1. 1 1 6 Accounting for Merchandising Businesses

2. 2 2 Service Business Fees earned$XXX Operating expenses–XXX Net income$XXX 6-1

3. 3 3 Merchandising Business Sales$XXX Cost of Merchandise Sold–XXX Gross Profit$XXX Operating Expenses–XXX Net Income$XXX 6-1

4. 4 4 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold. 6-1

5. 5 5 The cost of merchandise sold is subtracted from sales to arrive at gross profit. This amount is called gross profit because it is the profit before deducting the operating expenses. 6-1

6. 6 6 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory. 6-1

7. 7 7 11 6-1

8. 8 8 The multiple-step income statement contains several sections, subsections, and subtotals. 6-2 Multiple-Step Income Statement

9. 9 9 The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account. 6-2

10. 10 Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. 6-2

11. 11 Sales discounts are granted by the seller to customers for early payment of amounts owed. 6-2

12. 12 Net sales is determined by subtracting sales returns and allowances and sales discounts from sales. 6-2

13. 13 18 (Continued) Revenue from sales: Sales$720,185 Less: Sales returns and allowances$ 6,140 Sales discounts 5,790 11,930 Net sales$708,255 Cost of merchandise sold525,305 Gross profit$182,950 NetSolutions Income Statement For the Year Ended December 31, 2009 6-2 Multiple-Step Income Statement

14. 14 Operating expenses: Selling expenses: Sales salaries expense$53,430 Advertising expense10,860 Depr. Expense–store equipment3,100 Delivery Expense2,800 Miscellaneous selling expense 630 Total selling expenses$ 70,820 Administrative expenses: Office salaries expense$21,020 Rent expense8,100 Depr. expense–office equipment2,490 Insurance expense1,910 Office supplies expense610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations$ 77,240 Operating expenses: Selling expenses: Sales salaries expense$53,430 Advertising expense10,860 Depr. Expense–store equipment3,100 Delivery Expense2,800 Miscellaneous selling expense 630 Total selling expenses$ 70,820 Administrative expenses: Office salaries expense$21,020 Rent expense8,100 Depr. expense–office equipment2,490 Insurance expense1,910 Office supplies expense610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations$ 77,240 19 (Continued)

15. 15 (Concluded) Other income and expenses: Rent revenue $ 600 Interest expense(2,440) (1,840) Net income $75,400 Other income and expenses: Rent revenue $ 600 Interest expense(2,440) (1,840) Net income $75,400 6-2 20

16. 16 Cost of merchandise sold was discussed earlier. It is the cost of the merchandise sold to customers. 6-2

17. 17 As we discussed in Slide 16, sellers may offer customers sales discounts for early payment of their bills. From the buyer’s perspective, such discounts are referred to as purchase discounts. 6-2

18. 18 The buyer may return merchandise to the seller (a purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (a purchase allowance). 6-2

19. 19 24 Cost of Merchandise Sold 6-2

20. 20 6-2 Single-Step Income Statement An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues.

21. 21 26 Revenues: Net sales$708,255 Rent revenue 600 Total revenues$708,855 Expenses: Cost of merchandise sold$525,305 Selling expenses70,820 Administrative expenses34,890 Interest expense 2,440 Total expenses 633,455 Net income$ 75,400 NetSolutions Income Statement For the Year Ended December 31, 2009 6-2 Exhibit 3: Single-Step Income Statement

22. 22 6-2 Example Exercise 6-2 Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2. Merchandise Inventory, May 1$121,200 Merchandise Inventory, May 31142,000 Purchases985,000 Purchases Returns and Allowances23,500 Purchases Discounts21,000 Transportation In11,300 31

23. 23 34 On January 3, NetSolutions sold $1,800 of merchandise for cash. 6-3 Cash Sales

24. 24 35 6-3 Using a perpetual inventory, the $1,200 cost of the inventory must be recorded. Cash Sales (continued)

25. 25 36 6-3 At the end of the month, $48 was sent to pay the service charge on credit card sales. Credit Card Sales

26. 26 37 6-3 Sales on Account Using a Perpetual Inventory Jan. 12Accounts Receivable—Sims Co. 510 00 Sales510 00 Invoice No. 7172 On January 12, NetSolutions sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280. 12Cost of Merchandise Sold 280 00 Merchandise Inventory 280 00 Cost of merchandise sold on Invoice No. 7172.

27. 27 The terms for when payments for merchandise are to be made, agreed on by the buyer and the seller, are called credit terms. If buyer is allowed an amount of time to pay, it is known as the credit period. 6-3 Sales Discounts

28. 28 39 If invoice is paid within 10 days of invoice date Invoice for $1,500 Terms: 2/10, n/30 $1,470 paid ($1,500 less a 2% discount) 6-3 Credit Terms

29. 29 40 If invoice is NOT paid within 10 days of invoice date Invoice for $1,500 Terms: 2/10, n/30 Full amount ($1,500) is due within 30 days of invoice date 6-3

30. 30 41 Sales Discounts 6-3 On January 22, NetSolutions receives the amount due, less the 2 percent discount. Jan. 22Cash 1 470 00 Accounts Receivable–Omega Tech. 1 500 00 Sales Discounts 30 00 Collection of Invoice No. 106-8, less 2% discount.

