Chp 5
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
5-1
Merchandising Operations
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 Identify the differences between service and merchandising companies.
Merchandising Operations
Income Measurement
Sales
Revenue
Less
Cost of
Goods Sold
Not used in a
Service business.
Equals
Gross
Profit
Cost of goods sold is the total
cost of merchandise sold during
the period.
5-3
Illustration 5-1
Income measurement process for a
merchandising company
Less
Operating
Expenses
Equals
Net
Income
(Loss)
LO 1 Identify the differences between service and merchandising companies.
Merchandising Operations
Flow of Costs
Illustration 5-4
Companies use either a perpetual inventory system or a periodic inventory
system to account for inventory.
5-4
LO 1 Identify the differences between service and merchandising companies.
Merchandising Operations
Flow of Costs
Perpetual System
5-5
Maintain detailed records of the cost of each inventory
purchase and sale.
Records continuously show inventory that should be on
hand for every item.
Company determines cost of goods sold each time a
sale occurs.
LO 1 Identify the differences between service and merchandising companies.
Merchandising Operations
Flow of Costs
Periodic System
Do not keep detailed records of the goods on hand.
Cost of goods sold determined by count at the end of
the accounting period.
Calculation of Cost of Goods Sold:
Beginning inventory
$ 100,000
Add: Purchases, net
5-6
800,000
Goods available for sale
LO 1
Recording Purchases of Merchandise
Made using cash or credit (on account).
Illustration 5-6
Normally record when
goods are received from the
seller.
Purchase invoice should
support each credit
purchase.
5-7
LO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Freight Costs Terms of Sale
Illustration 5-7
Shipping terms
Ownership of the goods
passes to the buyer when the
public carrier accepts the
goods from the seller.
Ownership of the goods
remains with the seller until
the goods reach the buyer.
5-8
Freight costs incurred by the seller are an operating expense.
LO 2
Recording Purchases of Merchandise
Purchase Returns and Allowances
Purchaser may be dissatisfied because goods are damaged
or defective, of inferior quality, or do not meet specifications.
5-9
Purchase Return
Purchase Allowance
Return goods for credit if the
sale was made on credit, or
for a cash refund if the
purchase was for cash.
May choose to keep the
merchandise if the seller will
grant a reduction of the
purchase price.
LO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Purchase Discounts
Credit terms may permit buyer to claim a cash discount
for prompt payment.
Advantages:
5-10
Example: Credit terms
may read 2/10, n/30.
Purchaser saves money.
Seller shortens the operating cycle by converting the
accounts receivable into cash earlier.
LO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Purchase Discounts - Terms
5-11
2/10, n/30
1/10 EOM
n/10 EOM
2% discount if
paid within 10
days, otherwise
net amount due
within 30 days.
1% discount if
paid within first 10
days of next
month.
Net amount due
within the first 10
days of the next
month.
LO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Sales of Merchandise
Journal Entries to Record a Sale
#1
Cash or Accounts receivable
XXX
Sales revenue
#2
Cost of goods sold
Inventory
5-12
XXX
XXX
XXX
Selling
Price
Cost
LO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Sales Returns and Allowances
5-13
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.
LO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Sales Discount
5-14
Offered to customers to promote prompt payment of the
balance due.
Contra-revenue account (debit) to Sales Revenue.
LO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Completing the Accounting Cycle
Adjusting Entries
5-15
Generally the same as a service company.
One additional adjustment to make the records agree with
the actual inventory on hand.
Involves adjusting Inventory and Cost of Goods Sold.
LO 4 Explain the steps in the accounting cycle for a merchandising company.
Completing the Accounting Cycle
Closing
Entries
5-16
LO 4 Explain the steps in the accounting cycle for a merchandising company.
Completing the Accounting Cycle
Closing Entries
5-17
LO 4 Explain the steps in the accounting cycle for a merchandising company.
Forms of Financial Statements
Multiple-Step Income Statement
5-18
Shows several steps in determining net income.
Two steps relate to principal operating activities.
