1. 5- 1 Adjusting Entries for Merchandisers Z-Mart’s Merchandise Inventory account at the end of year 2013 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists. P3 A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of merchandise, including theft and deterioration.

2. 5- 2 Inventory Control The continuous tracking of transactions in a perpetual inventory system allows companies to keep just the right quantity of products on the shelves for just the right amount of time. New microchip technology allows the transmitting of data automatically from every inventory item that enters, moves within, and exits a store. Managers can estimate inventory theft, fraud, and error like this: Determine inventory on hand at the beginning of the period. Determine inventory on hand at the beginning of the period. Monitor every piece of inventory that enters and exits inventory. Add any purchases: Subtract any goods that are sold: Monitor every piece of inventory that enters and exits inventory. Add any purchases: Subtract any goods that are sold: Count inventory to determine what is actually there (on hand). Count inventory to determine what is actually there (on hand). Oct. 1 + - For October Quantity per accounting records Shrinkage (theft, fraud, error)

3. 5- 3 Closing Entries for Merchandisers P3

4. 5- 4 P4 A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.

5. 5- 5 Single-Step Income Statement P4

6. 5- 6 Classified Balance Sheet Highly Liquid Less Liquid

7. 5- 7 Global View Accounting for Merchandise Purchases and Sales Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales. Financial Statement Differences 1.Order of expenses 2.Separate disclosures 3.Presentation of expenses 4.Classification of operating and nonoperating expenses 5.Alternative income 6.Order of current and noncurrent items on the balance sheet

8. 5- 8 A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future. = Quick Assets Quick Assets Current Liabilities Acid-TestRatio Acid-TestRatio = Cash + S-T Investments + Receivables Cash + S-T Investments + Receivables Current Liabilities Cash + S-T Investments + Receivables Cash + S-T Investments + Receivables Current Liabilities Acid-Test Ratio A1

9. 5- 9 Percentage of dollar sales available to cover expenses and provide a profit. Gross Margin Ratio A2

10. 5- 10 JCPenney A1/A2

11. 5- 11 Appendix 5A: Periodic Inventory System P5 A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold. (a) (b) (c) (d) (e) (f) (g)

12. 5- 12 Appendix 5A: Periodic Inventory System P5

13. 5- 13 Appendix 5B: Worksheet—Perpetual System P5