1. Accounting for Merchandising Operations
Chapter 5
Accounting for Merchandising Operations
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso

2. Merchandising Operations
Income Measurement
Sales
Revenue
Not used in a Service business.
Less
Illustration 5-1
Cost of
Goods Sold
Gross
Profit =
Less
Net
Income
(Loss)
Operating
Expenses =
Cost of goods sold is the total cost of merchandise sold during the period.
SO 1 Identify the differences between service and merchandising companies.

3. Merchandising Operations
Flow of Costs
Illustration 5-3
SO 1 Identify the differences between service and merchandising companies.

4. Merchandising Operations
Flow of Costs
Perpetual System
Purchases increase Merchandise Inventory.
Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory.
Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale.
Physical count done to verify Merchandise Inventory balance.
The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold.
SO 1 Identify the differences between service and merchandising companies.

5. Merchandising Operations
Flow of Costs
Periodic System
Purchases of merchandise increase Purchases.
Ending Inventory determined by physical count.
Calculation of Cost of Goods Sold:
Beginning inventory $ 100,000
Add: Purchases, net + 800,000
Goods available for sale 900,000
Less: Ending inventory - 125,000
Cost of goods sold $ 775,000
SO 1 Identify the differences between service and merchandising companies.

6. Recording Purchases of Merchandise
Illustration 5-5
Made using cash or credit (on account).
Normally recorded when goods are received.
Purchase invoice should support each credit purchase.
SO 2 Explain the recording of purchases under a perpetual inventory system.

7. Recording Purchases of Merchandise
Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they intend to sell.
Illustration: From INVOICE NO. 731 (Illustration 5-5) record the journal entry Sauk Stereo (Pembeli) would make to record its purchase from PW Audio Supply.
May 4
Merchandise inventory 3,800
Accounts payable 3,800
SO 2 Explain the recording of purchases under a perpetual inventory system.

8. Recording Purchases of Merchandise
Freight Costs – Terms of Sale
Illustration 5-6
Seller places goods Free On Board the carrier, and buyer pays freight costs.
Seller places goods Free On Board to the buyer’s place of business, and seller pays freight costs.
Freight costs incurred by the seller are an operating expense.
SO 2

9. Recording Purchases of Merchandise
Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Acme Freight Company €150 for freight charges, the entry on Sauk Stereo’s (Pembeli) books is:
May 6
Merchandise inventory 150
Cash
Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio (Penjual) Supply would have been:
May 4
Freight-out (or Delivery Expense) 150
Cash
SO 2 Explain the recording of purchases under a perpetual inventory system.

10. Recording Purchases of Merchandise
Purchase Returns and Allowances
Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.
Purchase Return
Purchase Allowance
Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash.
May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price.
SO 2 Explain the recording of purchases under a perpetual inventory system.

11. Recording Purchases of Merchandise
Illustration: Assume that on May 8 Sauk Stereo (Pembeli) returned to PW Audio Supply goods costing €300.
May 8
Accounts payable 300
Merchandise inventory 300
SO 2 Explain the recording of purchases under a perpetual inventory system.

12. Recording Purchases of Merchandise
Purchase Discounts
Credit terms may permit buyer to claim a cash discount for prompt payment.
Advantages:
Purchaser saves money.
Seller shortens the operating cycle.
Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days.
SO 2 Explain the recording of purchases under a perpetual inventory system.

13. Recording Purchases of Merchandise
Purchase Discount Terms
2/10, n/30
1/10 EOM
n/10 EOM
2% discount if paid within 10 days, otherwise net amount due within 30 days.
1% discount if paid within first 10 days of next month.
Net amount due within the first 10 days of the next month.
SO 2 Explain the recording of purchases under a perpetual inventory system.

14. Recording Purchases of Merchandise
Illustration: Assume Sauk Stereo pays the balance due of €3,500 (gross invoice price of €3,800 less purchase returns and allowances of €300) on May 14, the last day of the discount period. Prepare the journal entry Sauk (Pembeli) makes to record its May 14 payment.
May 14
Accounts payable 3,500
Cash ,430
Merchandise Inventory 70
SO 2 Explain the recording of purchases under a perpetual inventory system.

15. Recording Purchases of Merchandise
Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of €3,500 on June 3, the journal entry would be:
June 3
Accounts payable 3,500
Cash 3,500
SO 2 Explain the recording of purchases under a perpetual inventory system.

16. Recording Sales of Merchandise
Illustration 5-5
Made for cash or credit (on account).
Normally recorded when earned, usually when goods transfer from seller to buyer.
Sales invoice should support each credit sale.
SO 3 Explain the recording of sales revenues under a perpetual inventory system.

