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Accounting For Merchandising Businesses,Ss

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  • 1. Chapter 5 Accounting for Merchandising Businesses Financial and Managerial Accounting 8th Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
  • 2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.
  • 3. 1. Distinguish the activities of a service business from those of a merchandising business. 2. Describe and illustrate the financial statements of a merchandising business. 3. Describe the accounting for the sale of merchandise. 4. Describe the accounting for the purchase of merchandise. Objectives After studying this chapter, you should be able to:
  • 4. 5. Describe the accounting for transportation costs, sales taxes, and trade discounts. 6. Illustrate the dual nature of merchandising transactions. 7. Prepare a chart of accounts for a merchandising business. 8. Describe the accounting cycle for a merchandising business. 9. Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets. Objectives
  • 5. Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX Nature of Businesses
  • 6. Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX Nature of Businesses
  • 7. The Operating Cycle Purchasing Activity Production Activity Sales Activity Collection Activity Raw Materials Products Accounts Receivable Cash
  • 8. Multiple-Step Income Statement
  • 9.
    • Revenue from sales:
    • Sales $720,185
    • Less:Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930
    • Net sales $708,255
    • Cost of merchandise sold 525,305
    • Gross profit $182,950
    NetSolutions Income Statement For the Year Ended December 31, 2007 Continued
  • 10.
    • Operating expenses:
    • Selling expenses:
    • Sales salaries expense $56,230
    • Advertising expense 10,860
    • Depr. Expense – store equipment 3,100
    • Miscellaneous selling expense 630
    • Total selling expenses $ 70,820
    • Administrative expenses:
    • Office salaries expense $21,020
    • Rent expense 8,100
    • Depr. expense – office equipment 2,490
    • Insurance expense 1,910
    • Office supplies expense 610
    • Misc. administrative expense 760
    • Total admin. expenses 34,890
    • Total operating expenses 105,710
    • Income from operations $ 77,240
    Continued
  • 11.
    • Other income and expenses:
    • Rent revenue $ 600
    • Interest expense ( 2,440 ) (1,840 )
    • Net income $75,400
    Concluded
  • 12. Periodic vs. Perpetual Methods of Accounting Periodic Method
    • A method of determining the cost of merchandise sold and the amount of merchandise on hand
    • Under this method, the inventory records do not show the amount available for sale or the amount sold during the period
  • 13.
    • Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts.
    • The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.
    Periodic vs. Perpetual Methods of Accounting Perpetual Method
  • 14. Cost of Merchandise Purchased Purchases $521,980 Less: Purchase returns and allowances $9,100 Purchase discounts 2,525 11,625 Net purchases $510,355 Add transportation-in 17,400 Cost of merchandise purchased $527,755
  • 15. Cost of Merchandise Sold Merchandise inventory, 1/1/07 $ 59,700 Purchases $521,980 Less: Purchase returns and allowances $9,100 Purchase discounts 2,525 11,625 Net purchases $510,355 Add transportation-in 17,400 Cost of merchandise purchased 527,755 Merchandise available for sale $587,455 Less merchandise inventory, 12/31/07 62,150 Cost of merchandise sold $525,305
  • 16. Single-Step Income Statement for a Merchandising Business
  • 17.
    • Revenues:
    • Net sales $708,255
    • Rent revenue 600
    • Total revenues $708,855
    • Expenses:
    • Cost of merchandise sold $525,305
    • Selling expenses 70,820
    • Administrative expenses 34,890
    • Interest expense 2,440
    • Total expenses 633,455
    • Net income $ 75,400
    NetSolutions Income Statement For the Year Ended December 31, 2007
  • 18. Retained Earnings Statement
  • 19. Retained earnings, 1/1/07 $128800 Net income for year $75,400 Less dividends 18,000 Increase in owner’s equity 57,400 Retained earnings, 12/31/07 $186,200 NetSolutions Retained Earnings Statement For the Year Ended December 31, 2007
  • 20. Balance Sheet
  • 21.
    • Assets
    • Current assets:
    • Cash $52,950
    • Accounts receivable 91,080
    • Merchandise inventory 62,150
    • Office supplies 480
    • Prepaid insurance 2,650 Total current assets $209,310
    NetSolutions Balance Sheet December 31, 2007 Continued
  • 22.
