Accounting 101 Class Notes Chapter 4 Accounting for Merchandising Operations

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1 I. WHAT IS A MERCHANDISER? Merchandiser vs. Service Business Wholesaler vs. retailer This chapter changes the focus from a service-oriented business to a merchandising form of business. Merchandisers buy goods in a finished form and then turn around and sell them in the same condition. Therefore, the majority of the merchandiser s revenue comes from the sale of their products called merchandise inventory and the majority of the expenses from the Cost of Goods Sold. The accounting system for a merchandiser must be designed to record the receipt of goods for resale, keep track of the inventory of goods available for sale, and record the sale and cost of goods sold. A. Perpetual System (Perpetual means Ongoing) The Merchandise Inventory Account in the General Ledger is kept up to date for all purchases and sales of inventory. At any point during the period, my GL will tell me how much Inventory I have in the warehouse and how much Cost of Goods Sold has been incurred. Most common system used today. Computers have made this possible. B. Periodic System The periodic system gets its name because we don't constantly update the general ledger for increases and decreases in inventory. Periodically, we have to go out to the warehouse and count it. If there is less there than we had available, then we must have sold it. Can't know Inventory balance or Cost of Goods Sold until I count it. Previously, we accounted for the transactions of a merchandiser that used the periodic method of tracking inventory. As computers have become less expensive and more user friendly, almost all companies use some type of software package to track inventory and, therefore, use a perpetual inventory system. II. NATURE OF MERCHANDISING BUSINESS A. Cost of Goods Sold B. Merchandise Inventory When merchandise is sold, the revenue is reported as sales and it cost is recognized as an expense called Cost of Goods (Merchandise) Sold Goods/Merchandise on hand that will be sold to customers III. MERCHANDISE PURCHASE TRANSACTIONS Inventory is the items that we own for resale to our customers. A. To record a purchase of Inventory on account: Page 1

2 B. Purchase returns - To record a return of merchandise purchased on account: C. Purchase discounts to record the payment for merchandise when payment is made within the discount period. Incentive for customers to pay their bills early - a.k.a. terms Normal terms are expressed n/30, n/60, n/eom Two Reasons Purchase Discounts are offered: 1. The longer a receivable is outstanding the less likely it is to be collected 2. There is a time value to money, the quicker a business can get cash back in the system the quicker it can turn it into product to be sold. 1. Terms of the purchase Commonly when you deal with a vendor they have terms of payment. They ship you the product and you need to pay the invoice within 30 days. The vendor may want to encourage you to pay within 10 days offering you a 2% discount to do so. Expressed as 2/10, n/30 = take two percent off the bill if you pay within ten days, else the whole balance is due in 30 days. It is almost always advantageous to take advantage of cash discounts. On a $10,000 purchase at 2/10, n/30 you take $200 off the bill as a purchase discount and only remit $9,800 for paying only 20 days early. Getting 2% off for paying only 20 days early is an annualized return of 36% (365 days / 20 days = 18.25; Multiply x 2% and that = 36.5% annualized rate) 2. Gross method vs. net method D. Transportation costs Page 2

3 FOB (free on board) terms FOB Shipping Point - BUYER owns during shipping and is responsible for shipping cost/freight FOB Destination - SELLER owns during shipping and is responsible for shipping cost/freight If you are the BUYER purchasing inventory and you are responsible for the freight cost, then book the cost to Merchandise Inventory. If you are the SELLER and you are responsible for the freight cost, then book the cost to a Selling Expense account called Delivery Expense. IV. MERCHANDISE SALES A. To record a sale on account B. Merchandise returns - to record a return from a customer of a sale on account, do not decrease the revenue account directly, put all returns in their own account called Sales Returns & Allowances. 1. To record a return of merchandise sold on account (Returned goods are not defective): 2. To record a return of merchandise sold on account (Returned goods are defective): C. Sales Discounts to record the receipt of cash when the amount is received within the discount period. Page 3

