1. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Accounting for Merchandising Businesses Chapter 6

2. Learning Objectives 1. Distinguish between the activities and financial statements of service and merchandising businesses. 2. Describe and illustrate the accounting for merchandise transactions. 3. Describe and illustrate the financial statements of a merchandising business. 4. Describe the adjusting and closing process for a merchandising business. 5. Describe and illustrate the use of the ratio of net sales to assets in evaluating a company’s operating performance.

3. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Distinguish between the activities and financial statements of service and merchandising businesses. 1

4. Service Business Fees earned$XXX Operating expenses–XXX Net income$XXX Nature of Merchandising Businesses

5. Merchandising Business Sales$XXX Cost of Merchandise Sold–XXX Gross Profit$XXX Operating Expenses–XXX Net Income$XXX Nature of Merchandising Businesses

6. o When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold. Gross Profit

7. Nature of Merchandising Businesses o The cost of merchandise sold is subtracted from sales to arrive at gross profit. It is the profit before deducting operating expenses.

8. Nature of Merchandising Businesses o Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

9. N ATURE OF M ERCHANDISING B USINESSES

10. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe and illustrate the accounting for merchandise transactions. 2

11. Purchase Transactions o If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodic inventory system is being used.

12. Purchase Transactions o Under the perpetual inventory system, the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records.

13. * Purchase Transactions o On January 3, NetSolutions purchased merchandise for cash. NOTE: We will assume a perpetual inventory system is used.

14. Purchase Transactions o On January 4, NetSolutions purchased merchandise on account from Thomas Corporation.

16. Credit Terms o To encourage the buyer to pay before the end of the credit period, the seller may offer a discount. Credit terms of 2/10, n/30 are summarized in the next slide (Exhibit 2).

18. Purchases Discounts o A buyer may receive a discount from the seller (sales discount) for early payment of the amount owed. From the buyer’s perspective, such discounts are called purchases discounts.

19. Purchase Transactions o Alpha Technologies issues an invoice for $3,000 to NetSolutions dated January 5, with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within the discount period.

20. Discount of 2% on $3,000$60.00 Interest for 20 days at the rate of 6% on $2,940 – 9.80 Savings from borrowing$50.20YES Purchase Transactions o If NetSolutions can borrow cash at an annual interest rate of 6%, should the firm borrow cash to pay the invoice within the discount period?

21. Purchase Transactions o Alpha Technologies issued an invoice for $3,000 to NetSolutions dated January 5, with terms 2/10, n/30. Based on the calculation in the previous slide, NetSolutions pays the amount due, less the discount, on January 15.

22. Discount Not Taken o Assume that, instead of paying the invoice within the discount period, NetSolutions pays the invoice on February 4.

23. Purchases Returns and Allowances o A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. From a buyer’s perspective, such returns are called purchases returns and allowances.

24. Debit Memo o A debit memorandum, often called a debit memo, informs the seller of the amount the buyer proposes to debit to the account payable due the seller.

26. Debit Memo o NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 3 as follows:

27. Merchandise Purchased o On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30.

28. Merchandise Returned o On May 4, NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link.

29. Invoice Paid o On May 12, NetSolutions paid for the purchase of May 2 less the return and discount.

30. Cash Sales o On March 3, NetSolutions sold $1,800 of merchandise for cash.

31. Cash Sales o Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on March 3 is $1,200.

32. Cash Sales o Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $4,150 on March 31.

33. Sales on Account o On March 10, NetSolutions sold merchandise on account for $18,000. The cost of merchandise sold was $10,800.

34. Sales Discounts o The terms for when payments for merchandise are to be made are called credit terms. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay.

35. Receipts on Account o On March 19, NetSolutions receives the amount due within ten days, so the buyer deducted $360 ($18,000 x 2%) from the invoice amount.

36. Credit Memo o A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable. An example of a credit memo issued by NetSolutions is shown in Exhibit 4 (next slide).

38. Credit Memo o On April 13, issued Credit Memo No. 321 to Krier Company for merchandise returned to NetSolutions. Selling price, $2,250; cost to NetSolutions, $1,600.

39. Freight o If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, the terms are said to be FOB (free on board) shipping point.

40. Freight o On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the shipping cost of $50.

41. Freight o If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination.

42. Sale Plus Freight Cost o On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480.

43. Sale Plus Freight Cost o On June 15, NetSolutions pays freight of $40 on the sale of June 15.

44. Seller Prepays Freight o On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the merchandise sold is $360.

45. Seller Prepays Freight

46. F REIGHT T ERMS

48. S UMMARY : R ECORDING M ERCHANDISE I NVENTORY

49. D UAL N ATURE OF M ERCHANDISE T RANSACTIONS

57. C HART OF A CCOUNTS

58. Sales Taxes o On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax.

59. Sales Taxes o On a regular basis, the seller pays to the taxing authority (state) the amount of the sales taxes collected.