    • Property, plant, and equipment:
    • Land $20,000
    • Store equipment $27,100
    • Less accumulated
    • depreciation 5,700 21,400
    • Office equipment $15,570
    • Less accumulated
    • depreciation 4,720 10,850 Total property, plant, and
    • equipment 52,250
    • Total assets $261,560
    Continued
  • 23.
    • Liabilities
    • Current liabilities:
    • Accounts payable $22,420
    • Note payable (current portion) 5,000
    • Salaries payable 1,140
    • Unearned rent 1,800
    • Total current liabilities $ 30,360
    • Long-term liabilities:
    • Note payable (due 2017) 20,000
    • Total liabilities $ 50,360
    • Stockholders’ Equity
    • Capital stock $ 25,000
    • Retained earnings 186,200 211,200
    • Total liab. and stockholders’ equity $261,560
  • 24. Sales Transactions
  • 25. JOURNAL Date Description Post. Ref. Dr Cr. 1 2 3 4 PAGE 26 5 Jan. 3 Cash 1 800 00 2007 Sales 1 800 00 To record cash sales. On January 3, a firm sold $1,800 of merchandise for cash. Cash Sales
  • 26. Cash Sales Using a perpetual inventory, the inventory cost of $1,200 must be recorded. 6 7 8 9 3 Cost of Merchandise Sold 1 200 00 Merchandise Inventory 1 200 00 To record the cost of merchandise sold. 10
  • 27. Credit card sales (MasterCard or Visa) are recorded as cash sales. At the end of the month, $48 was sent to cover this service charge. JOURNAL Date Description Post. Ref. Dr Cr. 1 2 3 4 PAGE 28 5 Cash 48 00 Jan. 31 Credit Card Expense 48 00 2007 Cash Sales To record service charges on credit card sales for the month.
  • 28. Jan. 12 Accounts Receivable — Sims Co. 510 00 Invoice No. 7172. Sales 510 00 12 Cost of Merchandise Sold 280 00 Merchandise Inventory 280 00 Cost of merchandise sold on Invoice No. 7172. Sales on Account On January 12, a firm sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280.
  • 29. Sales Discounts The terms for when payments for merchandise are to be made are called credit terms. If buyer is allowed an amount of time to pay, it is known as the credit period.
  • 30. If invoice is paid within 10 days of invoice date Sales Discounts Credit Terms $1,470 paid (less 2% as a cash discount) Invoice for $1,500 Terms: 2/10, n/30
  • 31. If invoice is NOT paid within 10 days of invoice date Sales Discounts Credit Terms $1,500 PAID Invoice for $1,500 Terms: 2/10, n/30
  • 32. Sales Discounts On January 22, the firm receives $1,470 from Sims Co. which is the amount due of $1,500 less a 2 percent discount. Jan. 22 Cash 1 470 00 Accounts Receivable — Sims Co. 1 500 00 Sales Discounts 30 00 Collection of Invoice No. 7172, less discount.
  • 33. Sales Returns and Allowances Merchandise that is returned to the vendor is referred to as a sales return. If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as a sales allowance.
  • 34. Jan. 13 Sales Returns and Allowances 225 00 Credit Memo No. 32. Accounts Receivable — Krier Co. 225 00 13 Merchandise Inventory 140 00 Cost of Merchandise Sold 140 00 Cost of merchandise returned — Credit Memo 32. Sales Returns and Allowances On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.
  • 35. Purchase Transactions
  • 36. Date Description Post. Ref. Dr Cr. 1 2 3 4 5 Jan. 3 Merchandise Inventory 2 510 00 2007 Cash 2 510 00 Purchased inventory from Bowen Co. Purchase Transactions On January 13, Purchased merchandise for cash from Alden Company, $2,510.
  • 37. Purchase Discounts Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. What’s the last day the invoice can be paid?
  • 38. Invoice period 30 Days in March 31 Date of invoice 12 Remaining days 19 April 11 Let’s do a simple calculation. The full amount is due on April 11. Purchase Discounts
  • 39. We can borrow at an annual interest rate of 6%. Should we borrow the to pay the invoice within the discount period? Purchase Discounts $60 discount (2% x $3,000)?
