1. C6 - 1 Learning Objectives Power Notes 1. Nature of Merchandising Business 2a. Accounting for Purchases 2b. Accounting for Sales 2c. Transportation Costs 2d. Merchandise Transactions 3.Merchandising Chart of Accounts 4.Merchandising Income Statement 5.Merchandising Accounting Cycle 6.Financial Analysis and Interpretation Chapter 6 Accounting for Merchandising Businesses Accounting for Merchandising Businesses C6

2. C6 - 2 Nature of Merchandising Businesses Inventory Costs and Relationships Perpetual Inventory Systems Merchandising Transactions Merchandising Chart of Accounts Merchandising Financial Statements Ratio of Net Sales to Assets Slide # Power Note Topics 3 6 8 13 25 27 34 Power Notes Chapter 6 Accounting for Merchandising Businesses Accounting for Merchandising Businesses Note: To select a topic, type the slide # and press Enter.

3. C6 - 3 Merchandising and Inventory  Merchandising involves selling inventory  Inventory is usually an important asset 4 Inventory must be accounted for periodically or perpetually 4 Traditional periodic method is often being replaced by perpetual inventory accounting

4. C6 - 4 Income Statement Comparison Fees earned$150,000 Operating expenses120,000 Net income$ 30,000 Service Business Sales revenue$600,000 Cost of mdse. sold450,000 Gross profit$150,000 Operating expenses120,000 Net income$ 30,000 Merchandising Business 20% of revenues 5% of revenues

5. C6 - 5 Income Statement Comparison Fees earned$150,000 Operating expenses120,000 Net income$ 30,000 Service Business Sales revenue$600,000 Cost of mdse. sold450,000 Gross profit$150,000 Operating expenses120,000 Net income$ 30,000 Merchandising Business 20% of revenues 5% of revenues 75% of revenues

6. C6 - 6 LIABILITIES OWNER’S EQUITY REVENUES ASSETS COSTS & EXPENSES Inventory Costs and Relationships MerchandiseInventory Cost of Mdse. Sold If merchandise inventory is....... Cost of merchandise sold is...... Gross profit and net income are... Ending owner’s equity is......... If merchandise inventory is....... Cost of merchandise sold is...... Gross profit and net income are... Ending owner’s equity is......... overstated understated overstated Net Income

7. C6 - 7 LIABILITIES OWNER’S EQUITY REVENUES ASSETS COSTS & EXPENSES Inventory Costs and Relationships MerchandiseInventory Cost of Mdse. Sold If merchandise inventory is....... Cost of merchandise sold is...... Gross profit and net income are... Ending owner’s equity is......... If merchandise inventory is....... Cost of merchandise sold is...... Gross profit and net income are... Ending owner’s equity is......... understated overstated understated Net Income

8. C6 - 8 4 Continuous determination of inventory value 4 Continuous determination of gross profit 4 Affordable with computers, scanners, and bar codes on most products 4 Perpetual inventory accounting provides management controls 4 Managers know which items are selling fastest and the profit margin on those items Advantages of Using Perpetual Inventory

9. C6 - 9 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger Mdse. Inventory5,000 Accts. Payable5,000 Mdse. Inventory 5,000A Cost of Mdse. SoldA In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandiseA B

10. C6 - 10 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger Mdse. Inventory5,000 Accts. Payable5,000 Accts. Payable 1,000 Mdse. Inventory 1,000 Mdse. Inventory 5,000A Cost of Mdse. Sold 1,000A B B 4,000Bal In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandise Sale of merchandiseA B C

11. C6 - 11 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger Mdse. Inventory5,000 Accts. Payable5,000 Accts. Payable 1,000 Mdse. Inventory 1,000 Accts. Receivable3,250 Sales3,250 Cost of Mdse. Sold2,500 Mdse. Inventory2,500 Mdse. Inventory 5,000A Cost of Mdse. Sold 2,500 Purchase on account Return of merchandise Sale of merchandise 1,000A B B C C 2,500 1,500C Bal A B C In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur.

