1. Financial Accounting: Tools for Business Decision Making, 3rd Ed.
Kimmel, Weygandt, Kieso
ELS

2. Chapter 5

3. Chapter 5 Merchandising Operations
PowerPoint Slides
After studying Chapter 5, you should be able to:
Identify the differences between a service enterprise and a merchandising company.
Explain the recording of purchases under a perpetual inventory system.
Explain the recording of sales revenues under a perpetual inventory system.
Distinguish between a single-step and a multiple-step income statement. 1

4. Chapter 5 Merchandising Operations
PowerPoint Slides
After studying Chapter 5, you should be able to
Determine the cost of goods sold under a periodic system.
Explain the factors affecting the profitability. 1

5. Service enterprises perform services as their primary source of revenue.
Merchandising companies buy and sell merchandise.

6. Differences Between a Service Enterprise and a Merchandising Company
PowerPoint Slides
Differences Between a Service Enterprise and a Merchandising Company
In a merchandising company, the primary source of revenues is the sale of merchandise, referred to as sales revenue or sales.
Unlike expenses for a service company, expenses for a merchandising company are divided into two categories:
Cost of goods sold - the total cost of merchandise sold during the period.
Operating expenses - selling and administrative expenses. 2

7. Terms Sales revenue or sales = sale of merchandise
Cost of goods sold = total cost of merchandise sold

8. How Income is Measured in a Merchandising Company
Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
Net Income
(Loss)
Less
Equals
How Income is Measured in a Merchandising Company
Page 202 in book

9. Operating cycle of a company is...
the average time it takes to go from cash to cash in producing revenues. TO

10. Operating cycle of a merchandising company is...
ordinarily longer than than that of a service company;
purchase of merchandise and its sale lengthens the cycle.

11. Merchandising Company
Receive Cash
Perform Services
Buy Inventory
Sell Inventory
Service Company
Merchandising Company
Cash
Accounts
Receivable
Merchandise
Inventory

12. Inventory Systems
Perpetual - detailed inventory system in which the cost of inventory is maintained and the records continuously show the inventory that should be on hand
Periodic -inventory system in which detailed records are not maintained and the cost is goods sold is determined only at end of accounting period

13. Comparing Periodic and Perpetual Inventory Systems
Inventory Purchased
Item Sold
End of Period
Perpetual
Perpetual
No Entry
Record Purchase of Inventory
Record Revenue and compute and record Cost of Goods
End of Period
Inventory Purchased
Item Sold
Periodic
Record Purchase of Inventory
Record Revenue Only
Compute and record Cost of Goods Sold

14. Computers

15. and electronic scanners have enabled many companies to install perpetual inventory systems

16. What Is Charged to Merchandise Inventory?
All costs of getting the inventory to company and ready to sell
+Freight-In
+Special Permits
Only costs associated with merchandise purchased for resale - not assets acquired for use, such as supplies

17. Merchandise Purchases
On May 4 the company bought $ 3,800 worth of merchandise from PW Audio Supply, Inc.
Task:Record the purchase by getting information from the Purchase Invoice.
The Purchase Invoice is a copy of the sales invoice.

18. 7.Goods sold: catalog no.,description,quantity, price per unit
1. Seller
2.Invoice Date
3.Purchaser
4.Salesperson
5.Credit terms
6.Freight terms
7.Goods sold: catalog no.,description,quantity, price per unit
8.Total invoice price
Invoice No. 731
Firm Name: Sauk Stero
City Chelsea State Illinois Zip 60915
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
Date5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description QTY Price Amount
IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800
1,500
300 8
Production Model
Circuits
A2547Z48

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

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

21. Freight Costs - On Incoming Inventory

22. Merchandise Inventory
Freight Costs - On Incoming Inventory
On May 6 the company paid $ 150 to have the merchandise inventory delivered to them.
Merchandise Inventory
Freight-Out
Cash
May 4 3,800
May 8 300
May 6 150
May
GENERAL JOURNAL Debit Credit
May 6 Merchandise Inventory
Cash
To record payment of freight.

23. Freight Costs - On Outgoing Inventory

24. Merchandise Inventory
Freight Costs-on outgoing inventory
On May 6 the seller company paid $ 150 to have merchandise inventory delivered to the buyer.
Merchandise Inventory
Freight-Out
Cash
May
May 6 150
GENERAL JOURNAL Debit Credit
May 6 Freight-Out
Cash
To record payment of freight on goods sold.

25. Purchase Discounts
Credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment.
Credit terms specify the amount of cash discounts and the time period during which they are offered.
2/10,n/30
1/10 EOM

26. Purchases Discounts
Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period
Original Invoice $3,800
-Returns
Amount due before discount $3,500
2% discount
Net due $3,430

27. Merchandise Inventory
Purchases Discounts
Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period.
Merchandise Inventory
Accounts Payable
Cash
May 4 3,800
May
May
May 4 3,800
May
May
May
May
May 14 3,500
GENERAL JOURNAL Debit Credit
May 14 Accounts Payable ,500
Cash , Merchandise Inventory
To record payment within discount period.

28. Merchandise Inventory
Payment of Invoice
Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was NOT paid within the discount period.
Merchandise Inventory
Accounts Payable
Cash
May 4 3,800
May
May
May 4 3,800
Jun 3 3,500
Jun ,500
GENERAL JOURNAL Debit Credit
June 3 Accounts Payable ,500
Cash ,500
To record payment NOT within discount period.

