Merchandising Operations Horngren’s Accounting Lecture Twelve Lisa, Li 1
Accounting 2
accounting Learning Objectives 2 Purchase of merchandise inventory using perpetual inventory system
accounting Learning Objectives 3 Account for the sale of merchandise inventory using a perpetual inventory system
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accounting 8 Date Accounts and Explanation Debit Credit Oct. 10 Merchandise Inventory (2,500 × $15) 37,500 Accounts Payable 37,500 Purchased inventory on account Oct. 13 Accounts Payable (100 × $15) 1,500 Merchandise Inventory 1,500 Returned inventory to seller Oct. 22 Accounts Payable ($37,500 − $1,500) 36,000 Cash ($36,000 – $720) 35,280 Merchandise Inventory ($36,000 × 0.02) 720 Paid within discount period net of return Date Accounts and Explanation Debit Credit Oct. 10 Accounts Receivable (2,500 × $15) 37,500 Sales Revenue 37,500 Sale on account Cost of Goods Sold 22,500 Merchandise Inventory 22,500 Record cost of goods sold Oct. 13 Sales Returns and Allowances (100 × $15) 1,500 Accounts Receivable 1,500 Received returned goods Merchandise Inventory 900 Cost of Goods Sold 900 Placed goods back in inventory Oct. 22 Cash ($36,000 − $720) 35,280 Sales Discounts ($36,000 × 0.02) 720 Accounts Receivable ($37,500 − $1,500) 36,000 Cash collection within discount period net of return Accounting book for The Textbook Store Accounting book for Piranha(seller)
Describe merchandising operations and the two types of merchandise inventory systems Account for the purchase of merchandise inventory using a perpetual inventory system Account for the sale of merchandise inventory using a perpetual inventory system Accounting 9
Adjust and close the accounts of a merchandising business Prepare a merchandiser’s financial statements Use the gross profit percentage to evaluate business performance Accounting 10
accounting Learning Objectives 3 Account for the sale of merchandise inventory using a perpetual inventory system
The freight in is part of the inventory cost for the buyer. The freight out is a delivery expense to the seller. Smart Touch Learning pays $30 to ship the June 21 sale to the customer. 5- 12 accounting
For the year, Smart Touch Learning sells $297,500 of merchandise inventory. They process $11,200 of sales returns and allowances, and they award $5,600 of sales discounts. What is Net Sales Revenue for the year? 5- 13 accounting
For the year, Smart Touch Learning sells $297,500 of merchandise inventory. They process $11,200 of sales returns and allowances, and they award $5,600 of sales discounts. What is Net Sales Revenue for the year? 5- 14 accounting
The difference between Net Sales Revenues and Cost of Goods Sold Indicates the amount available to cover operating expenses For this example, assume Smart Touch Learning’s Cost of Goods Sold is $199,500; its gross profit is calculated as follows: 5- 15 accounting
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Adjust and close the accounts of a merchandising business Accounting 18
At the end of the period, actual inventory on hand may differ from the accounting records in perpetual inventory system. This difference can occur because of: Theft Damage Errors ‘Merchandise Inventory’ account must be adjusted at the end of the period accounting
Smart Touch Learning’s Merchandise Inventory account shows an unadjusted balance of $31,530,with no theft or error. But on December 31, ST Learning counts the inventory on hand, and the total cost comes to only $31,290. ST Learning records this adjusting entry for inventory shrinkage. And the entry brings Merchandise Inventory to its correct balance. accounting
Close R to Income Summary Close E and contra-revenues(-R) to Income Summary Close Income Summary to Capital Close Withdrawals to Capital 5- 21 accounting
5- 22 accounting Closing in a Merchandiser
At this point, the Income Summary account has a $25,200 balance. Next, we need to close Income Summary to the Capital account. 5- 23 accounting
Prepare a merchandiser’s financial statements Accounting 24
Income Statement Single-Step Income Statement Multi-Step Income Statement (common approach) Change in owner’s equity Balance Sheet The report format (A at top, L and O/E at bottom) The account format (A at left, L and O/E at right) Cash flow Statement 5- 25 accounting
Income statement format that groups all revenues together and then lists and deducts all expenses together without calculating any subtotals. accounting
Multi-step I/S format that contains subtotals to highlight significant relationships. Net Sales Revenue Gross Profit (Gross Margin) Operating Income Net Income. 5- 27 accounting
COGS: is also called Cost of Sales. It represents a functional expense. Gross profit: Net Sales Revenue minus COGS. It is the extra sale amount the company receives from the customer over what the company paid to the vendor. accounting
Operating Expenses: Expenses (other than COGS) that occur in the entity’s major line of business. Operating income: Gross profit minus operating expenses. It measures the results of the entity’s major ongoing activities (normal operations). accounting Multi-Step Income Statement
Other revenues and expenses: Revenues or expenses that are outside the normal, day-to-day operations of a business, such as interest expense, taxes, etc. Finally, Net Income is determined by subtracting Other Revenues and Expenses from Operating Income. accounting Multi-Step Income Statement
A merchandiser’s statement of owner’s equity looks exactly like that of a service business. Merchandisers have an additional CA, Merchandise Inventory. Service businesses do not have it in B/S. Accounting 31
Use the gross profit percentage to evaluate business performance Accounting 32
Measures the profitability of each sales dollar. When this number is trending downward, it can indicate a significant problem. Useful profitability ratios
a. $27,740 ($87,940 − $60,200) b. $3,524 ($103,600 − $99,200 − $876) c. $65,180 ($99,200 – $34,020)
a. $27,740 ($87,940 − $60,200) b. $3,524 ($103,600 − $99,200 − $876) c. $65,180 ($99,200 – $34,020) d. $64,200 ($66,200 – $1,600 – $400) e. $23,700 ($64,200 – $40,500) f. $115,500 ($112,520 + $2,086 + $894) g. $112,520 ($75,800 + $36,720)
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accounting 39 a. Sales – they should try to increase sales, a higher Sales will increase Gross Profit Percentage b. Sales Returns and Allowances – they should try to decrease sales returns and allowances, a higher Sales Returns and Allowances will decrease Gross Profit Percentage c. Cost of Goods Sold – they should try to decrease cost of goods sold, a higher Cost of Goods Sold will decrease Gross Profit Percentage d. Sales Discounts – they should try to decrease sales discounts, a higher Sales Discount will decrease Gross Profit Percentage
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5- 43 The adjusted trial balance of Leading Business Systems at March 31, 2015, follows: Homework LEADING BUSINESS SYSTEMS Adjusted Trial Balance March 31, 2015 Balance Account Title Debit Credit Cash $3,000 Accounts Receivable 10,000 Merchandise Inventory 40,000 Office Supplies 7,500 Equipment 45,000 Accumulated Depreciation—Equipment $18,000 Accounts Payable 15,000 Salaries Payable 2,500 Notes Payable, long-term 11,100 Wright, Capital 50,000 Wright, Withdrawals 55,000 Sales Revenue 300,000 Sales Returns and Allowances 3,000 Sales Discounts 2,500 Cost of Goods Sold 180,000 Selling Expense 30,000 Administrative Expense 18,000 Interest Expense 2,600 Total $396,600 $396,600 Requirements 1. Journalize the required closing entries at March 31, 2015. 2. Set up T-accounts for Income Summary; Wright, Capital; and Wright, Withdrawals. Post the closing entries to the T-accounts and calculate their ending balances. 3. How much was Leading’s net income or net loss? 4. Prepare Leading’s multi-step income statement for the year ended March 31, 2015.
44 The End of Chapter 5
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