Accounting For Merchandising Businesses

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Accounting For Merchandising Businesses

  1. 1. <ul><li>1. Nature of Merchandising Business </li></ul><ul><li>2. Financial Stmts of a Merch Business </li></ul><ul><li>3. Accounting for Sales </li></ul><ul><li>4. Accounting for Purchases </li></ul><ul><li>5. Transportation, Sales Tax, Discounts </li></ul><ul><li>6. Dual Nature of Merch Transactions </li></ul><ul><li>7. Chart of Accounts for Merch Business </li></ul><ul><li>8. Accounting Cycle for Merch Business </li></ul><ul><li>9. Financial Analysis and Interpretation </li></ul>Learning Objectives Power Notes Chapter 5 Accounting for Merchandising Businesses C5
  2. 2. <ul><li>Merchandising involves selling inventory </li></ul><ul><li>Inventory is usually an important asset </li></ul><ul><li>Inventory must be accounted for periodically or perpetually </li></ul><ul><li>Traditional periodic method is often being replaced by perpetual inventory accounting </li></ul>Merchandising and Inventory
  3. 3. Income Statement Comparison Fees earned $150,000 Operating expenses 120,000 Net income $ 30,000 Service Business Sales revenue $600,000 Cost of mdse. sold 450,000 Gross profit $150,000 Operating expenses 120,000 Net income $ 30,000 Merchandising Business 20% of revenues 5% of revenues 75% of revenues
  4. 4. <ul><li>Revenue from sales: </li></ul><ul><li>Sales $720,185 </li></ul><ul><li>Less:Sales returns and allow. $ 6,140 Sales discounts 5,790 11,930 </li></ul><ul><li>Net sales $708,255 </li></ul><ul><li>Cost of merchandise sold 525,305 </li></ul><ul><li>Gross profit $182,950 </li></ul>NetSolutions Income Statement (Multiple-Step) For the Year Ended December 31, 2002 Continued
  5. 5. <ul><li>Operating expenses: </li></ul><ul><li>Selling expenses: </li></ul><ul><li>Sales salaries expense $60,030 </li></ul><ul><li>Advertising expense 10,860 </li></ul><ul><li>Depr. expense–store equip. 3,100 </li></ul><ul><li>Miscellaneous selling expense 630 </li></ul><ul><li> Total selling expenses $ 74,620 </li></ul><ul><li>Administrative expenses: </li></ul><ul><li>Office salaries expense $21,020 </li></ul><ul><li>Rent expense 8,100 </li></ul><ul><li>Depr. expense–office equip. 2,490 </li></ul><ul><li>Insurance expense 1,910 </li></ul><ul><li>Office supplies expense 610 </li></ul><ul><li>Misc. admin. expenses 760 </li></ul><ul><li> Total admin. expenses 34,890 </li></ul><ul><li>Total operating expenses 109,510 </li></ul><ul><li>Income from operations $ 73,440 </li></ul>Continued
  6. 6. <ul><li>Other income: </li></ul><ul><li>Interest revenue $ 3,800 </li></ul><ul><li>Rent revenue 600 </li></ul><ul><li>Total other income $ 4,400 </li></ul><ul><li>Other expense: </li></ul><ul><li>Interest expense 2,440 1,960 </li></ul><ul><li>Net income $75,400 </li></ul>
  7. 7. <ul><li>Revenues: </li></ul><ul><li>Net sales $708,255 </li></ul><ul><li>Interest revenue 3,800 </li></ul><ul><li>Rent revenue 600 </li></ul><ul><li>Total revenues $712,655 </li></ul><ul><li>Expenses: </li></ul><ul><li>Cost of merchandise sold $525,305 </li></ul><ul><li>Selling expenses 74,620 </li></ul><ul><li>Administrative expenses 34,890 </li></ul><ul><li>Interest expense 2,440 </li></ul><ul><li>Total expenses 637,255 </li></ul><ul><li>Net income $ 75,400 </li></ul>NetSolutions Income Statement (Single-Step) For the Year Ended December 31, 2002
  8. 8. NetSolutions Balance Sheet December 31, 2002 <ul><li> Assets </li></ul><ul><li>Current assets: </li></ul><ul><li>Cash $ 52,950 </li></ul><ul><li>Notes receivable 40,000 </li></ul><ul><li>Accounts receivable 60,880 </li></ul><ul><li>Interest receivable 200 </li></ul><ul><li>Merchandise inventory 62,150 </li></ul><ul><li>Office supplies 480 </li></ul><ul><li>Prepaid insurance 2,650 </li></ul><ul><li>Total current assets $219,310 </li></ul>Continued
  9. 9. Transparency Master 5-6 TWO INVENTORY SYSTEMS PERPETUAL:       The Merchandise Inventory account is increased when inventory is purchased.        The Merchandise Inventory account is decreased when inventory is sold to a customer.      Therefore, the Merchandise Inventory account always (perpetually) shows the amount of inventory on hand.   PERIODIC:          Purchases of inventory are recorded in a Purchases account.        Inventory is not removed from the accounting records when it is sold.        Therefore, the amount of inventory on hand must be determined by taking a physical inventory count.   SUMMARY:   The perpetual inventory system requires more accounting entries, but it provides more up-to-date information for managing inventory.
  10. 10. Transparency Master 5-7 CCOST-BENEFIT ANALYSIS IMPLEMENTING A PERPETUAL INVENTORY SYSTEM Benefits: 1. Accounting records always show the amount of inventory on hand. This will assist in: a. determining when to reorder inventory. b. determining how much inventory to reorder. c. analyzing whether an item of inventory is a &quot;hot seller&quot; or &quot;slow mover.&quot; d. making decisions on markdowns or special promotions.   2. A physical inventory count is necessary only at year-end. This count validates the perpetual inventory records. (Continued)  
