1. Merchandising Operations
Chapter 5
Merchandising Operations

2. Merchandising Operations
Previously we have only been looking at service companies
Like lawn care or Painting for example
This chapter we shift focus to those who sell goods
Like Canadian Tire or Mountain Equipment Co-op for example

3. Revenue & Expenses
Revenue for a merchandising company is called Sales Revenue
Expenses are split into 2 categories
Operating expenses (same as service company)
Cost of Goods Sold or COGS
COGS is the total cost of the merchandise sold during the period

4. Gross Profit 175 300 125 Example: Bought bike for $125, sold for $300
Gross Profit is the difference between the sales revenue and the COGS
Gross Profit
Sales Revenue
COGS
Example: Bought bike for $125, sold for $300
175
300
125

5. Net Income Equations Expanded
Revenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Net
Income / Loss

6. Inventory Systems We Will Use This One!!!!! Perpetual Inventory
Always have an up to date inventory
Update COGS with every transaction
Growing in popularity, especially for bigger companies as it is automated and gives real time information
Periodic Inventory
Calculate inventory at the end of the period
Update COGS at the end of the period
Still used, usually in smaller companies that don’t want to spend the money on an automated system

7. How We Record Buying Inventory
Every purchase should have a business document to support it, used by buyer and seller
Receipt, Invoice, Purchase Order, etc
When merchandise is purchased for resale the asset that is debited is called Merchandise Inventory
If other assets are purchased, but not for resale they go into their own corresponding asset account, like supplies or equipment for example
Example
Bought 5 TVs on account at $500 each for the purpose or resale
Merchandise Inventory $2 500
Accounts Payable $2 500

8. Buying Inventory Subsidiary Inventory Records
Merchandise Inventory is a catch all account that contains all of the goods that a company has available for sale
However when a company offers more than 1 good for sale (and they usually do) it is nice to know how many of each item you have available for sale
To keep this information organizations keep a subsidiary inventory ledger, that has separate accounts for each item or sku (stock keeping unit) to keep track of how much is available
You can have subsidiary ledgers for any group of accounts that share a common characteristic, like inventory, or accounts receivable

9. Buying Inventory Freights Costs
Eddie’s Canoes manufactures a high quality all wood canoe and is located in Newstadt, Ontario. Eddie’s has sold 20 canoes to Grand River Outfitters, located in Kitchener Ontario. The travel time between the two businesses is approximately 1.5 hours.
The shipping costs to hire a truck to deliver the goods is $800
The insurance cost to insure the load while in transit against damage is $100
Who should pay for these fees?

10. Buying Inventory Freights Costs Cont.
Go back to the business document, that is where the terms of the sale will be listed
If the purchase order had said FOB destination, which means that the seller is responsible for the delivery of the goods
However, the purchase states FOB shipping point, so the buyer is responsible for the delivery
When buying goods for resale and you incur freight fees your journal entry will look like this, because the freight is part of the inventory we are getting ready to sell
Merchandise Inventory $900
Cash $900

11. Buying Inventory Purchase Returns and Allowances
Buyers may want to return goods if the goods are not what they wanted, goods are damaged or defective, etc
Seller can either accept the good back and give a refund or offer an allowance for the buyer to keep the good (like 25% off for example)

12. Buying Inventory Purchase Returns and Allowances Cont.
One of the canoes Grand River bought from Eddie cost $1 200, and was supposed to be blue, but instead it was red
Grand River complained and Eddie said that he would either issue a full refund or Grand River could keep the canoe for 15% off
Return
Accounts Payable $1 200
Merchandise Inventory $1 200 OR
Allowance
Accounts Payable $ 180
Merchandise Inventory $180

13. Buying Inventory Discounts
2 types of discounts can be offered
Quantity
Purchase
Quantity discount is when there is a price or percentage reduction when a large amount is purchased, when buying this way you reduce the cost of your inventory and therefore your COGS
Purchase discount is incentive some companies offer to get their money sooner, these terms are on the business document and look like this 2/10, n/30 which means 2% off is paid in 10 days and the total is due in 30 days, taking advantage of this discount reduces the inventory cost and therefore COGS

14. Buying Inventory Discounts Cont.
Eddie’s usually sells their canoes for $1500, but for orders over 10 they sell them for $1200.
Grand River’s journal entry looks like this:
Merchandise Inventory $24 000
Accounts Payable $24 000
Eddie’s policy is 4/7, n/30, and Grand River’s pays the full bill on the 6th day, and the journal entry looks like this:
Merchandise Inventory $960
Cash $23 040

15. Summary of all that has happened while buying inventory
Initial purchase of product $24 000
Freight Costs of $900
Purchase allowance of $180
Purchase discount of $960
Merchandise Inventory
24 000
180
900
960
23 760
Total

16. Practice Questions Pages 258-259 BE5-1, BE5-2, BE5-3, BE5-4, BE5-5
Page 260 EP5-2

17. Selling Inventory
Revenue is recorded when it is earned, sales revenue is no different
Each sale should be supported by a business document
Because we are working in a perpetual inventory system we need to make 2 entries for every sale
Record the sales revenue
Dr Cash/AR and Cr Sales Revenue
Record cost of the merchandise sold
Dr COGS and Cr Merchandise Inventory

