2. 5 - 1 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Merchandising Operations and the Accounting Cycle Chapter 5

3. 5 - 2 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Service Co. Income Statement Year ended June 30, 20xx Service revenue$xxx Expenses: Salary expense x Depreciation expense x Income tax expense x Net income$ xx Merchandising Co. Income Statement Year ended June 30, 20xx Sales revenue$xxx Cost of goods sold x Gross profit xx Operating expenses: Salary expense x Depreciation expense x Net income$ xx Income Statements

4. 5 - 3 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Use sales and gross profit to evaluate a company. Objective 1

5. 5 - 4 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Net sales Sales Revenue less Sales Returns and Sales Discounts = Sales Revenue

6. 5 - 5 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Target Corporation Income Statement (Adapted) Year Ended December 31, 2000 Net sales revenue (same as Net sales)$33,212 Cost of goods sold (same as Cost of sales) 23,029 Gross profit (same as Gross margin) 10,183 Expenses: Selling, general, administrative7,490 Depreciation expense 854 Interest expense 393 Other expenses, net 302 Total operating expenses 9,039 Net earnings (same as Net income)$ 1,144 Millions Gross Profit or Gross Margin

7. 5 - 6 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Operating Cycle of a Merchandising Business Cash Inventory Cash Inventory Accounts Receivable Accounts Receivable Purchase and Cash SalePurchase and Sale on Account

8. 5 - 7 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Perpetual Periodic Inventory Systems

9. 5 - 8 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Account for the purchase and sale of inventory. Objective 2

10. 5 - 9 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Purchase of Inventory Merchant prepares purchase order Merchant prepares purchase order Suppliers send merchandise and a bill Suppliers send merchandise and a bill Compares

11. 5 - 10 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Purchase of Inventory Example l On May 1, the Sporting Store acquired on account $2,000 of various items for resale. l The supplier sent the merchandise along with a bill stating the quantity, price, and terms of sale. l What is the journal entry?

12. 5 - 11 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber May 1 Inventory $2,000 Accounts Payable $2,000 Purchased inventory on account Inventory Accounts Payable 2,000 2,000 May 1 Inventory $2,000 Accounts Payable $2,000 Purchased inventory on account Inventory Accounts Payable 2,000 2,000 Purchase of Inventory Example

13. 5 - 12 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Purchase Returns and Allowances Example l Assume that on May 4 a $100 item was returned prior to payment of the invoice. l What is the journal entry? May 4 Accounts Payable 100 Inventory 100 Merchandise was returned May 4 Accounts Payable 100 Inventory 100 Merchandise was returned

14. 5 - 13 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Purchase Returns and Allowances Example l Assume that one of the items of merchandise is slightly damaged, and the store was given a $10 allowance. l What is the journal entry? May 4 Accounts Payable 10 Inventory 10 Received a purchase allowance May 4 Accounts Payable 10 Inventory 10 Received a purchase allowance

15. 5 - 14 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Purchase Returns and Allowances Example Inventory 2,000 100 10 Bal. 1,890 Accounts Payable 100 2,000 10 Bal. 1,890

16. 5 - 15 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Purchase Discounts l Credit terms are stated in expressions such as: l 2/10, N/30, meaning that a discount of 2% is allowed if the invoice is paid within 10 days; otherwise the full (net) amount is due within 30 days.

17. 5 - 16 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Purchase Discounts Example l Assume the Sporting Store purchased merchandise for $1,000 with terms of 2/10, N/30. l The store paid within the discount period. l The 2% discount ($20) is deducted from the amount due ($1,000) and $980 is remitted.

18. 5 - 17 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Purchase Discounts Example l What is the journal entry? Accounts Payable 1,000 Cash980 Inventory 20 To record payment of invoice within the discount period Accounts Payable 1,000 Cash980 Inventory 20 To record payment of invoice within the discount period

19. 5 - 18 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Transportation Costs l Transportation costs are the cost of moving inventory from seller to buyer. l FOB stands for Free on Board and governs the passing of title of the goods. l Selling/buying agreements usually specify FOB terms.

20. 5 - 19 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Transportation Costs FOB Shipping Point FOB Destination

21. 5 - 20 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Freight Charges Example l Assume that on May 9 the Sporting Store paid $60 for freight. l What is the journal entry? May 9 Inventory 60 Cash 60 Paid a freight bill May 9 Inventory 60 Cash 60 Paid a freight bill

22. 5 - 21 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Sporting Store Example l Assume that on May 11 the store sold merchandise costing $1,800 for $2,600 in cash. l What are the journal entries?

23. 5 - 22 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Sporting Store Example May 11 Cash 2,600 Sales Revenue 2,600 To record sale of merchandise May 11 Cash 2,600 Sales Revenue 2,600 To record sale of merchandise May 11 Cost of Goods Sold 1,800 Inventory 1,800 To record the cost of merchandise sold May 11 Cost of Goods Sold 1,800 Inventory 1,800 To record the cost of merchandise sold

24. 5 - 23 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Sporting Store Example l On May 15, the store sold to Maria Gym $5,000 worth of merchandise with a cost of $3,000. l Terms are 2/10, N/30. Invoice Maria GymTerms 2/10, N/30 Total$5,000

25. 5 - 24 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Sales Discounts and Sales Returns and Allowances Example l On May 17, Maria Gym returned $1,500 worth of goods that cost $900. l In addition, a credit of $100 was allowed for merchandise that was damaged. l What are the journal entries?

