1. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting for Merchandising Businesses Chapter 5 Student Version These slides should be viewed using the presentation mode (left click your mouse on the icon).

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 1 Distinguish between the activities and financial statements of service and merchandise businesses.

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 1 Nature of Merchandising Businesses  Most services businesses, such as plumbing repair and accounting services, have no merchandise.  Merchandising businesses, such as a department store or sandwich shop, generate revenue by selling a product.  Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory.

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 2 Describe and illustrate the financial statements of a merchandising business.

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Multiple-Step Income Statement  The multiple-step income statement contains several sections, subsections, and subtotals.  Below is the revenue section for NetSolutions.

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Revenue from Sales  Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account.  Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise.

7. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Revenue from Sales  Sales discounts are granted by the seller to customers for early payment of amounts owed.  Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Cost of Merchandise Sold  The cost of merchandise sold is the cost of the merchandise sold to customers. Merchandise costs consist of all the costs of acquiring the merchandise and readying it for sale, such as purchase and freight costs.  A single figure for cost of merchandise sold is shown on the multiple-step income statement on the next slide.

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Cost of Merchandise Sold  The buyer may return merchandise to the seller (purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (purchase allowance).  You have seen that 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.

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Cost of Merchandise Sold  If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodic inventory system is being used.  Under the perpetual inventory system, the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records.

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Gross Profit  Gross profit is computed by subtracting the cost of merchandise sold from net sales. Gross Profit

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2  Selling expenses are incurred directly in the selling of merchandise. Multiple-Step Income Statement  Administrative expenses, sometimes called general expenses, are incurred in the administration or general operations of the business.  Income from operations, sometimes called operating income, is determined by subtracting operating expenses from gross profit.

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Other Income and Expense  Other income is revenue from sources other than the primary operating activity of a business.  Other expense is an expense that cannot be traced directly to the normal operations of the business.

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 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.

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Balance Sheet  The form of balance sheet with the assets on the left-hand side and the liabilities and stockholders’ equity on the right-hand side is called the account form. LO 2  When the balance sheet is presented in a downward sequence in three sections, it has been prepared using the report form.

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 3 Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; freight; sales taxes and trade discounts; dual nature of merchandising transactions.

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On January 3, NetSolutions sold $1,800 of merchandise for cash. Cash Sales LO 3

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on January 3 is $1,200. LO 3 Cash Sales

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sales made to customers using credit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 31. Cash Sales LO 3

20. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On January 12, NetSolutions sold merchandise on account for $510. Sales on Account LO 3 The cost of merchandise sold was $280.

21. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The terms for when payments for merchandise are to be made are called credit terms.  If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay. Sales Discounts LO 3

22. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On January 17, NetSolutions receives the amount due within ten days, so the buyer deducted $30 ($1,500 x 2%) from the invoice amount. Receipts on Account LO 3

23. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Credit Memo LO 3  A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable.

24. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On January 13, issued Credit Memo No. 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. Credit Memo LO 3

25. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Purchase Transactions LO 3 On January 3, NetSolutions purchased merchandise for cash (assume a perpetual inventory is used).

26. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. * Purchase Transactions LO 3 On January 4, NetSolutions purchased merchandise on account from Thomas Corporation.

27. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Purchases Discounts  A buyer may receive a discount from the seller (sales discount) for early payment of the amount owed.  From the buyer’s perspective, such discounts are called purchases discounts. LO 3

28. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within the discount period. LO 3 Purchase Transactions LO 3

29. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Alpha Technologies issued an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. Based on the calculation in the previous slide, NetSolutions pays the amount due, less the discount, on March 22. Purchase Transactions

30. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Assume that, instead of paying the invoice within the discount period, NetSolutions pays the invoice on April 11. Discount Not Taken LO 3

31. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Purchases Returns and Allowances  A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order.  From a buyer’s perspective, such returns are called purchases returns and allowances.

32. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Debit Memo  A debit memorandum, often called a debit memo, informs the seller of the amount the buyer proposes to debit to the account payable due the seller.

33. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3  NetSolutions records the return of the merchandise as follows: Debit Memo  NetSolutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 is issued to Maxim System.

34. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30. Merchandise Purchased LO 3 On May 4, NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link.

35. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On May 12, NetSolutions paid for the purchase of May 2 less the return and discount. Invoice Paid LO 3

36. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Freight  If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, the terms are said to be FOB (free on board) shipping point. LO 3  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.

37. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the shipping cost of $50. Two entries are required. LO 3 Freight

38. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. Again, two entries are required. Sale Plus Freight Cost LO 3

39. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On June 15, NetSolutions pays freight of $40 on the sale of June 15. Sale Plus Freight Cost LO 3

40. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the merchandise sold is $360. Three entries are needed. These are shown on the next slide. LO 3 Seller Prepays Freight

41. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Seller Prepays Freight

42. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On August 12, merchandise is sold on account to Lemon Company, $100 (plus a 6% sales tax). Sales Taxes LO 3 The seller pays to the taxing authority (state) the total amount of the sales taxes collected.

43. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Trade Discounts  When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts. LO 3

44. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  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. Dual Nature of Merchandise Transactions LO 3

45. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Dual Nature of Merchandise Transactions LO 3 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.

46. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Scully Company (Seller) Accounts Receivable—Burton Co.7,500 Sales7,500 Cost of Merchandise Sold4,500 Merchandise Inventory4,500 Burton Company (Buyer) Merchandise Inventory7,500 Accounts Payable—Scully Co.7,500 Dual Nature of Merchandise Transactions LO 3

47. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from Scully Company. LO 3 Dual Nature of Merchandise Transactions

48. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. No entry. Burton Company (Buyer ) Merchandise Inventory150 Cash150 LO 3 Scully Company (Seller ) Dual Nature of Merchandise Transactions

49. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. LO 3 Dual Nature of Merchandise Transactions

50. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounts Receivable—Burton Co.5,000 Sales5,000 Cost of Merchandise Sold3,500 Merchandise Inventory3,500 Scully Company (Seller) Burton Company (Buyer) Merchandise Inventory.5,000 Accounts Payable—Scully Co.5,000 LO 3 Dual Nature of Merchandise Transactions

51. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5. LO 3 Dual Nature of Merchandise Transactions

52. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Scully Company (Seller) Delivery Expense250 Cash250 Burton Company (Buyer) No entry. LO 3 Dual Nature of Merchandise Transactions

53. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. July 13.Scully Company issued Burton Company a credit memorandum for merchandise returned, $1,000. The cost of the merchandise returned was $700. LO 3 Dual Nature of Merchandise Transactions

54. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 LO 3 Dual Nature of Merchandise Transactions

55. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. July 15. Scully Company received payment from Burton Company for purchase of July 5. LO 3 Dual Nature of Merchandise Transactions

56. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Scully Company (Seller) Cash4,000 Accounts Receivable—Burton Co.4,000 Burton Company (Buyer) Accounts Payable—Scully Co.4,000 Cash4,000 LO 3 Dual Nature of Merchandise Transactions

57. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. LO 3 Dual Nature of Merchandise Transactions

58. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 Burton Company (Buyer) Merchandise Inventory12,500 Accounts Payable—Scully Co.12,500 LO 3 Dual Nature of Merchandise Transactions

59. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% × $12,000). LO 3 Dual Nature of Merchandise Transactions

60. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 LO 3 Dual Nature of Merchandise Transactions

61. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 4 Describe the adjusting and closing process for a merchandising business.

62. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 4 Adjusting Entry for Inventory Shrinkage  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 the merchandise count, the difference is often called inventory shrinkage or inventory shortage.

63. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary. LO 4 Step 1: Closing Entries

64. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Credit each temporary account with a debit balance, such as an expense, for its balance and debit Income Summary. Step 2: Closing Entries LO 4

65. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3.Debit Income Summary for the amount of its balance (net income) and credit Retained Earnings. LO 4 Steps 3 and 4: Closing Entries 4.Debit Retained Earnings for the balance of the Dividends account and credit the Dividends account.

66. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 5 Describe and illustrate the use of the ratio of net sales to assets in evaluating a company’s operating performance.

67. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ratio of Net Sales to Assets  The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. Ratio of Net Sales to Assets Net Sales Average Total Assets = LO 5

68. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 5 Ratio of Net Sales to Assets  The ratio of net sales to assets for each year are as follows:

69. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting for Merchandising Businesses The End