12. C6 - 12 Perpetual Inventory System General Journal DescriptionDebitCredit General Ledger Mdse. Inventory 5,000A Cost of Mdse. Sold 2,500 Purchase on account Return of merchandise Sale of merchandise 1,000A B B C C 2,500 1,500C Bal A B C In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Mdse. Inventory5,000 Mdse. Inventory5,000 Accts. Payable5,000 Accts. Payable 1,000 Mdse. Inventory 1,000 Mdse. Inventory 1,000 Accts. Receivable3,250 Sales3,250 Cost of Mdse. Sold2,500 Mdse. Inventory2,500

13. C6 - 13 Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Full amount is due within 30 days of invoice date. No

14. C6 - 14 2% of invoice amount is allowed as a cash discount. Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Yes Full amount is due within 30 days of invoice date. No

15. C6 - 15 2% of invoice amount is allowed as a cash discount. Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Yes Full amount is due within 30 days of invoice date. No Example: Merchandise was purchased for $1,500 with credit terms of 2/10, n/30. Payment within 10 days is calculated as: Invoice$1,500 Less 2% discount30 Net cost paid$1,470

16. C6 - 16 Selling and Buying Merchandise Inventory DescriptionDebitCredit Accts. Receivable1,500 Sales1,500 Cost of Mdse. Sold900 Mdse. Inventory900 Mdse. Inventory1,470 Accts. Payable1,470 SellerBuyer DescriptionDebitCredit Jan 12. Merchandise was sold with credit terms of 2/10, n/30. Jan 22. Payment was made within the discount period. Recorded at net cost $1,500 - $30 (discount)

17. C6 - 17 Selling and Buying Merchandise Inventory DescriptionDebitCredit Accts. Receivable1,500 Sales1,500 Cost of Mdse. Sold900 Mdse. Inventory900 Cash1,470 Sales Discounts30 Accts. Receivable1,500 Mdse. Inventory1,470 Accts. Payable1,470 Accts. Payable1,470 Cash1,470 SellerBuyer DescriptionDebitCredit Jan 12. Merchandise was sold with credit terms of 2/10, n/30. Jan 22. Payment was made within the discount period. Recorded at net cost $1,500 - $30 (discount)

18. C6 - 18 Selling and Buying Merchandise Inventory DescriptionDebitCredit Accts. Receivable1,500 Sales1,500 Cost of Mdse. Sold900 Mdse. Inventory900 Cash1,470 Sales Discounts30 Accts. Receivable1,500 Mdse. Inventory1,500 Accts. Payable1,500 Accts. Payable1,500 Mdse. Inventory 30 Cash1,470 SellerBuyer DescriptionDebitCredit Jan 12. Merchandise was sold with credit terms of 2/10, n/30. Jan 22. Payment was made within the discount period. Recorded at full cost

19. C6 - 19 Accounting for Merchandise Transactions DescriptionDebitCredit Accts. Receivable5,000 Sales5,000 Cost of Mdse. Sold3,500 Mdse. Inventory3,500 Mdse. Inventory5,000 Accts. Payable5,000 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.

20. C6 - 20 Accounting for Merchandise Transactions DescriptionDebitCredit Transportation Out250 Cash250 Mdse. Inventory5,000 Accts. Payable5,000 No entry. Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Co. on July 5. Accts. Receivable5,000 Sales5,000 Cost of Mdse. Sold3,500 Mdse. Inventory3,500

21. C6 - 21 Accts. Receivable5,000 Sales5,000 Cost of Mdse. Sold3,500 Mdse. Inventory3,500 Transportation Out250 Cash250 Accounting for Merchandise Transactions DescriptionDebitCredit Sales Ret. & Allow.1,000 Accts Receivable1,000 Mdse. Inventory700 Cost of Mdse. Sold700 Mdse. Inventory5,000 Accts. Payable5,000 No entry. Accts. Payable1,000 Mdse. Inventory1,000 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.

22. C6 - 22 Accounting for Merchandise Transactions DescriptionDebitCredit Cash4,000 Accts. Receivable4,000 Accts. Payable4,000 Cash4,000 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 15. Scully Company received payment from Burton Co. for purchase of July 5.

23. C6 - 23 Cash4,000 Accts. Receivable4,000 Accounting for Merchandise Transactions DescriptionDebitCredit Accts. Receivable12,500 Sales12,000 Cash500 Cost of Mdse. Sold7,200 Mdse. Inventory7,200 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200. Accts. Payable4,000 Cash4,000 Mdse. Inventory12,500 Accts. Payable12,500

24. C6 - 24 Cash4,000 Accts. Receivable4,000 Accts. Receivable12,500 Sales12,000 Cash500 Cost of Mdse. Sold7,200 Mdse. Inventory7,200 Accounting for Merchandise Transactions DescriptionDebitCredit Cash12,260 Sales Discounts240 Accts. Receivable12,500 Accts. Payable4,000 Cash4,000 Mdse. Inventory12,500 Accts. Payable12,500 Accts. Payable12,500 Mdse. Inventory240 Cash12,260 Scully Company (Seller) Burton Co. (Buyer) DescriptionDebitCredit July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