26. 5 - 25 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Sales Discounts and Sales Returns and Allowances Example May 17 Sales Returns and Allowance 1,500 Accounts Receivable1,500 Received returned merchandise May 17 Sales Returns and Allowance 1,500 Accounts Receivable1,500 Received returned merchandise May 17 Inventory 900 Cost of Goods Sold900 Returned goods to inventory May 17 Inventory 900 Cost of Goods Sold900 Returned goods to inventory

27. 5 - 26 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Sales Discounts and Sales Returns and Allowances Example l There is no entry required for inventory since the goods were not returned. May 17 Sales Returns and Allowance100 Accounts Receivable100 Credit granted for damaged goods May 17 Sales Returns and Allowance100 Accounts Receivable100 Credit granted for damaged goods

28. 5 - 27 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounts Receivable May 15 = $5,000 Less May 17 returns and allowances $1,600 Equals May 20 balance due of $3,400 Sales Discounts and Sales Returns and Allowances Example l On May 20, the store received a check from Maria Gym for the balance due. l What is the balance due?

29. 5 - 28 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Sales Discounts and Sales Returns and Allowances Example l Maria took advantage of the sales terms – 2/10, N/30. May 20 Cash 3,332 Sales Discounts 68 Accounts Receivable 3,400 Cash collected within the discount period May 20 Cash 3,332 Sales Discounts 68 Accounts Receivable 3,400 Cash collected within the discount period

30. 5 - 29 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Adjust and close the accounts of a merchandising business. Objective 3

31. 5 - 30 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Book Inventory Balance $255,000 Book Inventory Balance $255,000 Physical Count $252,500 Physical Count $252,500 $2,500 difference Adjustments to Inventory Example

32. 5 - 31 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber December 31 Cost of Goods Sold 2,500 Inventory 2,500 To adjust inventory to physical count December 31 Cost of Goods Sold 2,500 Inventory 2,500 To adjust inventory to physical count Adjustments to Inventory Example l What is the journal entry?

33. 5 - 32 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Revenues Income Summary C.G.S. Sales Discount 22,824 Returns and A. 32,605 Capital Account 1,490,400 2,760,000 7,348 2,767,348 Other Exp. 1,884,348 883,000 338,519 Closing Entries for a Merchandising Business

34. 5 - 33 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Prepare a merchandiser’s financial statements. Objective 4

35. 5 - 34 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Income Statement Formats l There are two basic formats for the income statement: 1 Multi-step 2 Single-step

36. 5 - 35 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Multi-Step Format Sporting Store Income Statement Year Ended December 31, 2002 Sales revenue$2,760,000 Sales discounts– 22,824 Returns and allowances– 32,605 Net sales revenue$2,704,571 Cost of goods sold–1,490,400 Gross margin$1,214,171

37. 5 - 36 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Multi-Step Format Gross margin$1,214,171 Operating expenses: Wage expense– 166,285 Rent expense– 137,000 Insurance expense– 16,302 Depreciation expense– 9,781 Supplies expense– 8,151 Operating income$ 876,652

38. 5 - 37 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Multi-Step Format Operating income$876,652 Other revenue and expenses: Interest revenue 7,348 Interest expense– 1,000 Net income$883,000

39. 5 - 38 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Single-Step Format Sporting Store Income Statement Year Ended December 31, 2002 Revenues: Net sales (net of sales discounts)$2,704,571 Interest revenue 7,348 Total revenues$2,711,919

40. 5 - 39 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Single-Step Format Expenses: Cost of goods sold$1,490,400 Wage expense 166,285 Rent expense 137,000 Interest expense 1,000 Insurance expense 16,302 Depreciation expense 9,781 Supplies expense 8,151 Total expenses$1,828,919 Net income$ 883,000

41. 5 - 40 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Use the gross margin percentage and the inventory turnover ratio to evaluate a business. Objective 5

42. 5 - 41 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Inventory turnover = Cost of goods sold ÷ Average inventory Inventory turnover = Cost of goods sold ÷ Average inventory Gross profit percentage = Gross profit ÷ Net sales revenue Gross profit percentage = Gross profit ÷ Net sales revenue Using the Financial Statements for Decision Making

43. 5 - 42 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Gross Profit on $1 for Three Merchandisers Gross margin $0.45 Gross margin $0.42 Cost of goods sold $0.55 Cost of goods sold $0.58 Cost of goods sold $0.79 Gross margin $0.21 Wal-Mart Stores, Inc. $1.00 — $0.75 — $0.50 — $0.25 — $0.00 Austin Sound Target Corporation

44. 5 - 43 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Rate of Inventory Turnover for Three Merchandisers 1 Wal-Mart Stores, Inc. 234567 1 Target Corporation Austin Sound 7.0 times per year JanMarJunSepDec 2345 5.4 times per year 12 2.3 times per year

45. 5 - 44 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Compute the cost of goods sold. Objective 6

46. 5 - 45 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Purchases of inventory – Purchases discounts – Purchases returns and allowances = Net purchases Purchases of inventory – Purchases discounts – Purchases returns and allowances = Net purchases Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale Cost of goods available for sale – Ending inventory = Cost of goods sold Cost of goods available for sale – Ending inventory = Cost of goods sold Computing the Cost of Goods Sold in a Periodic System

47. 5 - 46 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Beginning Inventory $20,000 Beginning Inventory $20,000 Purchases and Freight-In $101,000 Purchases and Freight-In $101,000 Ending Inventory $15,000 Ending Inventory $15,000 Cost of Goods Sold $106,000 Cost of Goods Sold $106,000 Cost of Goods Available for Sale $121,000 Cost of Goods Available for Sale $121,000 Computing the Cost of Goods Sold in a Periodic System

48. 5 - 47 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber End of Chapter 5