31. 31 Jan. 13Sales Returns and Allowances 225 00 Accounts Receivable—Krier Co. 225 00 Credit Memo No. 32 13Merchandise Inventory 140 00 Cost of Goods Sold 140 00 Cost of merchandise returned. Credit Memo No. 32. 6-3 42 On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.

32. 32 1-2 Journalize the following merchandise transactions: a.Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625. b.Received payment less the discount. 6-3 Example Exercise 6-3 43

33. 33 45 On January 3, NetSolutions purchased merchandise for cash from Alden Company, $2,510. Purchase Transactions (Perpetual Inventory) 6-3 JOURNAL Date Description Post. Ref. Dr Cr. PAGE 24 Jan. 3Merchandise Inventory2 510 00 2009 Cash2 510 00 Purchased inventory from Bowen Co.

34. 34 46 6-3 Jan. 4 Merchandise Inventory 9 250 00 Accounts Payable—Thomas Corp.9 250 00 Purchased inventory on account. On January 4, NetSolutions purchased merchandise on account from Thomas Corporation, $9,250.

35. 35 Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. Purchases Discounts 6-3

36. 36 NetSolutions borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay the invoice within the discount period? 6-3 Discount of 2% on $3,000$60.00 Interest for 20 days at the rate of 6% on $2,940 – 9.80 Savings from borrowing$50.20 YES

37. 37 49 Mar. 12 Merchandise Inventory 3 000 00 Accounts Payable—Alpha Tech.3 000 00 Purchased inventory on account. 6-3 On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,000. Purchase Transactions (Perpetual Inventory)

38. 38 Mar. 22 Accounts Payable—Alpha Technol. 3 000 00 Cash2 940 00 Merchandise Inventory60 00 Paid Alpha Technologies for March 12 purchase. 6-3 If payment is made by March 22, NetSolutions records the discount as a reduction in cost. Notice that Merchandise Inventory is credited because NetSolutions maintains a perpetual inventory. 50

39. 39 Apr. 11 Accounts Payable—Alpha Technol. 3 000 00 Cash3 000 00 Paid Alpha Technologies for March 12 purchase. 6-3 51 If NetSolutions does not pay the invoice until April 11, it would pay the full amount.

40. 40 A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. Purchases Return 6-3

41. 41 When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance. 6-3 Purchases Allowance

42. 42 NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 (also called a debit memo) is issued to Maxim Systems. 6-3

43. 43 Mar. 7Accounts Payable—Maxim Systems 900 00 Debit Memo No. 18 Merchandise Inventory 900 00 6-3 55 On March 7, NetSolutions records the return of the merchandise indicated in Debit Memorandum No. 18.

44. 44 56 On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30. May 2Merchandise Inventory 5 000 00 Purchased merchandise. Accounts Payable—Delta Data 5 000 00 6-3

45. 45 57 On May 4, NetSolutions returns $3,000 of the merchandise. 6-3 4Accounts Payable—Delta Data Link 3 000 00 Returned portion of the merchandise purchased. Merchandise Inventory 3 000 00

46. 46 58 On May 12, NetSolutions pays the amount due, $1,960 [$2,000 – ($5,000 –$3,000) x 2%)]. 12Accounts Payable—Delta Data Links 2 000 00 Paid invoice [($5,000 – $3,000) x 2% = $40; $2,000 – $40 = $1,960] Cash1 960 00 Merchandise Inventory 40 00 6-3

47. 47 If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, it is said to be FOB (free on board) shipping point. 6-3 Transportation Costs

48. 48 62 On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50. June 10 Merchandise Inventory 900 00 Purchased merchandise, terms FOB shipping point. Accounts Payable—Magna Data 900 00 10Merchandise Inventory 50 00 Cash 50 00 Paid shipping cost. 6-3

49. 49 If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination. 6-3 Transportation Costs

50. 50 On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. 6-3 FOB Destination

51. 51 65 6-3 June 15Accounts Receivable—Kranz Co. 700 00 Sold merchandise, terms FOB destination. Sales 700 00 15Cost of Merchandise Sold 480 00 Merchandise Inventory 480 00 Record cost of merchandise sold to Kranz Company.

52. 52 66 6-3 On June 15, NetSolutions pays the transportation cost of $40. June 15 Delivery Expense 40 00 Cash 40 00 Paid shipping cost on merchandise sold.

53. 53 On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. The cost of the merchandise sold is $360. 6-3 FOB Shipping Point

54. 54 68 6-3 June 20Accounts Receivable—Planter Co. 800 00 Sold merchandise, terms FOB shipping point. Sales 800 00 20Cost of Merchandise Sold 360 00 Merchandise Inventory 360 00 Record cost of merchandise sold to Planter Company.