  • 40. Discount $60.00 Interest for 20 days at the rate of 6% on $2,940 –9.80 Savings from borrowing $50.20 Let’s see… Interest on the amount due of $3,000 less the 2 percent… Purchase Discounts
  • 41. Looks like we should take advantage of the discount even if we have to borrow the money. Purchase Discounts Discount $60.00 Interest for 20 days at the rate of 6% on $2,940 –9.80 Savings from borrowing $50.20
  • 42. JOURNAL Date Description Post. Ref. Dr Cr. 1 2 3 4 PAGE 27 5 On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,000. Mar. 12 Merchandise Inventory 3 000 00 2007 Accounts Payable —Alpha Technologies 3 000 00 Purchase Discounts
  • 43. JOURNAL Date Description Post. Ref. Dr Cr. 1 2 3 4 PAGE 27 5 If payment is made by March 22 NetSolutions records the discount as a reduction in cost. Mar. 22 Accounts Payable —Alpha Technol. 3 000 00 Cash 2 940 00 Merchandise Inventory 60 00 2007 Purchase Discounts
  • 44. JOURNAL Date Description Post. Ref. Dr Cr. 1 2 3 4 PAGE 27 5 If NetSolutions does not pay the invoice until April 11, it would pay the full amount. Apr. 11 Accounts Payable —Alpha Technol. 3 000 00 Cash 3 000 00 2007 Purchase Discounts
  • 45. Purchases Returns and Allowances A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.
  • 46. NetSolutions received the delivery from Maxim Systems and determined that $900 of the items were not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems. Purchases Returns and Allowances You sent me the wrong interface cards. We’ll send a debit memorandum with the returned items.
  • 47. Mar. 7 Accounts Payable — Maxim Systems 900 00 Debit Memo No. 18 Merchandise Inventory 900 00 Purchases Returns and Allowances
  • 48. Purchases Returns and Allowances On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30. May 2 Merchandise Inventory 5 000 00 Purchased merchandise. Accounts Payable —Delta Data 5 000 00
  • 49. Purchases Returns and Allowances On May 4, NetSolutions returns $3,000 of the merchandise. May 4 Accounts Payable —Delta Data Links 3 000 00 Returned portion of merchandise purchased. Merchandise Inventory 3 000 00
  • 50. Purchases Returns and Allowances On May 12, NetSolutions pays the amount due. ($5,000 – $3,000) x 2% May 12 Accounts Payable —Delta Data Links 2 000 00 Paid invoice. Cash 1 960 00 Merchandise Inventory 40 00
  • 51. Transportation Costs
  • 52. FOB Shipping Point Buyer pays freight costs and debits Merchandise Inventory Title passes to buyer as shipment leaves shipping point. Fruit Express
  • 53. June 10 Merchandise Inventory 900 00 Purchased merchandise, terms FOB shipping point. Accounts Payable — Magna Data 900 00 10 Merchandise Inventory 50 00 Cash 50 00 Paid shipping cost on merchandise purchased. On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50. FOB Shipping Point
  • 54. FOB Destination Title passes to buyer upon arrival at destination. Seller pays freight costs and debits Transportation Out Fruit Express
  • 55. On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40. FOB Destination June 15 Accounts Receivable — Kranz Co. 700 00 Sold merchandise, terms FOB destination. Sales 700 00 15 Cost of Merchandise Sold 480 00 Merchandise Inventory 480 00 Cost of sale of Kranz Co .
  • 56. FOB Destination June 15 Transportation Out 40 00 Cash 40 00 Paid shipping cost on merchandise sold. On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.
  • 57. Sales Taxes On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax. Aug. 12 Accounts Receivable —Lemon Co. 106 00 Sales 100 00 Sales Taxes Payable 6 00 Invoice No. 339
  • 58. Sales Taxes On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected. Sept.15 Sales Tax Payable 2 900 00 Cash 2 900 00 Payment for sales taxes collected during August.
  • 59. Illustration of Accounting for Merchandise Transactions July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500. Scully Company (Seller) Accounts Receivable — Burton Co. 7,500 Sales 7,500 Cost of Merchandise Sold 4,500 Merchandise Inventory 4,500 Burton Company (Buyer) Merchandise Inventory. 7,500 Accounts Payable — Scully Co. 7,500
  • 60. Illustration of Accounting for Merchandise Transactions Scully Company (Seller) No entry. Burton Company (Buyer) Merchandise Inventory 150 Cash 150 July 2. Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.
