ch05 - Chapter 5 Chapter 5 Chapter Chapter Accounting for...

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Unformatted text preview: Chapter 5 Chapter 5 Chapter Chapter Accounting for Merchandising Operations Chapter 5- 1 Study Objectives Study Objectives 1. Identify the differences between service and merchandising companies. 2. Explain the recording of purchases under a perpetual inventory system. 3. Explain the recording of sales revenues under a perpetual inventory system. 4. Explain the steps in the accounting cycle for a merchandising company. 5. Distinguish between a multiple­step and a single­step income statement. 6. Explain the computation and importance of gross profit. 7. Determine cost of goods sold under a periodic system. Chapter 5-2 Accounting for Merchandising Operations Accounting for Merchandising Operations Merchandising Operations Operating Operating cycles cycles Inventory Inventory systems— systems— perpetual and perpetual periodic periodic Chapter 5- 3 Recording Recording Purchases of Merchandise Merchandise Recording Recording Sales of Merchandise Merchandise Freight costs Purchase Purchase returns and allowances allowances Purchase Purchase discounts discounts Summary of Summary purchasing transactions transactions Sales returns Sales and allowances allowances Sales Sales discounts discounts Completing the Completing Accounting Cycle Cycle Adjusting Adjusting entries entries Closing Closing entries entries Summary of Summary merchandising entries entries Forms of Forms Financial Statements Statements Multiple-step Multiple-step income statement statement Single-step Single-step income statement statement Classified Classified balance sheet balance Determining Determining cost of goods sold under a periodic system periodic Merchandising Operations Merchandising Operations Merchandising Companies Buy and Sell Goods Wholesaler Retailer Consumer The primary source of revenues is referred to as sales revenue or sales. Chapter 5- 4 SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Merchandising Operations Income Measurement Sales Revenue Less Cost of Goods Sold Not used in a Service business. Equal s Cost of goods sold is the total cost of merchandise sold during the period. Chapter 5- 5 Gross Profit Illustration 5-1 Less Operating Expenses Equal s Net Income (Loss) SO 1 Identify the differences between service and merchandising companies. Operating Cycles Operating Cycles Illustration 5­2 The operating cycle of a merchandising company ordinarily is longer than that of a service company. Chapter 5- 6 SO 1 Identify the differences between service and merchandising companies. Inventory Systems Inventory Systems Perpetual System Features: 1. Purchases increase Merchandise Inventory. 2. Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory. 3. Cost of goods sold is increased and Merchandise Inventory is decreased for each sale. 4. Physical count done to verify Inventory balance. The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold. Chapter 5-7 SO 1 Identify the differences between service and merchandising companies. Inventory Systems Inventory Systems Periodic System Features: 1. Purchases of merchandise increase Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold: Beginning inventory $ 100,000 Add: Purchases, net Chapter 5-8 800,000 Goods available for sale SO 1 Identify the differences between service and merchandising companies. Recording Purchases of Merchandise Recording Purchases of Merchandise Made using cash or credit (on account). Illustration 5­4 Normally recorded when goods are received. Purchase invoice should support each credit purchase. Chapter 5- 9 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise E5-2 Information related to Steffens Co. is presented below. Prepare the journal entry to record the transaction under a perpetual inventory system. 1. On April 5, purchased merchandise from Bryant Company for $25,000 terms 2/10, net/30, FOB shipping point. April 5 Chapter 5-10 Merchandise inventory Accounts payable 25,000 25,000 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Not all purchases increase Merchandise Inventory. E5-2 Prepare the journal entry to record the transaction under a perpetual inventory system. 3. On April 7, purchased equipment on account for $26,000. April 7 Chapter 5-11 Equipment Accounts payable 26,000 26,000 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Recording Freight Costs Terms FOB shipping point ­ seller places goods Free On Board the carrier, and buyer pays freight costs. FOB destination ­ seller places the goods Free On Board to the buyer’s place of business, and seller pays freight costs. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller (Freight­out or Delivery Expense). Chapter 5-12 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise E5-2 Continued Prepare the journal entry to record the transaction Continued under a perpetual inventory system. 2. On April 6, paid freight costs of $900 on merchandise purchased from Bryant. April 6 Chapter 5-13 Merchandise inventory Cash 900 900 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Purchase Returns and Allowances Purchaser may be dissatisfied because goods damaged or defective, of inferior quality, or do not meet specifications. 