60. Trade Discounts o When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts.

61. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe and illustrate the financial statements of a merchandising business. 3

62. Multiple-Step Income Statement o The multiple-step income statement contains several sections, subsections, and subtotals.

63. R EVENUE FROM S ALES

64. Revenue from Sales o Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account.

65. Revenue from Sales o Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.

66. Revenue from Sales o Sales discounts are granted by the seller to customers for early payment of amounts owed.

67. Revenue from Sales o Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

68. Cost of Merchandise Sold o The cost of merchandise sold is the cost of the merchandise sold to customers. Merchandise costs consist of all the costs of acquiring the merchandise and readying it for sale, such as purchase and freight costs.

69. M ULTIPLE -S TEP I NCOME S TATEMENT

71. I NCOME FROM O PERATIONS Selling expenses are incurred directly in the selling of merchandise.  Sales salaries  Store supplies used  Depreciation of store equipment  Delivery expense  Advertising expense

72. I NCOME FROM O PERATIONS Administrative expenses, sometimes called general expenses, are incurred in the administration or general operations of the business.  Office salaries  Depreciation of office equipment  Office supplies used

73. M ULTIPLE -S TEP I NCOME S TATEMENT

74. Multiple-Step Income Statement o Income from operations, sometimes called operating income, is determined by subtracting operating expenses from gross profit.

75. M ULTIPLE -S TEP I NCOME S TATEMENT

76. Other Income and Expense o Other income is revenue from sources other than the primary operating activity of a business. o Other expense is an expense that cannot be traced directly to the normal operations of the business.

77. M ULTIPLE -S TEP I NCOME S TATEMENT

78. Single-Step Income Statement o An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.

79. S INGLE -S TEP I NCOME S TATEMENT

80. S TATEMENT OF O WNER ’ S E QUITY

81. Balance Sheet o The form of balance sheet with the assets on the left-hand side and the liabilities and owner’s equity on the right-hand side is called the account form.

82. Balance Sheet o When the balance sheet is presented in a downward sequence in three sections, it has been prepared using the report form. This is the form used in the next two slides.

83. B ALANCE S HEET (continued)

84. B ALANCE S HEET

85. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe the adjusting and closing process for a merchandising business. 4

86. Adjusting Entry for Inventory Shrinkage o Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory.

87. Adjusting Entry for Inventory Shrinkage o If the balance of the Merchandise Inventory account is larger than the total amount of the merchandise count, the difference is often called inventory shrinkage or inventory shortage.

88. Dec. 31, 2015 Account balance of Merchandise Inventory$63,950 Physical merchandise inventory on hand 62,150 Inventory shrinkage$ 1,800 Inventory Shrinkage o NetSolutions’ inventory records indicate the following on December 31, 2015:

89. Inventory Shrinkage o At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry:

90. Step 1: Closing Entries o Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary.

91. Step 2: Closing Entries o Credit each temporary account with a debit balance, such as an expense, for its balance and debit Income Summary.

92. Step 3: Closing Entries o Debit Income Summary for the amount of its balance (net income) and credit the owner’s capital account.

93. Step 4: Closing Entries o Debit the owner’s capital account for the balance of the drawing account and credit the drawing account.

94. Closing Entries o NetSolutions’ Income Summary account after the closing entries have been posted is as follows:

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96. Ratio of Net Sales to Assets o The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. Ratio of Net Sales to Assets Net Sales Average Total Assets =

97. Ratio of Net Sales to Assets o The following data (in millions) were taken from the annual reports of Dollar Tree, Inc.:

98. Ratio of Net Sales to Assets o The ratio of net sales to assets for each year are as follows:

99. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Appendix The Periodic Inventory System

100. P ERIODIC I NVENTORY S YSTEM

102. Recording Merchandise Transactions o Purchases. Purchases of inventory are recorded in a purchases account rather than in the merchandise inventory account.

103. Recording Merchandise Transactions o Purchases Discounts. Purchases discounts are normally recorded in a separate purchases discounts account. The balance of the purchases discounts account is reported as a deduction from Purchases for the period.

104. Recording Merchandise Transactions o Purchases Returns and Allowances. Purchases returns and allowances are recorded in a similar manner as purchase discounts.

105. Recording Merchandise Transactions o Freight In. When merchandise is purchased FOB shipping point, the buyer pays for the freight. Under the periodic inventory system, freight paid when purchasing merchandise FOB shipping point is debited to Freight In.

106. (continued)

107. (concluded)

108. C LOSING E NTRIES (continued)

109. C LOSING E NTRIES

110. (concluded) C LOSING E NTRIES

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