  • 61. Illustration of Accounting for Merchandise Transactions July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB shipping point, n/30. The cost of the merchandise sold was $3,500. Scully Company (Seller) Accounts Receivable — Burton Co. 5,000 Sales 5,000 Cost of Merchandise Sold 3,500 Merchandise Inventory 3,500 Burton Company (Buyer) Merchandise Inventory. 5,000 Accounts Payable — Scully Co. 5,000
  • 62. Illustration of Accounting for Merchandise Transactions July 7. Scully Company paid transportation costs of $ 250 for delivery of merchandise sold to Burton Company on July 5. Scully Company (Seller) Transportation Out 250 Cash 250 Burton Company (Buyer) No entry.
  • 63. Illustration of Accounting for Merchandise Transactions July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $700. Scully Company (Seller) Sales Returns and Allowances 1,000 Accounts Receivable — Burton Co. 1,000 Merchandise Inventory 700 Cost of Merchandise Sold 700 Burton Company (Buyer) Accounts Payable — Scully Co. 1,000 Merchandise Inventory 1,000
  • 64. Illustration of Accounting for Merchandise Transactions July 15. Scully Company received payment from Burton Company for purchase of July 5. Scully Company (Seller) Cash 4,000 Accounts Receivable — Burton Co. 4,000 Burton Company (Buyer) Accounts Payable — Scully Co. 4,000 Cash 4,000
  • 65. Illustration of Accounting for Merchandise Transactions July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200. Continued (Seller) Cost of Merchandise Sold 7,200 Merchandise Inventory 7,200 Burton Company (Buyer)
  • 66. Illustration of Accounting for Merchandise Transactions July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200. Scully Company (Seller) Cost of Merchandise Sold 7,200 Merchandise Inventory 7,200 Burton Company (Buyer) Merchandise Inventory 12,500 Accounts Payable — Scully Co. 12,500
  • 67. Illustration of Accounting for Merchandise Transactions July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000). Scully Company (Seller) Cash 12,260 Sales Discounts 240 Accounts Receivable — Burton Co. 12,500 Burton Company (Buyer) Accounts Payable — Scully Co. 12,500 Merchandise Inventory 240 Cash 12,260
  • 68. Balance Sheet Accounts
    • 200 Liabilities
    • 210 Accounts Payable
    • 211 Salaries Payable
    • 212 Unearned Rent
    • 215 Notes Payable
    • 300 Stockholders’ Equity
    • 310 Capital Stock
    • 311 Retained Earnings
    • Dividends
    • Income Summary
    100 Assets 110 Cash 112 Accounts Receivable 115 Merchandise Inventory 116 Office Supplies 117 Prepaid Insurance 120 Land 123 Store Equipment 124 Accumulated Depreciation— Store Equipment 125 Office Equipment 126 Accumulated Depreciation— Office Equipment NetSolutions Chart of Accounts
  • 69. Income Statement Accounts 600 Other Income 610 Rent Revenue 700 Other Expense 710 Interest Expense 400 Revenues 410 Sales 411 Sales Returns and Allowances 412 Sales Discounts 500 Costs and Expenses 510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense— Store Equipment 523 Transportation Out 529 Miscellaneous Selling Expense 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense— Office Equipment 533 Insurance Expense 534 Office Supplies Expense 539 Miscellaneous Admin. Expense NetSolutions Chart of Accounts
  • 70. Merchandise Inventory Shrinkage NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, 2007. The physical count reveals that only $62,150 is actually available.
  • 71. Merchandise Inventory Shrinkage Dec. 31 Cost of Merchandise Sold 1 800 00 Merchandise Inventory 1 800 00 Adjusting Entry Inventory records $63,950 Inventory count 62,150 Inventory shortage $ 1,800
  • 72. Profitability Measures -- Effective Use of Assets Ratio of Net Sales to Assets Sears Penney Net sales $41,366,000 $31,846,000 Total assets: Beginning of year $50,409,000 $19,742,000 End of year $44,317,000 $20,908,000 Average $47,363,000 $20,325,000 Ratio of net sales to assets .87 to 1 1.57 to 1 Ratio Use: To assess the effectiveness in the use of assets to generate sales.
  • 73. The End Chapter 5