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Unformatted text preview: Chapter 5 MERCHANDISING OPERATIONS AND THE MULTIPLESTEP INCOME STATEMENT 1 1 11 Differences Between a Service Company and a Merchandising Company Primary Source of Revenue Service Company- performs services Barber, electrician, plumber, attorney, CPA Cars, clothing, food, office supplies Merchandise Company- sale of merchandise 2 Income Measurement for Merchandise Companies Total cost of merchandise sold during the period Operating Cycles Inventory Systems Perpetual Compute and record Cost of goods sold Maintain detailed records of purchases and sales Cost of goods sold is determined with each sale Inventory Systems Periodic No detailed records Cost of goods sold determined at end of the period by taking a physical count and pricing it. 2 11 Recording Purchases of Merchandise Purchase of merchandise is recorded when goods are received from the seller Every purchase should be supported by business documents Cash purchases have receipts or cancelled checks Credit purchases are supported by purchase invoices 7 Purchase of Merchandise Sauk purchased $ 3,800 of goods on account. Merchandise Inventory May 4 3,800 Accounts Payable May 4 3,800 Debit Credit May 4 Merchandise Inventory Accounts Payable To record goods purchased on account 3,800 3,800 Merchandise Inventory Includes all purchases of merchandise for re-sale to customers and costs to get it to the business Does not include items purchased for use and not for resale If an entity sells cash registers, then the cash registers it buys to re-sell would be inventory- ones used to ring-up sales for the business would be recorded as equipment 9 Purchase Returns and Allowances Purchase Return A return of the goods from the buyer to the seller for cash or credit. Purchase Allowance A reduction made in the selling price of the merchandise, granted by the seller so that the buyer will keep the goods. 10 Return of Merchandise Sauk Stereo returned goods costing $ 300 to PW Audio. Merchandise Inventory May 4 3,800 May 8 300 Accounts Payable May 8 300 May 4 3,800 Debit May 8 Accounts Payable Merchandise Inventory 300 Credit 300 To record return of goods purchased on account Freight Costs... On incoming goods you purchase are charged to inventory. On outgoing goods you sell are an operating expense to the seller. 12 Freight Cost Incurred by Buyer Merchandise Inventory May 4 3,800 May 8 300 May 9 150 Cash May 9 150 Debit Credit 150 May 9 Merchandise Inventory 150 Cash To record payment of freight on goods purchased Freight Cost Incurred by Seller Delivery Expense May 4 150 Cash May 4 150 Debit Credit May 9 Delivery Expense Cash To record payment of freight on goods sold 150 150 Purchase Discounts Credit terms may allow buyer to claim a cash discount if payment is made within a certain specified time Purchaser saves money and seller converts account receivable to cash faster 14 Purchase Discounts Credit terms may be written"2/10, net 30" which means 2% cash discount if paid within 10 days of invoice date, otherwise pay the full amount within 30 days Guess what "1/10, EOM" means? 1% cash discount if paid within 10 days, otherwise pay by the end of the month 15 Invoice date Credit terms Purchase Discounts Original Invoice Return on May 8 Amount due before discount 2% discount Net due $3,800 -300 $3,500 -70 $3,430 17 Purchase Discounts Merchandise Inventory May 4 3,800 May 8 300 May 9 150 May 14 70 Cash Accounts Payable May14 3,430 May 8 300 May 4 3,800 May 14 3,500 Debit Credit May 14 Accounts Payable Cash 70 To record payment within discount period 18 3,500 3,430 Merchandise Inventory Summary of Purchasing Transactions Perpetual System Merchandise Inventory Purchase Freight-in May 4 3,800 May 8 300 Purchase return May 9 150 May 14 70 Purchase discount Balance 3,580 19 Review Which of the following statements about a perpetual inventory system is true? a. Cost of goods sold is determined only at the end of the accounting period. b. Detailed records of the cost of each inventory purchase and sale are maintained continuously. c. The periodic system provides better control over inventories than a perpetual system. d. The increased use of computerized systems has increased the use of the periodic system. 