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 an allowance (deduction) from the purchase price. Chapter 5-14 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise E5-2 Continued Prepare the journal entry to record the transaction Continued under a perpetual inventory system. 4. On April 8, returned damaged merchandise to Bryant Company and was granted a $4,000 credit for returned merchandise. April 8 Chapter 5-15 Accounts payable Merchandise inventory 4,000 4,000 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Recording Purchase Discounts Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Purchaser saves money. Seller shortens the operating cycle. Example: Credit terms of 2/10, n/30, is read “two­ten, net thirty.” 2% cash discount if payment is made within 10 days. Chapter 5-16 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Purchase Discounts Terms Terms 2/10 1/10 EOM 2% discount if paid within 10 days. 1% discount if paid within first 10 days of next month. Chapter 5-17 n/30, n/60, or n/10 EOM Net amount due in 30 days, 60 days, or within the first 10 days of the next month. SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise E5-2 Continued Prepare the journal entry to record the transaction Continued under a perpetual inventory system. 5. On April 15, paid the amount due to Bryant Company in full. (Discount = $21,000 x 2% = $500) April 15 Accounts payable Merchandise inventory Cash Chapter 5-18 21,000 420 20,580 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise E5-2 Continued Prepare the journal entry to record the transaction Continued under a perpetual inventory system. 5. On April 15, paid the amount due to Bryant Company in full. What entry would be made if the company failed to pay within 10 days? April 16 or later Chapter 5-19 Accounts payable Cash 21,000 21,000 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Recording Purchase Discounts Should discounts be taken when offered? Dis c o unt o f 2 % o n $ 2 5 ,0 0 0 $ 2 5 ,0 0 0 inve s t e d at 10 % f o r 2 0 d ay s S aving s b y t ak ing t h e d is c o unt $ 5 0 0 .0 0 13 6 .9 9 $ 363. 01 Passing up the discount offered equates to paying an interest rate of 2% on the use of $25,000 for 20 days. Example: 2% for 20 days = Annual rate of 36.5% (365/20 = 18.25 twenty­day periods x 2% = 36.5%) Chapter 5-20 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Summary of Purchasing Transactions E5-2 Merchandise I nvent ory Debit 5th ­ Purchase 6th – Freight­in Balance Chapter 5-21 $25,000 900 Credit $4,000 420 8th ­ Return 15th ­ Discount $21,480 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Sales of Merchandise Recording Sales of Merchandise Made for cash or credit (on account). Illustration 5­4 Normally recorded when earned, usually when goods transfer from seller to buyer. Sales invoice should support each credit sale. Chapter 5-22 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise Two Journal Entries to Record a Sale #1 #2 Chapter 5-23 Cash or Accounts receivable Sales XXX Cost of goods sold Merchandise inventory XXX XXX XXX Sellin g Price Cost SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise E5-5 Presented are transactions related to Wheeler Company. 1. On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. The cost of the merchandise sold was $350,000. 2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. 3. On December 13,Wheeler Company received the balance due from Hashmi Co. Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system. Chapter 5-24 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise E5-5 Prepare the journal entries for Wheeler Company . 1. On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. Cost of merchandise sold was $350,000. Dec. 3 500,000 Cost of goods sold Merchandise inventory Chapter 5-25 Accounts receivable Sales 350,000 500,000 350,000 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise Recording Sales Returns and Allowances “Flipside” of purchase returns and allowances. Contra­revenue account (debit). Sales not reduced (debited) because: would obscure importance of sales returns and allowances as a percentage of sales. could distort comparisons between total sales in different accounting periods. Chapter 5-26 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise E5-5 Prepare the journal entries for Wheeler Company. 2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. Dec. 8 Chapter 5-27 Sales returns and allowances Accounts receivable 27,000 27,000 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise E5-5 Prepare the journal entries for Wheeler Company. 2. Variation On Dec. 8, Hashmi Co. returned merchandise for credit of $27,000. The original cost of the merchandise to Wheeler was $19,800. Dec. 8 27,000 Merchandise inventory Cost of goods sold Chapter 5-28 Sales returns and allowances Accounts receivable 19,800 27,000 19,800 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise Recording Sales Discount Offered to customers to promote prompt payment. “Flipside” of purchase discount. Contra­revenue account (debit). Chapter 5-29 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise E5-5 Prepare the journal entries for Wheeler Company . 