5 Accounting for
Merchandising Operations
Learning Objectives
1 Describe merchandising operations.
3 Recording sales.
Compare a multiple-step with a single-step income
5 statement.
5-1
LEARNING
OBJECTIVE
1 Describe merchandising.
Merchandising Companies
Buy and Sell Goods
Retailer
Wholesaler Consumer
The primary source of revenues is referred to as
sales revenue or sales.
5-2 LO 1
Merchandising Operations
Income Measurement
Not used in a
Sales Less
Illustration 5-1
Service business.
Revenue Income measurement process for a
merchandising company
Equals
Cost of Gross Less
Goods Sold Profit
Operating Equals Net
Cost of goods sold is the total Income
Expenses
cost of merchandise sold during (Loss)
the period.
5-3 LO 1
Operating Cycles
Illustration 5-2
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service
company.
Illustration 5-3
5-4 LO 1
Flow of Costs
Illustration 5-4
5-5 LO 1
LEARNING
OBJECTIVE
3 Recording sales
◆ Made using cash or credit (on account).
Illustration 5-6
◆ Sales revenue, like service
revenue, is recorded when
the performance obligation
is satisfied.
◆ Performance obligation is
satisfied when the goods
are transferred from the
seller to the buyer.
◆ Sales invoice should
support each credit sale.
5-6 LO 3
Recording Sales of Merchandise
Journal Entries to Record a Sale
#1 Cash or Accounts receivable XXX Selling
Sales revenue XXX Price
#2 Cost of goods sold XXX
Cost
Inventory XXX
5-7 LO 3
Recording Sales of Merchandise
Illustration: PW Audio Supply records the sale of $3,800
on May 4 to Sauk Stereo on account (Illustration 5-6) as
follows (assume the merchandise cost PW Audio Supply
$2,400).
May 4 Accounts Receivable 3,800
Sales Revenue 3,800
4 Cost of Goods Sold 2,400
Inventory 2,400
5-8 LO 3
Sales Returns and Allowances
◆ “Flip side” of purchase returns and allowances.
◆ Contra-revenue account to Sales Revenue (debit).
◆ Sales not reduced (debited) because:
► Would obscure importance of sales returns and
allowances as a percentage of sales.
► Could distort comparisons.
5-9 LO 3
Sales Discount
◆ Offered to customers to promote prompt payment of
the balance due.
◆ Contra-revenue account (debit) to Sales Revenue.
5-10 LO 3
LEARNING Compare a multiple-step with a single-
OBJECTIVE
5
step income statement.
Multiple-Step Income Statement
◆ Shows several steps in determining net income.
◆ Two steps relate to principal operating activities.
◆ Distinguishes between operating and non-operating
activities.
5-11 LO 5
Illustration 5-14
Multiple-
Step
Key Items:
◆ Net sales
Illustration 5-14
5-12
LO 5
Illustration 5-14
Multiple-
Step
Key Items:
◆ Net sales
◆ Gross profit
Illustration 5-14
5-13
LO 5
Illustration 5-14
Multiple-
Step
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
Illustration 5-14
5-14
LO 5
Multiple-
Step
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Nonoperating
activities
Illustration 5-14
5-15
LO 5
Multiple-
Step
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Nonoperating
activities
Illustration 5-14
5-16
LO 5
Multiple-
Step
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Nonoperating
activities
◆ Net income
Illustration 5-14
5-17
LO 5
Multiple-Step Income Statement
Question
The multiple-step income statement for a merchandiser
shows each of the following features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.
5-18 LO 5
Single-Step Income Statement
◆ Subtract total expenses from total revenues
◆ Two reasons for using the single-step format:
1. Company does not realize any profit until total
revenues exceed total expenses.
2. Format is simpler and easier to read.
5-19 LO 5
Single-Step Income Statement
Illustration 5-15
5-20 LO 5
Classified Balance Sheet
Illustration 5-16
5-21 LO 5
DO IT! 5 Financial Statement Classifications
Indicate in which financial statement and under what
classification each of the following accounts would be reported.
CL
CA
Balance sheet
PPE
PPE
N/A
PPE
CA
5-22 LO 5
Income statement, N/A
balance sheet, ppe
income statement, operational expenses
balance sheet, PPE
balance sheet, CA
income statement, N/A
balance sheet, CL
balance sheet, CA
balance sheet, ppe
balance sheet, long term liability
5-23 LO 5
5-24 LO 5
Determining Cost of Goods Sold
Illustration 5B-2
Cost of goods sold for a
merchandiser
Illustration 5B-2
5-25 LO 7
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5-26