17. Recording Sales of Merchandise
Two Journal Entries to Record a Sale #1
Cash or Accounts receivable XXX
Selling Price
Sales XXX #2
Cost of goods sold XXX
Cost
Merchandise inventory XXX
SO 3 Explain the recording of sales revenues under a perpetual inventory system.

18. Recording Sales of Merchandise
Illustration: Assume PW Audio Supply (Penjual) records its May 4 sale of €3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume the merchandise cost PW Audio Supply €2,400.
May 4
Accounts receivable 3,800
Sales 3,800 4
Cost of goods sold 2,400
Merchandise inventory 2,400
SO 3 Explain the recording of sales revenues under a perpetual inventory system.

19. Recording Sales of Merchandise
Sales Returns and Allowances
“Flipside” of purchase returns and allowances.
Contra-revenue account (debit).
Sales not reduced (debited) because:
would obscure importance of sales returns and allowances as a percentage of sales.
could distort comparisons between total sales in different accounting periods.
SO 3 Explain the recording of sales revenues under a perpetual inventory system.

20. Recording Sales of Merchandise
Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a €300 selling price (assume a €140 cost). Assume the goods were not defective.
May 8
Sales returns and allowances 300
Accounts receivable 300 8
Merchandise inventory 140
Cost of goods sold 140
SO 3 Explain the recording of sales revenues under a perpetual inventory system.

21. Recording Sales of Merchandise
Illustration: Assume the returned goods were defective and had a scrap value of €50, PW Audio would make the following entries:
May 8
Sales returns and allowances 300
Accounts receivable 300 8
Merchandise inventory 50
Cost of goods sold 50
SO 3 Explain the recording of sales revenues under a perpetual inventory system.

22. Recording Sales of Merchandise
Sales Discount
Offered to customers to promote prompt payment.
“Flipside” of purchase discount.
Contra-revenue account (debit).
SO 3 Explain the recording of sales revenues under a perpetual inventory system.

23. Recording Sales of Merchandise
Illustration: Assume Sauk Stereo pays the balance due of €3,500 (gross invoice price of €3,800 less purchase returns and allowances of €300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14.
May 14
Cash 3,430
Sales discounts 70 *
Accounts receivable 3,500
* [(€3,800 – €300) X 2%]
SO 3 Explain the recording of sales revenues under a perpetual inventory system.

24. Completing the Accounting Cycle
Adjusting Entries
Generally the same as a service company.
One additional adjustment to make the records agree with the actual inventory on hand.
Involves adjusting Merchandise Inventory and Cost of Goods Sold.
SO 4 Explain the steps in the accounting cycle for a merchandising company.

25. Completing the Accounting Cycle
Illustration: Suppose that PW Audio Supply has an unadjusted balance of €40,500 in Merchandise Inventory. Through a physical count, PW Audio determines that its actual merchandise inventory at year-end is €40,000. The company would make an adjusting entry as follows.
Cost of goods sold 500
Merchandise inventory 500
SO 4 Explain the steps in the accounting cycle for a merchandising company.

26. Forms of Financial Statements
Income Statement
Primary source for evaluating a company’s performance.
Format designed to differentiate between the various sources of income and expense.
SO 5 Prepare an income statement for a merchandiser.

27. Forms of Financial Statements
Income Statement Presentation of Sales
Illustration 5-13
SO 5 Prepare an income statement for a merchandiser.

28. Forms of Financial Statements
Gross Profit
Illustration 5-13
Illustration 5-10
SO 6 Explain the computation and importance of gross profit.

29. Forms of Financial Statements
Operating Expenses
Illustration 5-13
IFRS allows presentation by nature and presentation by function.
SO 5 Distinguish between a multiple-step and a single-step income statement.

30. Forms of Financial Statements
Various revenues and gains and expenses and
losses that are unrelated to the company’s main line of operations.
Other Income and Expense
Illustration 5-13
SO 5

31. Forms of Financial Statements
Interest expense, if material, must be disclosed on the face of the income statement.
Interest Expense
Illustration 5-13
SO 5

32. Forms of Financial Statements
Classified Statement of Financial Position
Illustration 5-15
SO 5 Distinguish between a multiple-step and a single-step income statement.

33. Periodic Inventory System
Periodic System
Separate accounts used to record purchases, freight costs, returns, and discounts.
Company does not maintain a running account of changes in inventory.
Ending inventory determined by physical count.
SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

34. Comparison of Entries-Perpetual vs. Periodic
Illustration 5A-2
SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

35. Comparison of Entries-Perpetual vs. Periodic
Illustration 5A-2
SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

36. Periodic Inventory System
Calculation of Cost of Goods Sold
Illustration 5A-1
SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.