55. 55 69 6-3 NetSolutions pays the transportation cost of $45 and adds it to the invoice. June 20 Accounts Receivable—Planter Co. 45 00 Cash 45 00 Prepaid shipping cost on merchandise sold.

56. 56 6-3 Determine the amount to be paid in full settlement of each of invoices (a) and (b), assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. Example Exercise 6-5 70 Transportation Returns and Merchandise Paid by Seller Transportation Terms Allowances a. $4,500$200FOB shipping point, $800 1/10, n/30 b. $5,000$60FOB destination, $2,500 2/10, n/30

57. 57 18 72 6-3

58. 58 18 73 On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax. Aug. 12 Accounts Receivable—Lemon Co. 106 00 Sales 100 00 Sales Taxes Payable6 00 Invoice No. 339 Sales Taxes 6-3

59. 59 18 74 On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected. Sept. 15 Sales Tax Payable 2 900 00 Cash 2 900 00 Payment for sales taxes collected during August. 6-3

60. 60 When wholesalers offer special discounts to certain classes of buyers that order large quantities, these discounts are called trade discounts. Trade Discounts 6-3

61. 61 Dual Nature of Merchandise Transactions 6-3 Each merchandising transaction affects a buyer and a seller. In the following illustrations, we show how the same transactions would be recorded by both the seller and the buyer. July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500.

62. 62 18 77 Scully Company (Seller) Accounts Receivable—Burton Co.7,500 Sales7,500 Cost of Merchandise Sold4,500 Merchandise Inventory4,500 Burton Company (Buyer) Merchandise Inventory.7,500 Accounts Payable—Scully Co.7,500 6-3

63. 63 July 2 Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company. 6-3

64. 64 18 79 Scully Company (Seller) No entry. Burton Company (Buyer) Merchandise Inventory150 Cash150 6-3

65. 65 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. 6-3

66. 66 18 81 Scully Company (Seller) Accounts Receivable—Burton Co.5,000 Sales5,000 Cost of Merchandise Sold3,500 Merchandise Inventory3,500 Burton Company (Buyer) Merchandise Inventory.5,000 Accounts Payable—Scully Co.5,000 6-3

67. 67 July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5. 6-3

68. 68 18 83 Scully Company (Seller) Delivery Expense250 Cash250 Burton Company (Buyer) No entry. 6-3

69. 69 July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $700. 6-3

70. 70 18 85 Scully Company (Seller) Sales Returns and Allowances1,000 Accounts Receivable—Burton Co.1,000 Merchandise Inventory700 Cost of Merchandise Sold700 Burton Company (Buyer) Accounts Payable—Scully Co.1,000 Merchandise Inventory1,000 6-3

71. 71 July 15. Scully Company received payment from Burton Company for purchase of July 5. 6-3

72. 72 18 87 Scully Company (Seller) Cash4,000 Accounts Receivable—Burton Co.4,000 Burton Company (Buyer) Accounts Payable—Scully Co.4,000 Cash4,000 6-3

73. 73 July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200. 6-3

74. 74 18 89 Scully Company (Seller) Accounts Receivable—Burton Co.12,000 Sales12,000 Accounts Receivable—Burton Co.500 Cash500 Cost of Merchandise Sold7,200 Merchandise Inventory7,200 6-3 Burton Company (Buyer) Merchandise Inventory12,500 Accounts Payable—Scully Co.12,500

75. 75 July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000). 6-3

76. 76 18 91 Scully Company (Seller) Cash12,260 Sales Discounts240 Accounts Receivable—Burton Co.12,500 Burton Company (Buyer) Accounts Payable—Scully Co.12,500 Merchandise Inventory240 Cash12,260 6-3

77. 77 1-2 Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms 2/15, n/30. The cost of the merchandise sold is $6,900. Sievert Co. issued a credit memorandum for $900 for merchandise returned and later received the amount due within the discount period. The cost of the merchandise returned was $540. Journalize Sievert Co.’s and Bray Co.’s entries for the receipt of the check for the amount due from Bray Co. 6-3 Example Exercise 6-6 92

78. 78 6-4 Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory. If the balance of the Merchandise Inventory account is larger than the total amount of merchandise count, the difference is often called inventory shrinkage or inventory shortage. Inventory Shrinkage

79. 79 NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, 2009. The physical count reveals that only $62,150 is actually available. 6-4

80. 80 18 97 Inventory records$63,950 Inventory count 62,150 Inventory shortage$ 1,800 Dec.31Cost of Merchandise Sold 1 800 00 Merchandise Inventory 1 800 00 Adjusting Entry Inventory shrinkage (63,950 – $62,150). 6-4

81. 81 1-2 Pulmonary Company’s perpetual inventory records indicate that $382,800 of merchandise should be on hand on March 31, 2008. The physical inventory indicates that $371,250 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Pulmonary Company for the year ended March 31, 2008. 6-4 Example Exercise 6-7 103 Follow My Example 6-7