1 Financial Accounting John J. Wild Sixth Edition McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
2 Chapter 04 Reporting and Analyzing Merchandising Operations
3 Conceptual Learning Objectives C1: Describe merchandising activities and identify income components for a merchandising company. C2: Identify and explain the inventory asset and cost flows of a merchandising company.
4 Analytical Learning Objectives A1: Compute the acid-test ratio and explain its use to assess liquidity. A2: Compute the gross margin ratio and explain its use to assess profitability.
5 Procedural Learning Objectives P1: Analyze and record transactions for merchandise purchases using a perpetual system. P2: Analyze and record transactions for merchandise sales using a perpetual system. P3: Prepare adjustments and close accounts for a merchandising company. P4: Define and prepare multiple-step and single-step income statements. P5: Appendix 4A Record and compare merchandising transactions using both periodic and perpetual inventory systems (see text for details).
6 C1 Merchandising Activities Service organizations sell time to earn revenue. Examples: Accounting firms, law firms, and plumbing services Revenue s Minus Expenses Equals Net income
8 Reporting Income for a Merchandiser C1 Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores Net sales Minus Cost of goods sold Equals Gross profit Minus Expenses Equals Net income
9 C2 Operating Cycle for a Merchandiser Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. Credit Sale Cash Sale Purchases Cash collection Purchases Merchandise inventory Accounts receivable Cash sales Merchandise inventory Credit sales
10 C3 Inventory Systems Beginning inventory + Net purchases = Merchandise available for sale Ending inventory + Cost of goods sold
11 P1 Merchandise Purchases On June 20, Jason, Inc. purchased $14,000 of Merchandise Inventory paying cash.
12 P1 Trade Discounts Used by manufacturers and wholesalers to offer better prices for greater quantities purchased. Example Matrix, Inc. offers a 30% trade discount on orders of 1,000 units or more of their popular product Racer. Each Racer has a list price of $5.25.
13 Vendor s Invoice for Purchase of Merchandise P1 ❷ ❶ ❹ ❸ ❺ ❻ ❶Seller ❷Invoice date ❸Purchaser ❹Order number ❺Credit terms ❻Freight terms ❼Goods ❽Invoice amount ❼ ❽
14 P1 Purchase Discounts A deduction from the invoice price granted to induce early payment of the amount due. Terms Discount Period Credit Period Time Due Due: Invoice price minus discount Due: Full Invoice Price Date of Invoice
15 P1 Purchase Discounts 2/10,n/30 Discount Percent Number of Days Discount Is Available Otherwise, Net (or All) Is Due in 30 Days Credit Period
16 P1 Purchase Discounts On May 7, Jason, Inc. purchased $27,000 of merchandise inventory on account, credit terms are 2/10, n/30.
17 P1 Purchase Discounts On May 15, Jason, Inc. paid the amount due on the purchase of May 7. *$27,000 2% = $540 discount
18 P1 Purchase Discounts After we post these entries, the accounts involved look like this: Merchandise Inventory 5/7 27,000 5/15 Bal. 26, Accounts Payable 5/15 27,000 5/7 27,000 Bal. 0
19 P1 When Discount Is Not Taken If we fail to take a 2/10, n/30 discount, is it really expensive? 365 days 20 days 2% = 36.5% annual rate Days in a year Number of additional days before payment Percent paid to keep money
20 P1 Purchase Returns and Allowances Purchase returns... refer to merchandise a buyer acquires but then returns to the seller. Purchase allowance... is a reduction in the cost of defective or unacceptable merchandise that a buyer acquires.
21 P1 Purchase Returns and Allowances On May 9, Matrix, Inc. purchased $20,000 of merchandise inventory on account, credit terms are 2/10, n/30.
22 P1 Purchase Returns and Allowances On May 10, Matrix, Inc. returned $500 of defective merchandise to the supplier.
23 P1 Purchase Returns and Allowances On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9.
25 P1 Transportation Costs On May 12, Jason, Inc. purchased $8,000 of merchandise inventory for cash and also paid $100 transportation costs.
26 P1 Quick Check On July 6, 2011, Seller Co. sold $7,500 of merchandise to Buyer, Co. on account; terms of 2/10,n/30. The shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will be part of Buyer s July 6 journal entry? a. Credit Sales $7,500 b. Credit Purchase Discounts $150 c. Debit Merchandise Inventory $7,600 d. Debit Accounts Payable $7,450 FOB shipping point indicates the buyer ultimately pays the freight. This is recorded with a debit to Merchandise Inventory.
27 P1 Cost of Merchandise Purchased
28 P2 Accounting for Merchandise Sales Sales discounts and returns and allowances are contra revenue accounts.
29 P2 Sales of Merchandise On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was carried in inventory at a cost of $18,000.
30 P2 Sales Discounts On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. Let s prepare the journal entries.
31 P2 Sales Discounts On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale.
32 P2 Sales Returns and Allowances On June 12, Barton Co. sold merchandise costing $4,000 for $7,500 on account. The credit terms were 2/10, n/30.
33 P2 Sales Returns and Allowances On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is related to the June 12 sale.
34 P2 Sales Returns and Allowances On June 20, Barton received the amount owed to it from the sale of June 12.
35 P3 Completing the Accounting Cycle Next, let s complete the accounting cycle by preparing the closing entries for Barton Company.
36 P3 Step 1: Close Credit Balances in Temporary Accounts to Income Summary
37 P3 Step 2: Close Debit Balances in Temporary Accounts to Income Summary
38 P3 Step 3: Close Income Summary to Retained Earnings
39 P3 Step 4: Close Dividends to Retained Earnings
40 P4 Multiple-Step Income Statement
41 P4 Single-Step Income Statement
42 P4 Balance Sheet
43 A1 Acid-Test Ratio Acid-test = ratio Acid-test = ratio Quick assets Current liabilities Cash + S/T investments + receivables Current liabilities A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future.
44 Gross Margin Ratio A2 Gross margin = ratio Net sales - Cost of goods sold Net sales Percentage of dollar sales available to cover expenses and provide a profit.
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