25. C6 - 25 NetSolutions Merchandising Chart of Accounts Balance Sheet Accounts 200 Liabilities 210Accounts Payable 211Salaries Payable 212Unearned Rent 215Notes Payable 300 Owner’s Equity 310Chris Clark, Capital 311Chris Clark, Drawing 312Income Summary 100 Assets 110Cash 111Notes Receivable 112Accounts Receivable 113Interest Receivable 115Merchandise Inventory 116Office Supplies 117Prepaid Insurance 120Land 123Store Equipment 124Accumulated Depreciation— Store Equipment 125Office Equipment 126Accumulated Depreciation— Office Equipment

26. C6 - 26 NetSolutions Merchandising Chart of Accounts Income Statement Accounts 600 Other Income 610Rent Income 611Interest Income 700 Other Expense 710Interest Expense 400 Revenues 410Sales 411Sales Returns and Allowances 412Sales Discounts 500 Costs and Expenses 510Cost of Merchandise Sold 520Sales Salaries Expense 521Advertising Expense 522Depreciation Expense— Store Equipment 523 Transportation Out 529Misc. Selling Expense 530Office Salaries Expense 531Rent Expense 532Depreciation Expense— Office Equipment 533Insurance Expense 534Office Supplies Expense 539Misc. Admin. Expense

27. C6 - 27 Revenue from sales: Sales$720,185 Less:Sales returns and allow.$ 6,140 Sales discounts5,79011,930 Net sales$708,255 Cost of merchandise sold525,305 Gross profit$182,950 NetSolutions Income Statement (Multiple-Step) For the Year Ended December 31, 2002 Continued

28. C6 - 28 Operating expenses: Selling expenses: Sales salaries expense$60,030 Advertising expense10,860 Depr. expense–store equip.3,100 Miscellaneous selling expense630 Total selling expenses$ 74,620 Administrative expenses: Office salaries expense$21,020 Rent expense8,100 Depr. expense–office equip.2,490 Insurance expense1,910 Office supplies expense610 Misc. admin. expenses760 Total admin. expenses34,890 Total operating expenses109,510 Income from operations$ 73,440 Continued

29. C6 - 29 Other income: Interest revenue$ 3,800 Rent revenue600 Total other income$ 4,400 Other expense: Interest expense2,4401,960 Net income $75,400

30. C6 - 30 Revenues: Net sales$708,255 Interest revenue3,800 Rent revenue600 Total revenues$712,655 Expenses: Cost of merchandise sold$525,305 Selling expenses74,620 Administrative expenses34,890 Interest expense2,440 Total expenses637,255 Net income$ 75,400 NetSolutions Income Statement (Single-Step) For the Year Ended December 31, 2002

31. C6 - 31 NetSolutions Balance Sheet December 31, 2002 Continued Assets Current assets: Cash$ 52,950 Notes receivable40,000 Accounts receivable60,880 Interest receivable200 Merchandise inventory62,150 Office supplies480 Prepaid insurance2,650 Total current assets$219,310

32. C6 - 32 NetSolutions Balance Sheet December 31, 2002 Property, plant, and equipment: Land$ 10,000 Store equipment$ 27,100 Less accum. depreciation5,70021,400 Office equipment$ 15,570 Less accum. depreciation4,72010,850 Total property, plant, and equipment42,250 Total assets$261,560 Continued

33. C6 - 33 NetSolutions Balance Sheet December 31, 2002 Liabilities Current liabilities: Accounts payable$ 22,420 Note payable (current portion)5,000 Salaries payable1,140 Unearned rent1,800 Total current liabilities$30,360 Long-term liabilities: Note payable (due 2004)20,000 Total liabilities$ 50,360 Owner’s Equity Chris Clark, capital211,200 Total liabilities and owner’s equity$261,560

34. C6 - 34 Profitability Analysis Profitability is the ability of an entity to earn profits. This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available. Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.

35. C6 - 35 Profitability Measures — Effective Use of Assets Ratio of Net Sales to Assets 20032002 Net sales$1,498,000$1,200,000 Total assets: Beginning of year$1,053,000$1,010,000 End of year 1,044,5001,053,000 Total$2,097,500$2,063,000 Average$1,048,750$1,031,500

36. C6 - 36 Ratio of Net Sales to Assets Use:To assess the effectiveness in the use of assets Net sales on account$1,498,000$1,200,000 Total assets: Beginning of year$1,053,000$1,010,000 End of year 1,044,5001,053,000 Total$2,097,500$2,063,000 Average$1,048,750$1,031,500 Ratio of net sales to assets1.4 to 11.2 to 1 Profitability Measures — Effective use of Assets 20032002

37. C6 - 37 Note: To see the topic slide, type 2 and press Enter. This is the last slide in Chapter 6. Power Notes Chapter 6 Accounting for Merchandising Businesses Accounting for Merchandising Businesses