18. Selling Inventory Cont.
Merchandise Inventory currently 20 canoes
(freight) – 960 (purchase discount)
= / 20 =1197
=19 at 1197
=1 at 1197 – 180 (purchase allowance on blue canoe) = 1017
Sold a red canoe for $1 800 cash
Cash
Revenue
Sold Canoe for Cash
COGS
Merchandise Inventory
To record cost of goods sold to cash customer, invoice #25

19. Selling Inventory Freight Costs
As mentioned earlier in the Buying Inventory Section the party responsible for the cost of freight is negotiated and noted on the business document
FOB shipping point means buyer pays to pick goods up
FOB destination means seller pays to deliver goods
When seller pays for freight they will increase the price to compensate and set up a Freight out or delivery expense account to record fees incurred this way
Grand River Outfitters sells a canoe FOB customer’s house
Delivery Expense $100
Accounts Payable $100
Shipped a canoe to customer’s house, invoice #29

20. Selling Inventory Sales Returns and Allowances
Buyers sometimes want to return goods because of a variety of reasons
When sales are returned or allowances given the revenue needs to be decreased
Want to keep track of this amount in a separate account
Use a contra revenue account called Sales Returns and Allowances
Must reverse the second journal entry to decrease COGS and increase Merchandise Inventory if the good is still able to be sold

21. Selling Inventory Sales Returns and Allowances Cont.
Sold a canoe, for 1800
It was returned because the customer did not like the model and wanted to upgrade at a later date, it had not been used and is still fine quality for sale
Sales Returns and Allowances $1 800
Cash $1 800
To record canoe returned, put back into inventory, invoice #17
Merchandise Inventory $1 197
Cost of Goods Sold $1 197
To record the cost of goods returned

22. Selling Inventory Sales Returns and Allowances Cont.
Sold a canoe for $2 200 cash, FOB customer’s house
Did not buy insurance for shipping and the canoe fell off the truck and was crushed by a transport truck, customer canceled order
Sales Return and Allowances $2 200
Cash $2 200
To record canoe returned, invoice #21
Loss Expense $1 197
COGS $1197
To record canoe damaged, invoice #21

23. Selling Inventory Discounts
As mentioned earlier we have quantity discount and sales discount (when from seller’s perspective)
No entry is needed for quantity discount, the sales revenue would just be reported as less on the initial journal entry
Sales discount account is a contra revenue account
Sold canoe for $2 000, 2/8, n30, customer paid on 7th day
Cash $1960
Sales Discount $40
Accounts Receivable $2000
To record collection of invoice #7 within discount period

24. Practice Questions
Page BE 6, 7
Page 260 E5-3
Page 264 P5-2A

25. Completing the Accounting Cycle Adjusting Entries
The adjusting entries for a Merchandising company is the same as for a service company, with one exception
Inventory needs to by physically verified
If some stock is missing an adjusting entry needs to be made
Inventory shows that Grand River should have 14 canoes, but a physical count reveals they only have 13
COGS $1197
Merchandise Inventory $1197
To record the difference between inventory records and physical units on hand

26. Completing the Accounting Cycle Closing Entries
Same as a service company, just a few new temporary accounts
Sales
Sales returns and allowances
Sales Discount
COGS
Freight Out
All of which are closed to the Income Summary

27. Practice Questions
Page 259 BE 8, 9
Page E5-4, E5-5, E5-6

28. Multiple-Step Income Statement
More useful that single-step because it highlights more information
Net Sales (sales – returns allowances and sales discounts)
Gross Profit (Net sales – COGS)
Income from Operations (Gross Profit – Operating Expenses)
Non-Operating Activities (gains or losses outside of normal operations)
Net Income (income from operation + non- operating income)

29. Grand River's Outfitters
Income Statement
Year ended January
Sales Revenue
Sales
$ 200,000
Less: Sales returns and allowances
$ ,500
Sales discounts
$ ,750
$ ,250
Net Sales
$ 191,750
Cost of Goods Sold
$ 80,320
Gross profit
$ 111,430
Operating Expense
Salaries expense
$ 45,250
Rent expense
$ 12,000
Utilities expense
$ ,500
Amortization expense $
Total operating expense
$ 59,500
Income from operations
$ 51,930

30. Other Revenues
Interest Revenue $
Gain on sail of property
$ 150,000
Total non-operating revenues
$ 150,750
Other Expenses
Legal fees from property sale
$ 50,000
Moving Expense
$ ,000
Total non-operating expenses
$ 55,000
Net from non-operating expenses
$ 95,750
Net Income
$ 147,680

31. Practice Questions
Page 259 BE 10
Page 262 E5-7, E5-9

32. Profitability Ratios
Gross Profit Margin
Profit Margin

33. Gross Profit Margin
More useful than Gross Profit, because it takes into account Net Sales
The higher the better
Gross Profit
Net Sales
Gross Profit Margin
26% $ $ $ $
45.5%

34. Profit Margin Net Sales Profit Margin Net Income $110 000 $845 000 13%
Explains how much of every dollar in sales is profit
Higher is better
Net Sales
Profit Margin
Net Income $ $
13%
$65 000 $
23.6%

35. Practice Questions
Page 259 BE 11, 12
Page P5-4A (a & b only)