fundamentals of accounting merchandising

fundamentals of merchandising accounting

1. PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 05
ACCOUNTINGFORMERCHANDISING
OPERATIONS

2. 5 -2
Service organizations sell time to
earn revenue.
Examples: Accounting firms, law firms and
plumbing services
SERVICECOMPANIES
C 1

3. 5 -3
Manufacturer Wholesaler Retailer Consumers
Merchandising Companies
MERCHANDISER
C 1

4. 5 -4
REPORTINGINCOMEFORA
MERCHANDISER
Merchandising companies sell products
to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
C 1

5. 5 -5
OPERATINGCYCLEFORA
MERCHANDISER
Begins with the purchase of merchandise
and ends with the collection of cash from the
sale of merchandise.
C 2

6. 5 -6
INVENTORYSYSTEMS
C 2

7. 5 -7
Perpetual systems
continually update
accounting records for
merchandising
transactions
Periodic systems
accounting records
relating to merchandise
transactions are
updated only at the end
of the accounting period
C 2
INVENTORYSYSTEMS

8. 5 -8
MERCHANDISEPURCHASES
On November 2, Z-Mart purchased $1,200 of
merchandise inventory for cash.
P1

9. 5 -9
TRADEDISCOUNTS
Used by manufacturers and wholesalers
to offer better prices for greater
quantities purchased.
Example
Z-Mart offers a 30% trade
discount for orders of 1,000
units or more on its popular
product Racer. Each
Racer has a list price of $5.25.Quantity sold 1,000
Price per unit 5.25$
Total 5,250
Less 30% discount(1,575)
Invoice price 3,675$
P1

10. 5 -10
P1 ACCOUNTINGFORMERCHANDISE
PURCHASES

11. 5 -11
PURCHASEDISCOUNTS
A deduction from the invoice price granted to
induce early payment of the amount due.
P1

12. 5 -12
2/10,n/30
Discount
Percent
Number of
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due in 30
Days
Credit
Period
PURCHASEDISCOUNTS
P1

13. 5 -13
On November 2, Z-Mart purchased $1,200 of
merchandise inventory on account, credit
terms are 2/10, n/30.
PURCHASEDISCOUNTS
P1

14. 5 -14
On November 12, Z-Mart paid the amount
due on the purchase of November 2.
PURCHASEDISCOUNTS
P1

15. 5 -15
PURCHASEDISCOUNTS
After we post these entries, the accounts involved
look like these:
P1

16. 5 -16
PURCHASERETURNSAND
ALLOWANCES
Purchase Return . . .
Merchandise returned by the purchaser to
the supplier.
Purchase Allowance . . .
A reduction in the cost of defective or
unacceptable merchandise received by a
purchaser from a supplier.
P1

17. 5 -17
On November 15, Z-Mart (buyer) issues a
$300 debit memorandum for an allowance
from Trex for defective merchandise.
PURCHASERETURNSAND
ALLOWANCES
P1

18. 5 -18
Z-Mart purchases $1,000 of merchandise on June 1 with
terms 2/10, n/60. Two days later, Z-Mart returns $100 of
goods before paying the invoice. When Z-Mart later pays
on June 11, it takes the 2% discount only on the $900
remaining balance.
PURCHASERETURNSAND
ALLOWANCES
P1

19. 5 -19
TRANSPORTATIONCOSTSAND
OWNERSHIPTRANSFER
P1

20. 5 -20
TRANSPORTATIONCOSTS
Z-Mart purchased merchandise on terms of FOB
shipping point. The transportation charge is
$75.
P1

21. 5 -21
ACCOUNTINGFORMERCHANDISE
P1

22. 5 -22
ACCOUNTINGFORMERCHANDISE
SALES
P2

23. 5 -23
SALESOFMERCHANDISE
P2
Each sales transaction for a seller of
merchandise involves two parts:
Revenue received in
the form of an asset
from a customer.
Recognition of the
cost of merchandise
sold to a customer.

24. 5 -24
On November 3, Z-Mart sold $2,400 of
merchandise on credit. The merchandise has a
cost basis to Z-Mart of $1,600.
SALESOFMERCHANDISE
P2

25. 5 -25
SALESDISCOUNTS
P2
Sales discounts on credit sales can benefit a seller by
decreasing the delay in receiving cash and reducing future
collection efforts.

26. 5 -26
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.
SALESDISCOUNTS
P2
The account was paid in full within the 60-day period.
The account was paid in full within the 10-day discount period.

27. 5 -27
SALESRETURNSANDALLOWANCES
P2
Sales returns and allowances usually involve
dissatisfied customers and the possibility of
lost future sales.
Sales returns refer
to merchandise that
customers return to
the seller after a
sale.
Sales allowances
refer to reductions in
the selling price of
merchandise sold to
customers.

28. 5 -28
Recall Z-Mart’s sale for $2,400 that had a cost
of $1,600. Assume the customer returns part of
the merchandise. The returned items sell for
$800 and cost $600.
SALESRETURNSANDALLOWANCES
P2

29. 5 -29
Assume that $800 of the merchandise Z-Mart
sold on November 3 is defective but the buyer
decides to keep it because Z-Mart offers a
$100 price reduction.
SALESALLOWANCES
P2

30. 5 -30
MERCHANDISINGCOSTFLOWIN
THEACCOUNTINGCYCLE
Beginning
inventory
Net
purchases
Merchandise
available for sale
Ending
inventory
Cost of
goods sold
To Income Statement
To Balance Sheet
To Income Statement
To Balance Sheet
Period 1
Beginning
inventory
Net
purchases
Merchandise
available for sale
Ending
inventory
Cost of
goods sold
Period 2
P2

31. 5 -31
ADJUSTINGENTRIESFOR
MERCHANDISERS
Z-Mart’s Merchandise Inventory account at the end of
year 2011 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.

32. 5 -32
CLOSINGENTRIESFOR
MERCHANDISERS
P3

33. 5 -33
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.

34. 5 -34
SINGLE-STEPINCOMESTATEMENT
P4

35. 5 -35
CLASSIFIEDBALANCESHEET
Highly
Liquid
Less
Liquid

36. 5 -36
GLOBALVIEW
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 measures of income
6.Order of current and noncurrent
items on the balance sheet

37. 5 -37
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
Current Liabilities
Acid-Test
Ratio
Acid-Test
Ratio
=
Cash + S-T Investments + Receivables
Current Liabilities
ACID-TESTRATIO
A1

38. 5 -38
Percentage of dollar
sales available to
cover expenses and
provide a profit.
Gross
Margin
Ratio
Net Sales -Cost of Goods Sold
Net Sales
=
GROSSMARGINRATIO
A2

39. 5 -39
JCPENNEY
A1/A2

40. 5 -40
APPENDIX5A:
PERIODICINVENTORYSYSTEM
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)

41. 5 -41
APPENDIX5A:
PERIODICINVENTORYSYSTEM
P5

42. 5 -42
APPENDIX5B:
WORKSHEET—PERPETUALSYSTEM
P5

43. 5 -43
END OF CHAPTER 05