20 Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system? a. A purchase of merchandise. b. A return of merchandise inventory to the supplier. c. Payment of freight costs for goods shipped to a customer. d. Payment of freight costs for goods received from a supplier. Review Review A purchase of $1,200 is made on March 2, terms 2/10, n/30, on which a return of $200 is granted on March 5. What amount should be paid on March 12? a. $1,176 b. $1,200 c. $1,000 d. $ 980 Recording Sales Under Perpetual Inventory System Sales revenues recorded when goods are transferred from the seller to the buyer Follows revenue recognition principle Every sale should be supported by business documents, i.e., cash register tape or sales invoice 23 3 11 Recording Sales Under Perpetual Inventory System Two entries required: One for Sales- may be on credit or cash One to record Cost of Goods Sold Same invoice as before, but now we are the seller and goods cost us $2,400 24 Sales Returns and Allowances- flip side of Purchase Returns and Allowances Same return as before, but now we are the seller and goods cost us $300. 25 Sales Returns and Allowances Is a contra-revenue account, normal balance is debit Are kept in this separate account so you know exactly how much you allowed in returns and allowances $ 2,500,000 25,000 $ 2,475,000 26 Sales Returns and Allowances Net Sales Sales Returns and Allowances What do excessive returns and allowances suggest? Inferior merchandise Inefficiencies in filling orders Errors in billing customers Mistakes in delivery or shipment of goods Overly aggressive sales clerks 27 Sales Discounts Credit terms may allow buyer to claim a cash discount for prompt payment Sales Discount is a contrarevenue account of sales. Normal debit balance. Credit terms 2/10,n/30 28 Use of Inventory related accounts Under the perpetual systems.... there are no purchase discount or purchase returns accounts. there are sales discounts and sales returns and allowances accounts. 29 4 11 Singlestep and and Multiple step Income Statements Singlestep total revenues minus total expenses; simple, easy to read Multistep highlights components and distinguishes activities 30 Singlestep Income Statement Multistep Income Statement 5 11 Cost of Goods SoldPeriodic Enter beginning inventory Add units or $ amount of purchases Cost of Goods (Units) Available for Sale In Units (not $) 0 Units bought 1,250 1,250 Subtract ending inventory Cost of Goods or Number of Units Sold 250 1,000 34 Cost of Goods Sold Periodic 35 Periodic Method Review Problem Beginning Inventory Ending Inventory Purchases Purchase Returns Freight In $100,000 $90,000 $250,000 $10,000 $ 6,000 Purchase Discounts $5,000 What is the cost of goods sold based on this information? 36 6 11 Evaluating Profitability Gross Profit Rate Profit Margin Ratio 37 Gross Profit Rate Gross Profit Net Sales = 38 Reasons Gross Profits Rates Change Selling products with a lower "mark-up" Increased competition can lower sales prices Paying higher prices to suppliers, which increases cost of goods sold 39 Profit Margin Ratio Net Income Net Sales = 40 Evaluate Profits Margins Selling products with a lower "mark-up" Increase in non-operating costs, such as interest expense Paying higher operating costs without increasing sales price (such as for gas) 41 Gross Profit Rates by Industry In addition to computing the company's gross profit and profit margin rates, you should compare to industry averages Profit Margin Rates by Industry If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is $50,000, what is cost of good sold under the periodic system? a. $390,000 b. $370,000 c. $330,000 d. $420,000 Review If sales revenues are $400,000, cost of goods sold is $310,000, and the operating expenses are $60,000, what is the gross profit? Review a. $ 30,000 b. $ 90,000 c. $340,000 d. $400,000 44 Review Which of the following would affect the gross profit rate (assuming sales are constant)? a. An increase in advertising expense. b. A decrease in depreciation expense. c. An increase in cost of goods sold. d. A decrease in insurance expense. 45 Which sales account would normally have a debit balance? a. Sales Discounts. b. Sales Returns and Allowances. c. Sales d. Both (a) and (b) Review 46 How is gross profit calculated? a.Sales Sales Returns Sales Discounts Cost of Goods Sold b. Sales Cost of Goods Sold. c. Net Sales operating expenses d. Sales all expenses Review 47 ...
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