3. On December 13, Wheeler Company received the balance due from Hashmi Co. Dec. 13 Cash 463,540 * Sales discounts Accounts receivable * 9,460 ** 473,000 *** ($473,000 – $9,460) ** [($500,000 – $27,000) X 2%] *** ($500,000 – $27,000) Chapter 5-30 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise E5-5 Variation Prepare the sales revenue section of the income statement for Wheeler Company. Wheeler Company I ncome St at ement (Part ial) For t he Mont h Ended Dec. 31, Sales revenue S ale s Le s s : S ale s r e t ur ns and a llo wa nc e s S ale s d is c o unt s N et sales Chapter 5-31 $ 5 0 0 ,0 0 0 (2 7 ,0 0 0 ) (9 ,4 6 0 ) 463, 540 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Completing the Accounting Cycle Completing the Accounting Cycle Adjusting Entries Generally the same as a service company. One additional adjustment to make the records agree with the actual inventory on hand. Involves adjusting Merchandise Inventory and Cost of Goods Sold. Chapter 5-32 SO 4 Explain the steps in the accounting cycle for a merchandising company. Completing the Accounting Cycle Completing the Accounting Cycle Closing Entries Close all accounts that affectnet income. E5-8 Presented is information related to Rogers Co. for the month of January 2008. Rogers uses the perpetual inventory method. End ing inve nt o r y pe r b o o k s $ 2 1,6 0 0 Re nt e x pe ns e End ing inve nt o r y pe r c o unt 2 1,0 0 0 S alar y e x pe ns e 6 1,0 0 0 Co s t o f g o o d s s o ld 2 18 ,0 0 0 S ale s d is c o unt 10 ,0 0 0 Fr e ig h t ­ o ut 7 ,0 0 0 S ale s r e t ur ns 13 ,0 0 0 I ns ur anc e e x pe ns e 12 ,0 0 0 S ale s 3 5 0 ,0 0 0 Required: $ 2 0 ,0 0 0 (a) Prepare the necessary adjusting entry for inventory. (b) Prepare the necessary closing entries. Chapter 5-33 SO 4 Explain the steps in the accounting cycle for a merchandising company. Completing the Accounting Cycle Completing the Accounting Cycle E5-8 (a) Prepare the necessary adjusting entry for inventory. Cost of goods sold Merchandise inventory 600 End ing inve nt o r y pe r b o o k s $ 2 1,6 0 0 End ing inve nt o r y pe r c o unt 600 2 1,0 0 0 O ve r s t at e m e nt o f inve nt o r y $ 6 0 0 Chapter 5-34 SO 4 Explain the steps in the accounting cycle for a merchandising company. Completing the Accounting Cycle Completing the Accounting Cycle E5-8 (b) Prepare the necessary closing entries. Sales Income summary 350,000 Income summary Cost of goods sold Freight­out Insurance expense Rent expense Salary expense Sales discounts Sales returns Income summary Retained earnings Chapter 5-35 341,600 8,400 350,000 218,600 7,000 12,000 20,000 61,000 10,000 13,000 8,400 SO 4 Explain the steps in the accounting cycle for a merchandising company. Forms of Financial Statements Forms of Financial Statements 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. Chapter 5-36 SO 5 Distinguish between a multiple-step and a single-step income statement. Forms of Forms of Forms Forms Financial Financial Statements Statements Statements Statements Illustration 5­11 Key Items: Net sales Gross profit Gross profit rate Chapter 5-37 Illustration 5­8 SO 5 Distinguish between a multiple-step and a single-step income statement. SO 6 Explain the computation and importance of gross profit. Forms of Forms of Forms Forms Financial Financial Statements Statements Statements Statements Illustration 5­11 Key Items: Net sales Gross profit Gross profit rate Operating expenses Chapter 5-38 SO 5 Distinguish between a multiple-step and a single-step income statement. Forms of Forms of Forms Forms Financial Financial Statements Statements Statements Statements Illustration 5­11 Key Items: Net sales Gross profit Gross profit rate Operating expenses Nonoperating activities Net income Chapter 5-39 SO 5 Distinguish between a multiple-step and a single-step income statement. Forms of Financial Statements Forms of Financial Statements Single-Step Income Statement Subtract total expenses from total revenues Two reasons for using the single­step format: 1) Company does not realize any type of profit until total revenues exceed total expenses. 2) Format is simpler and easier to read. Chapter 5-40 SO 5 Distinguish between a multiple-step and a single-step income statement. Forms of Financial Statements Forms of Financial Statements SingleStep Chapter 5-41 Illustration 5­12 SO 5 Distinguish between a multiple-step and a single-step income statement. Forms of Financial Statements Forms of Financial Statements Classified Balance Sheet Illustration 5­13 Chapter 5-42 SO 5 Distinguish between a multiple-step and a single-step income statement. Determining Cost of Goods Sold Under a Determining Cost of Goods Sold Under a Determining Determining Periodic System Periodic System Periodic Periodic Periodic System Separate accounts used to record purchases, freight costs, returns, and discounts. Company does not maintain a running account of changes in inventory. Ending inventory determined by physical count. Chapter 5-43 SO 7 Determine cost of goods sold under a periodic system. Determining Cost of Goods Sold Under a Determining Cost of Goods Sold Under a Determining Determining Periodic System Periodic System Periodic Periodic Calculation of Cost of Goods Sold Illustration 5­14 $316,000 Chapter 5-44 SO 7 Determine cost of goods sold under a periodic system. ...
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