4 Terms of the sale: D. How this is reported in the Income Statement: E. No Discounts Allowed F. Trade Discounts When calculating the amount of a sales or purchase discount, there is no discount on freight charges and there is no discount on returns. Allied Merchandisers was organized on May 1. Macy Co. is a major customer (buyer) of Allied (seller) products. Prepare journal entries to record the following transactions for Allied (seller) and Macy (buyer) assuming each uses a perpetual inventory system and the gross method. (Allied estimates returns using an adjusting entry at each year-end.) May 3- Allied made its first and only purchase of inventory for the period on May 3 for 2,000 units at a price of $10 cash per unit (for a total cost of $20,000). May 5- Allied sold 1,500 of the units in inventory for $14 per unit (invoice total: $21,000) to Macy Co. under credit terms 2/10, n/60. The goods cost Allied $15,000. May 7- Macy returns 125 units because they did not fit the customer s needs (invoice amount: $1,750). Allied restores the units, which cost $1,250, to its inventory. May 8- Macy discovers that 200 units are scuffed but are still of use and, therefore, keeps the units. Allied sends Macy a credit memorandum for $300 toward the original invoice amount to compensate for the damage. May 15- Allied receives payment from Macy for the amount owed on the May 5 purchase; payment is net of returns, allowances, and any cash discount. Page 4

5 GENERAL JOURNAL SELLER Date Description Post ref Debit Credit GENERAL JOURNAL BUYER Date Description Post ref Debit Credit Page 5

6 Santa Fe Retailing purchased merchandise as is (with no returns) from Mesa Wholesalers with credit terms of 3/10, n/60 and an invoice price of $24,000. The merchandise had cost Mesa $16,000. Assume that both buyer and seller use a perpetual inventory system and the gross method. 1. Prepare entries that the buyer records for the (a) purchase, (b) cash payment within the discount period, and (c) cash payment after the discount period. 2. Prepare entries that the seller records for the (a) sale, (b) cash collection within the discount period, and (c) cash collection after the discount period. GENERAL JOURNAL BUYER Date Description Post ref Debit Credit GENERAL JOURNAL SELLER Date Description Post ref Debit Credit Page 6

7 Sydney Retailing (buyer) and Troy Wholesalers (seller) enter into the following transactions. Both Sydney and Troy use a perpetual inventory system and the gross method. May 11- Sydney accepts delivery of $40,000 of merchandise it purchases for resale from Troy: invoice dated May 11; terms 3/10, n/90; FOB shipping point. The goods cost Troy $30,000. Sydney pays $345 cash to Express Shipping for delivery charges on the merchandise. May 12- Sydney returns $1,400 of the $40,000 of goods to Troy, who receives them the same day and restores them to its inventory. The returned goods had cost Troy $1,050. May 20- Sydney pays Troy for the amount owed. Troy receives the cash immediately. 1. Prepare journal entries that Sydney Retailing (buyer) records for these three transactions. 2. Prepare journal entries that Troy Wholesalers (seller) records for these three transactions. GENERAL JOURNAL BUYER Date Description Post ref Debit Credit Page 7

8 GENERAL JOURNAL SELLER Date Description Post ref Debit Credit Prepare journal entries for the following merchandising transactions of Dollar Store assuming it uses a perpetual inventory system and the gross method. Nov. 1- Dollar Store purchases merchandise for $1,500 on terms of 2/5, n/30, FOB shipping point, invoice dated November 1. Nov. 5- Dollar Store pays cash for the November 1 purchase. Nov. 7- Dollar Store discovers and returns $200 of defective merchandise purchased on November 1, and paid for on November 5, for a cash refund. Nov. 10- Dollar Store pays $90 cash for transportation costs for the November 1 purchase. Nov. 13- Dollar Store sells merchandise for $1,600 with terms n/30. The cost of the merchandise is $800. Nov. 16- Merchandise is returned to the Dollar Store from the November 13 transaction. The returned items are priced at $160 and cost $80; the items were not damaged and were returned to inventory. Page 8

