1. Copyright © 2007 Prentice-Hall. All rights reserved 1 Merchandising Operations Chapter 5

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Merchandising Operations Buying and selling products

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 Objective 1 Account for the purchase of inventory

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Purchase Sell Collect Operating Cycle of a Merchandising Business

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 Inventory Systems Periodic Perpetual

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Purchase of Inventory S5-1 Inventory10,000 Accounts Payable10,000 Purchased inventory

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 Purchase Discounts A deduction from the invoice price granted to encourage early payment of the amount due –2/10, n/30 –n/30 –eom Credit terms 2/10, n/30 means 2% discount if paid within 10 days. If the discount period is missed, the full amount is due within 30 days. This decreases the cost of the inventory.

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Purchase of Inventory S5-2 Accounts Payable10,000 Cash9,800 Inventory200 Paid within discount period 10,000 Inventory 200 Bal 9,800 Discount = $10,000 x 2% = $200

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 Purchase Returns and Allowances Purchase Return - Merchandise returned by the purchaser to the supplier Purchase Allowance - A reduction in the cost of defective merchandise received by a purchaser from a supplier

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Purchase Returns and Allowances – S5-2 Inventory100,000 Accounts Payable100,000 Purchased inventory

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Purchase Returns and Allowances – S5-2 Accounts Payable10,000 Inventory10,000 Returned damaged goods 100,000 Inventory 10,000 Bal 90,000 100,000 Accounts Payable 10,000 Bal 90,000

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Purchase Returns and Allowances – S5-2 Accounts Payable90,000 Cash90,000 Paid after the discount period 100,000 Inventory 10,000 Bal 90,000 100,000 Accounts Payable 10,000 Bal 0 90,000 Part a. If this is paid after the discount period, the company must pay the full invoice price less the return

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Purchase Returns and Allowances – S5-2 Accounts Payable90,000 Cash87,300 Inventory2,700 Paid within discount period 100,000 Inventory 10,000 Bal 87,300 2,700 100,000 Accounts Payable 10,000 Bal 0 90,000 Part b: If paid within the discount period. Discount = $90,000 x 3% = $2,700

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 Transportation Costs FOB Shipping Point (Buyer Pays) FOB Destination (Seller Pays) Seller Goods Buyer

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 Transportation Costs Freight in –Transportation cost on purchased goods –Debit inventory Freight-out –Transportation cost on goods sold –Debit an expense (delivery expense)

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT E5-15E5-15 Apr30Inventory6,000 Accounts Payable6,000 Purchased inventory

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT E5-15E5-15 Apr30Inventory300 Cash300 Paid freight charges 6,000 Inventory 300 Bal 6,300 6,000 Accounts Payable

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT E5-15E5-15 Apr30Accounts Payable1,000 Inventory1,000 Returned unsuitable goods 6,000 Accounts Payable 1,000 Bal 5,000 6,000 Inventory 300 Bal 5,300 1,000

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT E5-15E5-15 May14Accounts Payable5,000 Cash4,850 Inventory150 Paid within discount period 6,000 Accounts Payable 1,000 Bal 0 5,000 6,000 Inventory 300 Bal 5,150 1,000 150 Discount = $5,000 x 3% = $150 Remember, do not compute the discount on the freight charges….only the invoice price

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 Objective 2 Account for the sale of inventory

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 Sale of Inventory Sales Revenue –Amount earned from selling inventory –Revenue account Cost of Goods Sold –Cost of inventory that has been sold to customers –Expense account

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 Sale of Inventory Sales Returns & Allowances –When customer returns goods or the seller grants a reduction in price to customer –Contra-revenue account (debit balance) Sales Discounts –If customer pays within the discount period allowed by the seller –Contra-revenue account (debit balance) Delivery Expense (Freight Out)

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 Sales Transactions S5-5 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Accounts Receivable60,000 Sales Revenue60,000 To record sales on account Cost of Goods Sold32,000 Inventory32,000 To record cost of sales Remember, there are always two entries to record a sale when using the perpetual inventory system. One to record the selling price to the customer and the second to remove the inventory from your books at the amount your company paid to acquire it

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 Sales Transactions S5-5 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash60,000 Accounts Receivable60,000 Collected on account What if there were no credit terms allowed?

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 Sales Transactions S5-5 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash58,800 Sales Discount1,200 Accounts Receivable60,000 Collected on account

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 Sales Transactions S5-5 Sales$60,000 Sales Discount(1,200) Net Sales$58,800

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 S5-6S5-6 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Accounts Receivable10,000 Sales Revenue10,000 To record sales on account Cost of Goods Sold6,000 Inventory6,000 To record cost of sales

28. Copyright © 2007 Prentice-Hall. All rights reserved 28 S5-6S5-6 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Sales Returns & Allowances1,000 Accounts Receivable1,000 To record 100 books returned Inventory600 Cost of Goods Sold600 Returned books to inventory When merchandise is returned, you also have two entries

29. Copyright © 2007 Prentice-Hall. All rights reserved 29 S5-6S5-6 Sales Discounts 1,000 Sales Returns & Allowances Bal 1,000 Sales 10,000 Accounts Receivable Bal 9,000 1,000

30. Copyright © 2007 Prentice-Hall. All rights reserved 30 S5-6S5-6 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash8,820 Sales Discount180 Accounts Receivable9,000 Collected on account

31. Copyright © 2007 Prentice-Hall. All rights reserved 31 S5-6S5-6 Sales Discounts 1,000 Sales Returns & Allowances Bal 1,000 Sales 10,000 Accounts Receivable Bal 0 1,000 180 Bal 180 9,000 6,000 Cost of Goods Sold Bal 5,400 600

