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ch 5 ppt - 5 MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP...

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Unformatted text preview: 5 MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP INCOME STATEMENT 5- 1 Financial Accounting, Sixth Edition Study Objectives Study Objectives 1. 2. Explain the recording of purchases under a perpetual inventory system. 3. Explain the recording of sales revenues under a perpetual inventory system. 4. Distinguish between a single-step and a multiple-step income statement. 5. Determine cost of goods sold under a periodic system. 6. Explain the factors affecting profitability. 7. 5-2 Identify the differences between a service company and a merchandising company. Identify a quality of earnings indicator. 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. 5- 3 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. Equals Cost of goods sold is the total cost of merchandise sold during the period. 5-4 Gross Profit Illustration 5-1 Income measurement process for a merchandising company Less Operating Expenses Equals Net Income (Loss) SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Merchandising Operations Illustration 5-2 Operating Cycles The operating cycle of a merchandising company ordinarily is longer than that of a service company. 5- 5 SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Merchandising Operations Flow of Costs Illustration 5-3 Companies use either a perpetual inventory system or a periodic inventory system to account for inventory. 5- 6 SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Merchandising Operations Flow of Costs Perpetual System Records continuously show inventory that should be on hand. 5-7 Maintain detailed records of the cost of each inventory purchase and sale. Company determines cost of goods sold each time a sale occurs. SO 1 Identify the differences between service and merchandising companies. Merchandising Operations 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 5-8 800,000 Goods available for sale SO 1 Merchandising Operations Merchandising Operations Flow of Costs Additional Consideration Perpetual System: ► ► Provides better control over inventories. ► 5- 9 Traditionally used for merchandise with high unit values. Requires additional clerical work and additional cost to maintain inventory records. 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). Normally recorded when Illustration 5-5 goods are received. Purchase invoice should support each credit purchase. 5-10 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Illustration 5-5 Illustration: Sauk Stereo (the buyer) uses as a purchase invoice the sales invoice prepared by PW Audio Supply, Inc. (the seller). Prepare the journal entry for Sauk Stereo for the invoice from PW Audio Supply. May 4 5-11 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Freight Costs – Terms of Sale Illustration 5-6 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. 5-12 Freight costs incurred by the seller are an operating expense. Recording Purchases of Merchandise Recording Purchases of Merchandise Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Haul-It Freight Company $150 for freight charges, the entry on Sauk Stereo’s books is: May 6 Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would have been: May 4 5-13 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 are damaged or defective, of inferior quality, or do not meet specifications. Purchase Return Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. 5-14 Purchase Allowance May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price. SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Illustration: Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing $300. May 8 5-15 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: Example: terms may read 2/10, n/30. Purchaser saves money. 5-16 Credit Seller shortens the operating cycle. SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Purchase Discounts - Terms 2/10, n/30 n/10 EOM 2% discount if paid within 10 days, otherwise net amount due within 30 days. 5-17 1/10 EOM 1% discount if paid within first 10 days of next month. Net amount due 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 Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry Sauk Stereo makes to record its May 14 payment. May 14 (Discount = $3,500 x 2% = $70) 5-18 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of $3,500 on June 3, the journal entry would be: June 3 5-19 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Summary of Purchasing Transactions Inventory Debit 4th - Purchase 6th – Freight-in $3,500 150 Balance Credit $3,280 5-20 $300 70 8th - Return 14th - Discount SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Sales of Merchandise Recording Sales of Merchandise Made using cash or credit (on account). Normally recorded when Illustration 5-5 earned, usually when goods transfer from seller to buyer. Sales invoice should support each credit sale. 5-21 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise Journal Entries to Record a Sale #1 Cash or Accounts receivable XXX Sales revenue #2 Cost of goods sold Inventory 5-22 XXX XXX XXX Selling 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 Illustration: Assume PW Audio Supply records its May 4 sale of $3,800 to Sauk Stereo on account (Illustration 5-5) as follows. Assume the merchandise cost PW Audio Supply $2,400. May 4 4 5-23 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. Contra-revenue account (debit). Sales not reduced (debited) because: ► ► 5-24 Would obscure importance of sales returns and allowances as a percentage of sales. Could distort comparisons. SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a $300 selling price (assume a $140 cost). Assume the goods were not defective. May 8 8 5-25 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise Illustration: Assume the returned goods were defective and had a scrap value of $50, PW Audio would make the following entries: May 8 8 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 Recording Sales Discount “Flipside” of purchase discount. 5-27 Offered to customers to promote prompt payment. Contra-revenue account (debit). SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Recording Sales of Merchandise Recording Sales of Merchandise Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14. May 14 * * [($3,800 – $300) X 2%] 5-28 SO 3 Explain the recording of sales revenues SO under a perpetual inventory system. under Income Statement Presentation Income Statement Presentation Single-Step Income Statement Subtract total expenses from total revenues Two reasons for using the single-step format: 1) Company does not realize any type of profit until total revenues exceed total expenses. 2) Format is simpler and easier to read. 5-29 SO 4 Distinguish between a single-step and a multiple-step income statement. Income Statement Presentation Income Statement Presentation SingleStep Illustration 5-7 5-30 SO 4 Income Statement Presentation Income Statement Presentation Multiple-Step Income Statement Highlights the components of net income. Three important line items: 1) gross profit, 2) income from operations, and 3) net income. 5-31 SO 4 Distinguish between a single-step and a multiple-step income statement. Income Statement Presentation Income Statement Presentation MultipleStep Illustration 5-8 Key Key Line Items Items 5-32 SO 4 Income Statement Presentation Income Statement Presentation Sales Revenues Illustration 5-9 5-33 SO 4 Distinguish between a single-step and a multiple-step income statement. Income Statement Presentation Income Statement Presentation Gross Profit Illustration 5-11 Comparisons with past amounts and rates and with those in the industry indicate the effectiveness of a company’s purchasing and pricing policies. 5-34 SO 4 Distinguish between a single-step and a multiple-step income statement. Income Statement Presentation Income Statement Presentation Operating Expenses 5-35 Illustration 5-11 Income Statement Presentation Income Statement Presentation Nonoperating Activities Various revenues and expenses and gains and losses that are unrelated to the company’s main line of operations. Illustration 5-10 5-36 SO 4 Distinguish between a single-step and a multiple-step income statement. Income Income Income Income Statement Statement Presentation Presentation Presentation Presentation Illustration 5-11 5-37 Evaluating Profitability Evaluating Profitability Gross Profit Rate May be expressed as a percentage by dividing the amount of gross profit by net sales. A decline in the gross profit rate might have several causes. ► ► Increased competition may result in a lower selling price. ► 5-38 Selling products with a lower “markup.” Company forced to pay higher prices to its suppliers without being able to pass these costs on to its customers. SO 6 Explain the factors affecting profitability. Evaluating Profitability Evaluating Profitability Gross Profit Rate Illustration 5-15 Why does Wal-Mart have a lower gross profit rate than Target and the industry average? 5-39 SO 6 Explain the factors affecting profitability. Evaluating Profitability Evaluating Profitability Profit Margin Ratio Measures the percentage of each dollar of sales that results in net income. How do the gross profit rate and profit margin ratio differ? ► ► 5-40 Gross profit rate - measures the margin by which selling price exceeds cost of goods sold. Profit margin ratio - measures the extent by which selling price covers all expenses (including cost of goods sold). SO 6 Explain the factors affecting profitability. Evaluating Profitability Evaluating Profitability Profit Margin Ratio Illustration 5-17 How does Wal-Mart compare to its competitors? Keep in mind that an increasing percentage of Wal-Mart’s sales is from low-margin groceries. 5-41 SO 6 Explain the factors affecting profitability. ...
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This note was uploaded on 02/02/2012 for the course BIOL 1002 taught by Professor Pomarico during the Spring '08 term at LSU.

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