29. Sales Invoice ...
a business document that provides written evidence of a credit sale.

30. 7.Goods sold: catalog no.,description,quantity, price per unit
1. Seller
2.Invoice Date
3.Purchaser
4.Salesperson
5.Credit terms
6.Freight terms
7.Goods sold: catalog no.,description,quantity, price per unit
8.Total invoice price
Invoice No. 731
Firm Name: Sauk Stero
City Chelsea State Illinois Zip 60915
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
Date 5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description QTY Price Amount
IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800
1,500
300 8
Production Model
Circuits
A2547Z48

31. Under a Perpetual System
Sales Revenues -
Under a Perpetual System
are recorded when earned-revenue recognition principle
must be supported by a business document-written evidence
2 entries are made for each sale
one to record sale
one to record cost of merchandise sold

32. Merchandise Inventory Sales Returns & Allowances
Sales - under a perpetual system
Assume a sale of $ 3,800 ON ACCOUNT
For merchandise having a cost of $2,400
Cash
Accounts Receivable
Merchandise Inventory
May 4 3,800
May 4 2,400
Cost of Goods Sold
Sales Returns & Allowances
Sales
May 4 3,800
May 4 2,400

33. Sales Returns and Allowances
Flip side of purchase returns and allowance
On buyer’s books
GENERAL JOURNAL Debit Credit
May 8 Accounts Payable Merchandise Inventory
To record goods returned that were purchased on account.
On seller’s books
GENERAL JOURNAL Debit Credit
May 8 Sales Returns and Allowance Accounts Receivable
To record return of goods delivered to Sauk Stero.

34. Merchandise Inventory Sales Returns & Allowances
Sales - under a perpetual system
Assume a sale of $ 3,800 ON ACCOUNT
For merchandise having a cost of $2,400
Cash
Accounts Receivable
Merchandise Inventory
May 4 3,800
May 4 2,400
Cost of Goods Sold
Sales Returns & Allowances
Sales
May 4 3,800
May 4 2,400

35. What Is the Sales Returns and Allowances Account?
Contra Revenue Account to sales
Used to show how much came in on returns and allowances
Excessive returns and allowances suggest:
inferior merchandise
inefficiencies in filing orders
errors in billing customers
mistakes in delivery or shipment of goods

36. What Is the Sales Discount Account?
Contra Revenue Account to sales
Used to disclose amount of cash discounts taken by customers

37. Flip side of purchase discounts
Sales Discounts
Flip side of purchase discounts
On buyer’s books
GENERAL JOURNAL Debit Credit
May 14 Accounts Payable , Cash ,430 Merchandise Inventory
To record payment within discount period
On seller’s books
GENERAL JOURNAL Debit Credit
May 14 Cash , Sales Discounts Accounts Receivable
To record collection within discount period.

38. Two Forms Of Income Statements
Single-step income statement
Multiple-step income statement

39. Single-Step Income Statement
One step… subtract total expenses from total revenues
Revenues $10,000
Expenses 3,000
Net income $ 7,000

40. PW AUDIO, Inc. Single-step Income Statement For the Year Ended December 31, 2004
Sales $460,000
Interest Revenue ,000
Gain on Sale of equipment
Total Revenues $463,600
Expenses
Cost of goods sold $316,000
Selling expenses ,000
Administrative expenses ,000
Interest expense ,800
Casualty Loss from vandalism
Income tax expense ,100
Total expenses ,100
Net income $ 21,500

41. PW AUDIO SUPPLY, INC. Multi-step Income Statement For the Year Ended December 31, 2004
Sales revenues
Sales $ 480,000 Less: Sales returns and allowance $12,000
Sales discounts , ,000
Net sales ,000
Cost of goods sold ,000
Gross profit $ 144,000 Operating expenses
Selling expenses:
Store salaries expense $45,000
Advertising expense ,000
Depreciation expense ,000
Freight-out ,000
Total selling expenses $76,000
Administrative expenses
Salaries expense $19,000
Utilities expense ,000
Insurance Expense ,000
Total administrative expenses ,000
Total operating expenses ,000
Income from operations $ 30,000

42. PW AUDIO SUPPLY, INC. Multi-step Income Statement For the Year Ended December 31, 2004
Income from operations (continued) $ 30,000
Other revenues and gains
Interest revenue $ 3,000
Gain on sale of equipment
$ 3,600
Other expenses and losses
Interest expense $ 1,800
Casualty loss from vandalism
2, ,600
31,600
Income before income income taxes
Income tax expense ,100
Net income $21,500

43. Cost of Goods Sold -Periodic Method
A running account of changes in inventory is not maintained.
Separate accounts use to record freight costs, returns and discounts
Cost of goods sold and ending inventory are calculated at end of period.

44. PW AUDIO SUPPLY, INC. Cost of Goods Sold For the Year Ended December 31, 2004
Cost of goods sold Inventory, January 1 $ 36,000
Purchases $325,000
Less Purchase returns and allowances $10,400
Purchase discounts , ,200
Net purchases ,800
Add: Freight-in ,200
Cost of goods purchased ,000
Cost of goods available for sale ,000
Inventory, December ,000 Cost of goods sold ,000

45. Gross Profit Rate= Gross Profit Net Sales
Company’s gross profit expressed as a percentage

46. Profit Margin Ratio
Measures the percentage of each dollar of sales that results in net income
Profit Margin Ratio =
Net Income
Net Sales
Higher value suggests favorable return on each dollar of sales. 19