1. 1 Chapter 5

2. 2 Chapter 5 Merchandising Operations After studying Chapter 5, you should be able to: zIdentify the differences between a service enterprise and a merchandising company. zExplain the recording of purchases under a perpetual inventory system. zExplain the recording of sales revenues under a perpetual inventory system. zDistinguish between a single-step and a multiple-step income statement.

3. 3 Chapter 5 Merchandising Operations After studying Chapter 5, you should be able to zDetermine the cost of goods sold under a periodic system. zExplain the factors affecting the profitability.

4. 4 Merchandising companies buy and sell merchandise. Service enterprises perform services as their primary source of revenue.

5. 5 Differences Between a Service Enterprise and a Merchandising Company zIn a merchandising company, the primary source of revenues is the sale of merchandise, referred to as sales revenue or sales. zUnlike expenses for a service company, expenses for a merchandising company are divided into two categories: yCost of goods sold - the total cost of merchandise sold during the period. yOperating expenses - selling and administrative expenses.

6. 6 Terms zSales revenue or sales = revenue from merchandise sold zCost of goods sold = total cost of merchandise sold

7. 7 Page 202 in book Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Income (Loss) Less Equals How Income is Measured in a Merchandising Company

8. 8 Operating cycle of a company is... the average time it takes to go from cash to cash in producing revenues. TO

9. 9 Operating cycle of a merchandising company is... zordinarily longer than than that of a service company; zpurchase of merchandise and its sale lengthens the cycle.

10. 10 Receive Cash Perform Services Buy Inventory Sell Inventory Service Company Merchandising Company Cash Accounts Receivable Accounts Receivable Merchandise Inventory

11. 11 Inventory Systems zPerpetual - detailed inventory system in which the cost of inventory is maintained and the records continuously show the inventory that should be on hand zPeriodic -inventory system in which detailed records are not maintained and the cost is goods sold is determined only at end of accounting period

12. 12 Record Revenue and compute and record Cost of Goods Compute and record Cost of Goods Sold Perpetual Periodic Perpetual Item Sold End of Period Comparing Periodic and Perpetual Inventory Systems Inventory Purchased Record Purchase of Inventory End of Period No Entry Record Purchase of Inventory Record Revenue Only Inventory Purchased Item Sold

13. 13 Computers & electronic scanners have enabled many companies to install perpetual inventory systems

14. 14 What Is Charged to Merchandise Inventory? zAll costs of getting the inventory to company and ready to sell (location & condition to sell) y+Freight-In y+Special Permits zOnly costs associated with merchandise purchased for resale - not assets acquired for use, such as supplies

15. 15 Merchandise Purchases On May 4 the company bought $ 3,800 worth of merchandise from PW Audio Supply, Inc. Task:Record the purchase by getting information from the Purchase Invoice. The Purchase Invoice is a copy of the sales invoice.

16. 16 1. Seller 2.Invoice Date 3.Purchaser 4.Salesperson 5.Credit terms 6.Freight terms 7.Goods sold: catalog no.,description, quantity, price per unit 8.Total invoice price Invoice No. 731 Address 125 Main Street Attention o f James Hoover, Purchasing Agent Firm Name: Sauk Stero City Chelsea State Illinois Zip 60915 Date5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer Catalog No. Description QTY Price Amount IMPORTANT : ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800 1,5003008 Production Model Circuits A2547Z48

17. 17 Merchandise Purchases On May 4 the company bought $ 3,800 worth of merchandise from PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 4 Merchandise Inventory 3,800 Accounts Payable 3,800 To record goods purchased on account. Accounts Payable Merchandise Inventory May 4 3,800 Freight-out May 4 3,800

18. 18 Purchases Returns and Allowances On May 8 the company returned $300 worth of merchandise to PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account. Accounts Payable Merchandise Inventory May 4 3,800 Freight-out May 4 3,800May 8 300

19. 19 Freight Costs - On Incoming Inventory On May 6 the company paid $ 150 to have the merchandise inventory delivered to them. GENERAL JOURNAL Debit Credit May 6 Merchandise Inventory 150 Cash 150 To record payment of freight. Freight-Out Merchandise Inventory May 4 3,800 Cash May 6 150May 8 300 May 6 150

20. 20 Freight Costs-on outgoing inventory On May 6 the seller company paid $ 150 to have merchandise inventory delivered to the buyer. GENERAL JOURNAL Debit Credit May 6 Freight-Out 150 Cash 150 To record payment of freight on goods sold. Freight-Out Merchandise Inventory Cash May 6 150

21. 21 Purchase Discounts Credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment. Credit terms specify the amount of cash discounts and the time period during which they are offered. 2/10,n/30 1/10 EOM

22. 22 Purchases Discounts Review - Company purchased $3,800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period Original Invoice $3,800 -Returns 300 Amount due before discount $3,500 2% discount 70 Net due $3,430

23. 23 Purchases Discounts Review - Company purchased $3,800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period. GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period. Accounts Payable Merchandise Inventory May 4 3,800 Cash May 4 3,800May 8 300 May 14 70 May 14 3,500 May 14 3430 May 6 150

24. 24 Payment of Invoice Review - Company purchased $3,800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was NOT paid within the discount period. GENERAL JOURNAL Debit Credit June 3 Accounts Payable 3,500 Cash 3,500 To record payment NOT within discount period. Accounts Payable Merchandise Inventory May 4 3,800 Cash May 4 3,800May 8 300 Jun 3 3,500

25. 25 Sales Invoice... a business document that provides written evidence of a credit sale.