  11. 11. COST-BENEFIT ANALYSIS IMPLEMENTING A PERPETUAL INVENTORY SYSTEM (Cont) <ul><li>Costs: </li></ul><ul><li>1. Hiring extra accounting personnel or increased fees paid to an accounting service as the result of a greater number of transactions that must be recorded and processed. </li></ul><ul><li>OR </li></ul><ul><li>2. Purchasing optical scanners and computerized equipment to track purchases and sales of inventory items. </li></ul>
  12. 13. Transparency Master 5-11 MERCHANDISE SALES The following new accounts are used to record sales of merchandise to customers.   Account Classifi- Normal Account Purpose cation Balance   Sales Used to record Revenue Credit sales revenue when- ever a sale is made to a cash or credit customer.   Sales Used to record Contra- Debit Returns & cash or credit Revenue Allowances refund given to a customer who returns merchandise.   Sales Used to record Contra- Debit Discounts discounts granted Revenue to a customer for paying an account receivable within a discount period. (for example: 2/10, n/30)
  13. 14. Transparency Master 5-12 MERCHANDISE SALES (Concluded) The following new accounts are used to record sales of merchandise to customers. Account Classifi- Normal Account Purpose cation Balance Cost of Used to record the cost Expense Debit Merchandise of inventory items sold to Sold customers. The inventory items sold must be removed from the merchandise inventory account.   Credit Card Used to record the service Expense Debit Expense fee charged by credit card companies.   Sales Tax Used to record sales tax Liability Credit Payable collected by the seller; these taxes must be paid to the appropriate tax authority (example: state or county).
  14. 15. Transparency Master 5-13 SALES TRANSACTIONS FOR S & V OFFICE SUPPLY COMPANY 1. Sold $500 in merchandise to a cash customer. The cost of the merchandise sold was $280.   2. Sold $1,200 worth of merchandise to a customer who charged the merchandise to her VISA card. The cost of the merchandise sold was $950. [Hint: Bank card sales (VISA and MasterCard) are treated the same as cash sales because the retailer may deposit the credit card slips directly into his or her bank account.]   3. Sold $2,000 in merchandise to a credit customer on a store account. The terms of the sale are 2/10, n/30. The cost of the merchandise sold was $1,600.
  15. 16. Transparency Master 5-14 SALES TRANSACTIONS FOR S & V OFFICE SUPPLY COMPANY 4. Accepted a return of $50 worth of merchandise from the cash customer in #1. The cost of the merchandise returned was $30. The customer received a cash refund.   5. Received payment from the credit customer in #3 within the discount period. (Hint: Since the customer did pay within the discount period, you must show that discount in your journal entry.)   6. Paid the service fee on VISA and Master Card sales to Third National Bank, $75.
  16. 17. Transparency Master 8-18 PURCHASE TRANSACTIONS FOR S & V OFFICE SUPPLY COMPANY   1. S & V purchased $500 worth of merchandise for cash.   2. S & V purchased $4,000 of merchandise on account; terms n/30.   3. S & V paid for the merchandise purchased in #2.   4. S & V purchased $2,000 of merchandise from its supplier on account; terms 3/15, n/45.   5. S & V returned $100 worth of the merchandise purchased in #4 because it was damaged.   6. S & V paid for the merchandise purchased in #4, less the amount returned in #5. This invoice was paid within the discount period.
  17. 18. Transparency Master 5-20 FREIGHT TERMS FOB FOB Shipping Point Destination   Ownership (title) passes to buyer when merchandise Delivered to Received is freight carrier by buyer   Transportation costs are paid by Buyer Seller   Risk of loss during transportation belongs to Buyer Seller
  18. 19. Transparency Master 5-21 Freight Terms and Discounts Logan Appliances purchased $8,000 of merchandise, 2/10, n/30, FOB shipping point. The seller prepaid the shipping charges of $200. If Logan pays for this merchandise within the discount period, how much should Logan remit to the seller?
  19. 20. Transparency Master 5-22 PURCHASE TRANSACTIONS FOR S & V OFFICE SUPPLY COMPANY FREIGHT TERMS 1. S & V purchased $1,000 worth of merchandise on account; terms 2/10, n/30, FOB Shipping Point. The freight costs of $50 were prepaid by the seller and added to the invoice.   2. S & V paid for the merchandise purchased in #1 within the discount period.
  20. 21. <ul><li>Profitability is the ability of an entity to earn profits. </li></ul><ul><li>This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available. </li></ul><ul><li>Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet. </li></ul>Profitability Analysis
  21. 22. Profitability Measures — Effective Use of Assets Ratio of Net Sales to Assets 2003 2002 Net sales $1,498,000 $1,200,000 Total assets: Beginning of year $1,053,000 $1,010,000 End of year 1,044,500 1,053,000 Total $2,097,500 $2,063,000 Average $1,048,750 $1,031,500
  22. 23. Ratio of Net Sales to Assets Use: To assess the effectiveness in the use of assets Net sales on account $1,498,000 $1,200,000 Total assets: Beginning of year $1,053,000 $1,010,000 End of year 1,044,500 1,053,000 Total $2,097,500 $2,063,000 Average $1,048,750 $1,031,500 Ratio of net sales to assets 1.4 to 1 1.2 to 1 Profitability Measures — Effective use of Assets 2003 2002

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