Periodic

33. Periodic System This type of inventory system does not keep an updated record of all goods bought, sold and on handThis type of inventory system does not keep an updated record of all goods bought, sold and on hand In a periodic system, inventory is only counted once a yearIn a periodic system, inventory is only counted once a year This system is mostly used for inexpensive productsThis system is mostly used for inexpensive products

34. Sales Revenues — Periodic System Record when earned - revenue recognition principleRecord when earned - revenue recognition principle Only ONE entry is made for each sale in a periodic inventory systemOnly ONE entry is made for each sale in a periodic inventory system NONE to record cost of goods sold as in a perpetual inventory systemNONE to record cost of goods sold as in a perpetual inventory system

35. Sales Assume a sale of $3,800 on account Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales May 4 3,800 X X

36. Purchase of Merchandise Perpetual inventory systemPerpetual inventory system –Merchandise Inventory-one account used to accumulate the cost of goods purchased Periodic inventory systemPeriodic inventory system –Separate accounts used to accumulate the cost of goods purchased

37. Normal Balances Cost of Goods Purchased Accounts Account Normal Balance Purchases Purchase Returns and Allowances Purchase Discounts Freight In DebitDebitCreditCredit

38. Net Purchases Net purchases are gross purchases adjusted for returns and discounts Purchases Less: Purchase returns and allowances Purchase discounts Purchase discounts Net purchases $ 10,400 6,800 6,800$325,00017,200307,800

39. Cost of Goods Purchased Cost of goods purchasedis net purchases plus freight-in Cost of goods purchased is net purchases plus freight-in Purchases Less: Purchase returns and allowances Purchase discounts Purchase discounts Net purchases Add: Freight-in Cost of goods purchased $ 10,400 6,800 6,800$325,00017,200307,80012,200320,000