32. Copyright © 2007 Prentice-Hall. All rights reserved 32 S5-7S5-7 Sales$10,000 Sales Returns & Allowances(1,000) Sales Discounts(180) Net Sales$8,820 Cost of Goods Sold(5,400) Gross Profit$3,420

33. Copyright © 2007 Prentice-Hall. All rights reserved 33 Objective 3 Adjust and close the accounts of a merchandising business

34. Copyright © 2007 Prentice-Hall. All rights reserved 34 Adjusting Inventory If physical count of inventory is different from amount on the books – Inventory Shrinkage Debit Cost of Goods Sold Credit Inventory

35. Copyright © 2007 Prentice-Hall. All rights reserved 35 S5-8S5-8 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cost of Goods Sold1,100 Inventory1,100 Adjustment for shrinkage $65,000 (per books) - 63,900 (physical count) $1,100 (shrinkage)

36. Copyright © 2007 Prentice-Hall. All rights reserved 36 Closing Entries 1.Close all income statement accounts with credit balances to Income Summary 2.Close all income statement accounts with debit balances to Income Summary 3.Close Income Summary to Capital 4.Close Withdrawals to Capital

37. Copyright © 2007 Prentice-Hall. All rights reserved 37 S5-9S5-9 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dec31Sales Revenue700,000 Income Summary700,000 31Income Summary424,000 Cost of Goods Sold385,000 Rent Expense20,000 Depreciation Expense10,000 Sales Discounts9,000

38. Copyright © 2007 Prentice-Hall. All rights reserved 38 S5-9S5-9 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dec31Income Summary276,000 J. Hayes, Capital276,000 (700,000 – 424,000) 31J. Hayes, Capital60,000 J. Hayes, Withdrawals60,000

39. Copyright © 2007 Prentice-Hall. All rights reserved 39 Objective 4 Prepare a merchandiser’s financial statements

40. Copyright © 2007 Prentice-Hall. All rights reserved 40 Income Statement Net sales - Cost of goods sold Gross profit -Operating expenses: Selling expenses – related to selling and marketing the inventory General expense – office expenses Operating income +Other revenue and expense Net income

41. Copyright © 2007 Prentice-Hall. All rights reserved 41 Income Statement Formats Multiple-Step – see previous slide –Contains key subtotals Single-Step –Total revenues minus total expenses

42. Copyright © 2007 Prentice-Hall. All rights reserved 42 S5-10S5-10 Carolina Communications Income Statement For the Year Ended January 31, 2009 Net Sales Revenue$25,000 Cost of Goods Sold20,000 Gross Profit$5,000 Operating Expenses3,500 Net Income$1,500 Multiple step has key subtotal, gross profit

43. Copyright © 2007 Prentice-Hall. All rights reserved 43 S5-10S5-10 Carolina Communications Income Statement For the Year Ended January 31, 2009 Net Sales Revenue$25,000 Cost of Goods Sold$20,000 Operating Expenses 3,500 23,500 Net Income$1,500 Single step combines all expenses

44. Copyright © 2007 Prentice-Hall. All rights reserved 44 Objective 5 Use gross profit percentage and inventory turnover to evaluate a business

45. Copyright © 2007 Prentice-Hall. All rights reserved 45 Gross Profit Percentage Percentage of dollar sales available to cover expenses and provide a profit Gross Profit Net Sales

46. Copyright © 2007 Prentice-Hall. All rights reserved 46 Rate of Inventory Turnover Cost of goods sold Average inventory Average inventory = (Beg inventory + End inventory) / 2 How rapidly is inventory sold?

47. Copyright © 2007 Prentice-Hall. All rights reserved 47 E5-25E5-25 Net sales$65 Cost of sales(33) Gross profit$32 Gross profit percentage: Gross Profit Net Sales = $32 $65 = 49%

48. Copyright © 2007 Prentice-Hall. All rights reserved 48 E5-25E5-25 Inventory Turnover: = $33 $(4 + 3)/2 = 9.4 times Cost of goods sold Average inventory

49. Copyright © 2007 Prentice-Hall. All rights reserved 49 Objective 6 Compute cost of goods sold in a periodic inventory system

50. Copyright © 2007 Prentice-Hall. All rights reserved 50 Cost of Goods Sold – Periodic Inventory System Beginning Inventory + Purchases Goods Available for Sale

51. Copyright © 2007 Prentice-Hall. All rights reserved 51 Cost of Goods Sold – Periodic Inventory System Goods Available for Sale - Ending Inventory Cost of Goods Sold

52. Copyright © 2007 Prentice-Hall. All rights reserved 52 Cost of Goods Sold – Periodic Inventory System Beginning Inventory + Purchases Goods Available for Sale - Ending Inventory Cost of Goods Sold

53. Copyright © 2007 Prentice-Hall. All rights reserved 53 E5-26E5-26 a. Sales$170,000 Sales discounts(3,000) Sales returns(15,000) Net sales$152,000

54. Copyright © 2007 Prentice-Hall. All rights reserved 54 E5-26E5-26 b. Inventory, May 31, 20X6$19,000 Purchases$82,000 Purchases discounts(2,000) Purchases returns(8,000) Freight in4,000 Net purchases76,000 Goods available for sale$95,000 Inventory, May 31, 20X7(21,000) Cost of goods sold$74,000

55. Copyright © 2007 Prentice-Hall. All rights reserved 55 E5-26E5-26 c. Net sales$152,000 Cost of goods sold(74,000) Gross profit$78,000

56. Copyright © 2007 Prentice-Hall. All rights reserved 56 End of Chapter 5