9 GENERAL JOURNAL Date Description Post ref Debit Credit V. INCOME STATEMENT FOR A MERCHANDISING BUSINESS A. Multiple Step Income Statement 1. Revenue 2. Cost of Goods Sold Cost of Goods Sold is no longer a calculation; it is an account and transactions are recorded directly into the inventory account and the Cost of Goods Sold account. Page 9

10 3. Gross Profit Accounting Operating Expenses a. Selling Expenses b. General & Administrative Expenses 5. Income from Operations 6. Other Income 7. Other Expense 8. Net Income Page 10

11 Net sales computation for multiple-step income statement A company reports the following sales-related information. Compute and prepare the net sales portion only of this company s multiple-step income statement. Sales, gross $200,000 Sales returns and allowances $16,000 Sales discounts 4,000 Sales salaries expense 10,000 The following expenses were incurred by a merchandising business during the year. In which expense section of the income statement should each be reported: (a) selling expense, (b) administrative expense, or (c) other expense? 1. Advertising expense 2. Depreciation expense on store equipment 3. Insurance expense on office equipment 4. Interest expense on notes payable 5. Rent expense on office building 6. Salaries of office personnel 7. Salary of sales manager 8. Sales supplies used Page 11

12 The partial Adjusted Trial Balance for Dewey, Cheetum & Howe Law Firm is presented below: Dewey, Cheetum & Howe Law Firm Adjusted Trial Balance December 31, 2018 Adj. T/Balance Account Title Dr. Cr. Sales 520,680 Sales Returns & Allowances 2,640 Sales Discounts 1,155 Cost of Goods Sold 380,000 Interest Income 3,280 Rent Expense 24,000 Wages Expense 48,000 Advertising Expense 10,600 Depreciation Expense -Factory Equip 4,800 Depreciation Expense -Store Equip 3,800 Store Supplies Expense 3,200 Interest Expense 2,215 Delivery Expense Office Supplies Expense 820 Insurance Expense 1,840 Instructions: Compute the amounts as indicated on the following page for the Multi-Step Income Statement of Dewey, Cheetum & Howe Law Firm. SHOW ALL CALCULATIONS IN THE SPACE PROVIDED! Page 12

13 Income Statement Calculations: Accounting Net Sales 2. Cost of Goods Sold 3. Gross Profit 4. Total Operating Expenses Selling Expenses General Expenses 5. Income from Operations 6. Other Income 7. Other Expense 8. Net Income Page 13

14 Barkley Company s adjusted trial balance on March 31, 2017, its fiscal year-end, follows. Debit Credit Merchandise inventory $ 56,500 Other (noninventory) assets 202,600 Total liabilities $ 42,500 Common stock 10,000 Retained earnings 154,425 Dividends 3,000 Sales 332,650 Sales discounts 5,875 Sales returns and allowances 20,000 Cost of goods sold 115,600 Sales salaries expense 44,500 Rent expense Selling space 16,000 Store supplies expense 3,850 Advertising expense 26,000 Office salaries expense 40,750 Rent expense Office space 3,800 Office supplies expense 1,100 Totals $539,575 $539,575 On March 31, 2016, merchandise inventory was $37,500. Supplementary records of merchandising activities for the year ended March 31, 2017, reveal the following itemized costs. Invoice cost of merchandise purchases $138,500 Purchases discounts received 2,950 Purchases returns and allowances 6,700 Costs of transportation-in 5,750 Required 1. Compute the company s net sales for the year. 2. Compute the company s total cost of merchandise purchased for the year. 3. Prepare a multiple-step income statement that includes separate categories for net sales, cost of goods sold, selling expenses, and general and administrative expenses. 4. Prepare a single-step income statement that includes these expense categories: cost of goods sold, selling expenses, and general and administrative expenses. Page 14