1. Unit 2: Chapter 5: Accounting for Merchandising Operations
Unit 2 Quiz (chapter 5 quest) will be Thursday October 9

2. Operating Cycle: Service Company Cash Accounts Receivable Receive Cash
Perform Services
Accounts
Receivable

3. Merchandising Company (whole sale)
Operating Cycle:
Cash
Merchandising Company (whole sale)
Accounts
Receivable
Receive Cash
Buy Inventory
Merchandise
Inventory
Sell Inventory

4. Merchandising Company
Enterprise that buys and sells goods to earn a profit
E.g. clothing stores, convenience stores, restaurants, etc.
Wholesalers sell to retailers, retailers sell to consumers
Primary source of revenue for Merchandising Company = Sales
Service company primary source of revenue = Service revenue or Fees earned 4

5. Merchandising Company
2 types of Expenses in Income Statement:
Cost of goods sold
Total cost of merchandise you sold during the period.
For manufacturer: How much you paid for the raw materials or
For retailer: How much you paid for the finished goods
Operating expenses
Advertising expense
Salary expense
Rent expense
Utility expense 5

6. Merchandising Company
Gross Profit = Sales Revenue – COGS
For example, if Walmart buys 100 calculator for $15 from Texas instruement on September 1. Then WMT sells them for $25 to customers during September. What is their Gross Profit for September? (assuming that this is the only item they sold during September)
GP = (25 * 100) – (15* 100) = 1000 6

7. To calculate the cost of goods sold in Periodic Inventory system, three figures are needed:
The beginning inventory figure (last year’s ending inventory figure)
The cost of goods purchased figure (accumulated throughout the year in an account known as ‘Purchases’)
The ending inventory figure – obtained by taking a physical inventory (counting and valuing the entire inventory)
*****The expenses section is now headed Operating Expenses

8. Periodic Inventory Method:
The cost of the inventory sold is calculated at the end of the fiscal period using the formula below:
Cost of Beg. + Cost of goods - Cost of goods= Cost of Ending
Inventory Purchased Sold Inventory
CGS and CGP will appear in Income Statement whereas CEI will appear in Balance sheet under “current asset” right after accounts receivable.
Many companies use Periodic Inventory method because this is relatively easy and inexpensive.
Companies, which use periodic inventory method, will typically calculate CGS only once a year at year end.

9. Periodic Inventory Method:
At the fiscal year-end, a physical inventory must be taken to:
Update the current asset on the balance sheet just like office supplies account
Calculate the cost of goods sold for the income statement
To be used as the beginning inventory for the next accounting period
Merchandise Inventory is a Current Asset on the balance sheet as it will be sold within a year.

10. Example – Use the formula!
Units Dollars
Beginning Inventory $42,500
Merchandise Purchased ,000
Total Goods Available for Sale ? ?
Merchandise Sold ,100
Ending Inventory ? ?
Use the equation to calculate the total number of units and dollar value for ending inventory, as well as Total Goods Available for Sale

11. Example – Use the formula!
Units Dollars Beginning Inventory 1700 $42,500 Merchandise Purchased ,000 Total Goods Available for Sale ? ? Merchandise Sold ,100 Ending Inventory ? ? Use the equation to calculate the total number of units and dollar value for ending inventory, as well as Total Goods Available for Sale Answers: Total Goods Available for Sale = Units: 7200 Dollars: $185,500 Ending Inventory = Units: 1400 Dollars: $36,400

12. Cost of Goods Sold on the Income Statement
The inventory that was NOT sold belongs on the balance sheet – appears as “Ending Inventory or Inventory” in Balance Sheet.
The cost of the inventory that WAS sold – is known as Cost of Goods Sold – which belongs to the income statement
Ie: an item that cost $75.00 to produce was sold for $ The profit is $25.00

13. Cost of Goods Sold on the Income Statement
The total cost of goods sold is usually the biggest expense figure for a merchandising business
“Purchase” account is in expense category of the ledger.

14. Eastern Trading Company Income Statement Year Ended Dec 31 2014
Revenue Sales Cost of Goods Sold Inventory, January 1 $ Purchases Cost of Goods Available for Sale Less Inventory, December Cost of Goods Sold Gross Profit

15. Gross Profit Percentage
In this example, Gross Profit or Margin is 49% of sales / = 0.49
This means that for every dollar of revenue, 49 cents are available to cover operating expenses and to achieve a net income.
Most companies try to reach a specific gross profit percentage.

16. Drawbacks of Periodic Inventory System
When the periodic inventory system is used, financial statements cannot be obtained unless a physical inventory is taken - very time consuming. However, it is also very easy to manage (especially for small businesses such as a convenience store or pharmacy store)
We can calculate cost of goods sold only once a year when we do the physical inventory.

17. PERPETUAL INVENTORY
Typically small businesses would use periodic inventory system, which we have learned so far.
But many big corporaions would use perpetual inventory system.
Under perpetual inventory system, you do not have to wait until Dec 31 to find out how many units are ”goods available for sale” in your storage. You can easily find out how many inventory you have at any moment.
A detailed record of items in stock is up to date on an ongoing basis.

18. PERPETUAL INVENTORY
For example, at wal-mart, each cash register is a point of sale terminal connected to the store’s main computer.
As items are sold, the cashier scans the items, which captures the code numbers and the quantities sold via the scanner.
This information is transfered directly to the store’s central computer, which is programmed to make the appropriate deductions from the inventory and to make the accounting entries as shown below:

19. PERPETUAL INVENTORY
For example, at wal-mart, customer bought and paid $150 for a printer today.
WMT paid $ 100 last month for this printer to Samsung.
What kind of accounting transaction should occur under periodic inventory system?
Bank $150
Sales $150
What kind of accounting transaction should occur under perpetual inventory system?

20. PERPETUAL INVENTORY The entriy would be: Dr. Cr. Bank 150
Sales (selling price)
Cost of goods sold 100 (cost price)
Merchandise Inventory 100

21. PERPETUAL INVENTORY Every sale under perpedutal system has two parts:
Revenue portion of the sale: Receipt of cash or AR and recording sales account
Cost portion of the sale: Reduction of inventory (by crediting merchandize inventory account) and recording COGS (by debiting COGS account)
This means that we do not need to use COGS formula under this system, which is COGS = BI + purchase - EI

22. PERPETUAL INVENTORY Apple sold 5085 + HST worth of Ipads to Bestbuy.
This is the seller’s (Apple) perspective:
Dr. Cr. AR
Sales (selling price)
HST Payable
Cost of goods sold 2250 (cost price)
Merchandise Inventory 2250

23. Classwork / Homework
Page 258 BE5-1, BE5-8, BE5-10, BE5-11, BE5-12, BE5-15
Page 260 E5-1 (1, 2, 3, 7, 12, 14)