Distinguishes between operating and non-operating
activities.
LO 5 Distinguish between a multiple-step and a single-step income statement.
MultipleStep
Key Items:
Net sales
Gross profit
Operating
expenses
Nonoperating
activities
Net income
Illustration 5-14
5-19
LO 5
Forms of Financial Statements
Single-Step Income Statement
5-20
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.
LO 5 Distinguish between a multiple-step and a single-step income statement.
Forms of Financial Statements
Single-Step Income Statement
Illustration 5-15
5-21
LO 5 Distinguish between a multiple-step and a single-step income statement.
APPENDIX 5B
Periodic Inventory System
Determining Cost of Goods Sold Under a
Periodic System
5-22
No running account of changes in inventory.
Ending inventory determined by physical count.
Cost of goods sold not determined until the end of the
period.
LO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
APPENDIX 5B
Periodic Inventory System
Determining Cost of Goods Sold Under a
Periodic System
Illustration 5B-2
5-23
LO 7
APPENDIX 5B
Periodic Inventory System
Recording Merchandise Transactions
5-24
Record revenues when sales are made.
Do not record cost of merchandise sold on the date of sale.
Physical inventory count determines:
Cost of merchandise on hand and
Cost of merchandise sold during the period.
Record purchases in Purchases account.
Purchase returns and allowances, Purchase discounts, and
Freight costs are recorded in separate accounts.
LO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
A Look at IFRS
Key Points
5-25
Under both GAAP and IFRS, a company can choose to use
either a perpetual or a periodic system.
Inventories are defined by IFRS as held-for-sale in the ordinary
course of business, in the process of production for such sale, or
in the form of materials or supplies to be consumed in the
production process or in the providing of services.
LO 8 Compare the accounting procedures for
merchandising under GAAP and IFRS.
A Look at IFRS
Key Points
5-26
Under GAAP, companies generally classify income statement
items by function. Classification by function leads to
descriptions like administration, distribution, and manufacturing.
Under IFRS, companies must classify expenses by either
nature or function. Classification by nature leads to descriptions
such as the following: salaries, depreciation expense, and
utilities expense. If a company uses the functional-expense
method on the income statement, disclosure by nature is
required in the notes to the financial statements.
LO 8 Compare the accounting procedures for
merchandising under GAAP and IFRS.
A Look at IFRS
Key Points
5-27
Presentation of the income statement under GAAP follows
either a single-step or multiple-step format. IFRS does not
mention a single-step or multiple-step approach.
Under IFRS, revaluation of land, buildings, and intangible
assets is permitted. The initial gains and losses resulting from
this revaluation are reported as adjustments to equity, often
referred to as other comprehensive income.
IAS 1, Presentation of Financial Statements, provides general
guidelines for the reporting of income statement information.
LO 8 Compare the accounting procedures for
merchandising under GAAP and IFRS.
A Look at IFRS
Key Points
5-28
Similar to GAAP, comprehensive income under IFRS includes
unrealized gains and losses (such as those on certain types of
investment securities) that are not included in the calculation of
net income.
IFRS requires that two years of income statement information
be presented, whereas GAAP requires three years.
LO 8 Compare the accounting procedures for
merchandising under GAAP and IFRS.
A Look at IFRS
Looking to the Future
The IASB and FASB are working on a project that would rework the
structure of financial statements. Specifically, this project will address
the issue of how to classify various items in the income statement. A
main goal of this new approach is to provide information that better
represents how businesses are run. In addition, this approach draws
attention away from just one numbernet income. It will adopt major
groupings similar to those currently used by the statement of cash flows
(operating, investing, and financing), so that numbers can be more
readily traced across statements. Finally, this approach would also
provide detail, beyond that currently seen in most statements (either
GAAP or IFRS), by requiring that line items be presented both by
function and by nature. The new financial statement format was heavily
influenced by suggestions from financial statement analysts.
5-29
LO 8 Compare the accounting procedures for
merchandising under GAAP and IFRS.
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