26. 26 1. Seller 2.Invoice Date 3.Purchaser 4.Salesperson 5.Credit terms 6.Freight terms 7.Goods sold: catalog no.,description, quantity, price per unit 8.Total invoice price Invoice No. 731 Address 125 Main Street Attention o f James Hoover, Purchasing Agent Firm Name: Sauk Stero City Chelsea State Illinois Zip 60915 Date 5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer Catalog No. Description QTY Price Amount IMPORTANT : ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800 1,5003008 Production Model Circuits A2547Z48

27. 27 Sales Revenues - Under a Perpetual System zare recorded when earned-revenue recognition principle zmust be supported by a business document- written evidence z2 entries are made for each sale yone to record sale yone to record cost of merchandise sold

28. 28 Sales - under a perpetual system Assume a sale of $ 3,800 ON ACCOUNT Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales May 4 3,800 May 4 2,400 for merchandise having a cost of $2,400 May 4 3,800

29. 29 Sales Returns and Allowances Flip side of purchase returns and allowance On buyer’s books GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account. On seller’s books GENERAL JOURNAL Debit Credit May 8 Sales Returns and Allowance 300 Accounts Receivable 300 To record return of goods delivered to Sauk Stero.

30. 30 Sales - under a perpetual system Assume a sale of $ 3,800 ON ACCOUNT Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales May 4 3,800 May 4 2,400 For merchandise having a cost of $2,400 May 4 3,800

31. 31 What Is the Sales Returns and Allowances Account? zContra Revenue Account to sales zUsed to show how much came in on returns and allowances Excessive returns and allowances suggest: zinferior merchandise zinefficiencies in filling orders zerrors in billing customers zmistakes in delivery or shipment of goods

32. 32 What Is the Sales Discount Account? zContra Revenue Account to sales zUsed to disclose amount of cash discounts taken by customers

33. 33 Sales Discounts Flip side of purchase discounts On seller’s books GENERAL JOURNAL Debit Credit May 14Cash 3,430 Sales Discounts 70 Accounts Receivable 3500 To record collection within discount period. On buyer’s books GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period

34. 34 Two Forms Of Income Statements zSingle-step income statement  Multiple-step income statement

35. 35 Single-Step Income Statement One step… subtract total expenses from total revenues Revenues $10,000 Expenses 3,000 Net income$ 7,000

36. 36 PW AUDIO, Inc. Single-step Income Statement For the Year Ended December 31, 2004 Sales $460,000 Interest Revenue 3,000 Gain on Sale of equipment 600 Total Revenues$463,600 Expenses Cost of goods sold$316,000 Selling expenses 76,000 Administrative expenses 38,000 Interest expense 1,800 Casualty Loss from vandalism 200 Income tax expense 10,100 Total expenses 442,100 Net income $ 21,500

37. 37 Sales revenues Sales$ 480,000 Less: Sales returns and allowance$12,000 Sales discounts 8,000 20,000 Net sales 460,000 Cost of goods sold 316,000 Gross profit $ 144,000Operating expenses Selling expenses: Store salaries expense $45,000 Advertising expense 16,000 Depreciation expense 8,000 Freight-out 7,000 Total selling expenses$76,000 Administrative expenses Salaries expense $19,000 Utilities expense 17,000 Insurance Expense 2,000 Total administrative expenses 38,000 Total operating expenses114,000 Income from operations $ 30,000 PW AUDIO SUPPLY, INC. Multi-step Income Statement For the Year Ended December 31, 2004

38. 38 Income from operations (continued) $ 30,000 Other revenues and gains Interest revenue $ 3,000 Gain on sale of equipment 600 $ 3,600 Other expenses and losses Interest expense $ 1,800 Casualty loss from vandalism 200 2,000 1,600 31,600 Income before income income taxes Income tax expense 10,100 Net income $21,500 PW AUDIO SUPPLY, INC. Multi-step Income Statement For the Year Ended December 31, 2004

39. 39 Cost of Goods Sold - Periodic Method A running account of changes in inventory is not maintained. Separate accounts use to record freight costs, returns and discounts Cost of goods sold and ending inventory are calculated at end of period.

40. 40 Cost of goods sold Inventory, January 1$ 36,000 Purchases$325,000 Less Purchase returns and allowances $10,400 Purchase discounts 6,800 17,200 Net purchases 307,800 Add: Freight-in 12,200 Cost of goods purchased 320,000 Cost of goods available for sale 356,000 Inventory, December 31 40,000 Cost of goods sold 316,000 PW AUDIO SUPPLY, INC. Cost of Goods Sold For the Year Ended December 31, 2004

41. 41 Gross Profit Ratio= Gross Profit Net Sales Company’s gross profit expressed as a percentage Also called “Gross margin ratio”

42. 42 Profit Margin Ratio Measures the percentage of each dollar of sales that results in net income Profit Margin Ratio = Net Income Net Sales Higher value suggests favorable return on each dollar of sales.