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Chapter_5_student - 5 MERCHANDISING OPERATIONS AND THE...

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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. Identify the differences between a service company and a merchandising company. Explain the recording of purchases under a perpetual inventory system. Explain the recording of sales revenues under a perpetual inventory system. 2. 3. 5-2 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 Not used in a Service business. Illustration 5-1 Income measurement process for a merchandising company Cost of Goods Sold Equals Gross Profit Less Cost of goods sold is the total cost of merchandise sold during the period. Operating Expenses Equals Net Income (Loss) 5-4 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 Perpetual System Maintain detailed records of the cost of each inventory purchase and sale. Records continuously show inventory that should be on hand. Company determines cost of goods sold each time a sale occurs. 5-6 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 800,000 Goods available for sale 5-7 SO 1 Recording Purchases of Merchandise Recording Purchases of Merchandise Made using cash or credit (on account). Normally recorded when goods are received. Illustration 5-5 Purchase invoice should support each credit purchase. 5-8 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Illustration: To record the purchase of $3,800 of inventory on account with terms 2/10, n/30 by Sauk, the journal entry would be: May 4 5-9 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. 5-10 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 5-11 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. 5-12 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 Accounts payable Inventory 300 ...300 5-13 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Recording Purchases of Merchandise Purchase Discounts Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Example: Credit terms may read 2/10, n/30. Purchaser saves money. Seller shortens the operating cycle. 5-14 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 2% discount if paid within 10 days, otherwise net amount due within 30 days. 1/10 EOM 1% discount if paid within first 10 days of next month. n/10 EOM Net amount due within the first 10 days of the next month. 5-15 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= 2% x 3,500=70) Accounts Payable Cash Merchandise Inventory 3,500 3,430 70 5-16 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 5-17 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 Credit 4th - Purchase 6th Freight-in Balance $3,800 150 $3,580 $300 70 8th - Return 14th - Discount 5-18 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 earned, usually when goods transfer from seller to buyer. Illustration 5-5 Sales invoice should support each credit sale. 5-19 SO 3 Explain the recording of sales revenues under a perpetual inventory system. Recording Sales of Merchandise Recording Sales of Merchandise Journal Entries to Record a Sale #1 Cash or Accounts receivable Sales revenue XXX XXX Selling Price #2 Cost of goods sold Inventory XXX XXX Cost 5-20 SO 3 Explain the recording of sales revenues under a perpetual inventory system. 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 Accounts receivable Sales Revenue 3,800 3,800 4 Costs of goods sold Inventory 2,400 2,400 5-21 SO 3 Explain the recording of sales revenues under a perpetual inventory system. Recording Sales of Merchandise Recording Sales of Merchandise Sales Returns and Allowances "Flipside" of purchase returns and allowances. Contra-revenue account (debit). Sales not reduced (debited) because: Would obscure importance of sales returns and allowances as a percentage of sales. Could distort comparisons. 5-22 SO 3 Explain the recording of sales revenues under a perpetual inventory system. 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 Sales returns and allowances 300 Accounts Receivable 300 8 Inventory Cost of goods sold 140 140 5-23 SO 3 Explain the recording of sales revenues under a perpetual inventory system. 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 5-24 SO 3 Explain the recording of sales revenues under a perpetual inventory system. Recording Sales of Merchandise Recording Sales of Merchandise Sales Discount Offered to customers to promote prompt payment. "Flipside" of purchase discount. Contra-revenue account (debit). 5-25 SO 3 Explain the recording of sales revenues under a perpetual inventory system. 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 Cash Sales Discounts Accounts Receivable 70 3,430 3,500 * * 5-26 (3,800300) X 2% SO 3 Explain the recording of sales revenues under a perpetual inventory system. Income Statement Presentation Income Statement Presentation Sales Revenues Illustration 5-9 5-27 SO 4 Distinguish between a single-step and a multiple-step income statement. Income Statement Presentation Income Statement Presentation Gross Profit Illustration 5-11 5-28 SO 4 Distinguish between a single-step and a multiple-step income statement. ...
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This note was uploaded on 02/27/2012 for the course ACCT 2000 taught by Professor Holmes during the Spring '08 term at LSU.

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