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Merchandising Operations
 

Merchandising Operations

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Merchandising Operations Merchandising Operations Presentation Transcript

  • ATG 157 - Chapter 5 Merchandising Operations & The Multiple-Step Income Statement
  • Study Objectives
    • Identify the differences between:
      • Service Company
      • Merchandising Company
    • Explain recording of purchases and sales revenues under a perpetual inventory system
    • Distinguish between:
      • Single-Step Income Statement
      • Multiple-Step Income Statement
  • Study Objectives (Cont’d)
    • Determine Cost of Goods Sold under a periodic inventory system
    • Explain the factors affecting profitability
  • Service vs. Merchandising
    • Service Companies
      • Revenues earned through performance of services
      • Examples:
        • Dentists, Accounting Firms, Attorneys
    • Merchandising Companies
      • Revenues earned through sales of merchandise
      • Examples: Restaurants, Dept. Stores
  • Service enterprises perform services as their primary source of revenue. Merchandising companies buy and sell merchandise.
  • Merchandising Companies Wholesalers vs. Retailers
    • Wholesalers
      • Merchandising Companies who sell to retailers
    • Retailers
      • Merchandising Companies who purchase and sell directly to consumers
  • Terms
    • Sales revenue or sales = sale of merchandise
    • Cost of goods sold = total cost of merchandise sold
  • Merchandising Operations
    • Primary Revenues:
      • Sales Revenue (or Sales)
    • Expenses:
      • Cost of Goods Sold
      • Operating Expenses
  • Operating Expenses
    • Selling, General and Administrative expenses relating to the sale of merchandise
  • Page 202 in book Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Income (Loss) Less Less Equals Equals How Income is Measured in a Merchandising Company
  • Receive Cash Receive Cash Perform Services Buy Inventory Sell Inventory Service Company Merchandising Company Cash Cash Accounts Receivable Accounts Receivable Merchandise Inventory
  • Inventory Systems
    • Two Types:
    • Perpetual Inventory System
    • Periodic Inventory System
  • Perpetual Inventory System
    • Detailed records maintained continuously
    • Inventory on hand known at any time
    • Cost of Goods sold determined at point of sale
  • Periodic Inventory System
    • Does not involve maintenance of detailed system pertaining to goods on hand
    • Does not show inventory on hand at any given time
    • Involves physical count of inventory at the end of the accounting period
      • Cost of Goods sold determined at time of physical inventory count
  • Record Revenue and compute and record Cost of Goods Compute and record Cost of Goods Sold Perpetual Periodic Perpetual Item Sold End of Period Comparing Periodic and Perpetual Inventory Systems Inventory Purchased Record Purchase of Inventory End of Period No Entry Record Purchase of Inventory Record Revenue Only Inventory Purchased Item Sold
  • Considerations...
    • Perpetual Inventory System
      • Generally used by companies who sell high-ticket items
      • Gives better control over these inventories
      • Cost can be minimized through computerized system
      • Growing in popularity
  • Recording of Purchases
    • Perpetual Inventory System
    • Purchases made:
      • By Cash or
      • On Account
    • When recorded?
      • Generally when goods are received
    • All costs of getting the inventory to company and ready to sell
      • Freight-In
      • Special Permits
    • Only costs associated with merchandise purchased for resale - not assets acquired for use, such as supplies
    What Is Charged to Merchandise Inventory?
  • Recording Purchases
    • Purchases supported by:
      • Purchase Invoice
        • Indicates total purchase price, quantity, etc.
    • Recording of purchases of merchandise for sale (in a perpetual inventory system):
      • Debit to Merchandise Inventory
      • Credit to Cash or Accounts Payable
    • 1. Seller
    • 2.Invoice Date
    • 3.Purchaser
    • 4.Salesperson
    • 5.Credit terms
    • 6.Freight terms
    • 7.Goods sold: catalog no.,description,quantity, price per unit
    • 8.Total invoice price
    Invoice No. 731 Address 125 Main Street Attention o f James Hoover, Purchasing Agent Date5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer Catalog No. Description QTY Price Amount Firm Name: Sauk Stero City Chelsea Stat e Illinois Zip 60915 IMPORTANT : ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800 1,500 300 8 Production Model Circuits A2547Z48
  • Merchandise Purchases On May 4 the company bought $ 3,800 worth of merchandise from PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 4 Merchandise Inventory 3,800 Accounts Payable 3,800 To record goods purchased on account. Accounts Payable Merchandise Inventory May 4 3,800 Freight-out May 4 3,800
  • Purchase Returns & Allowances
    • Purchase Returns
      • Purchaser returns goods to seller for credit or cash refund
    • Purchase Allowances
      • Purchaser dissatisfied with goods keeps those goods as long as the seller grants a discount for the purchase of those goods
  • Purchases Returns and Allowances On May 8 the company returned $300 worth of merchandise to PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account. Accounts Payable Merchandise Inventory May 4 3,800 Freight-out May 4 3,800 May 8 300 May 8 300
  • Freight Costs
    • Whether these costs are included in inventory is determined on whether:
      • Buyer incurs costs
        • Merchandise inventory increased
      • Seller incurs costs
        • Merchandise inventory is not increased (is an expense to the seller)
  • Freight Costs - On Incoming Inventory On May 6 the company paid $ 150 to have the merchandise inventory delivered to them. GENERAL JOURNAL Debit Credit May 6 Merchandise Inventory 150 Cash 150 To record payment of freight. Freight-Out Merchandise Inventory May 4 3,800 Cash May 6 150 May 8 300 May 6 150
  • Freight Costs-on outgoing inventory On May 6 the seller company paid $ 150 to have merchandise inventory delivered to the buyer. GENERAL JOURNAL Debit Credit May 6 Freight-Out (or Delivery Expense) 150 Cash 150 To record payment of freight on goods sold. Freight-Out Merchandise Inventory Cash May 6 150 May 6 150
  • Purchase Discounts
    • Purchases on Account
    • Terms may allow for discount if company pays for goods quickly
  • Terms of Credit
    • Example, Illus. 5-4:
      • Terms 2/10, n/30
      • Read: “two-ten, net-thirty”
      • Explanation:
        • 2% discount if paid within 10 days
          • 2% is less any returns and/or allowances
        • If not paid within 10 days, the full invoice is due within 30 days
      • The 10 days is called the discount period
  • Purchase Discounts Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period Original Invoice $3,800 -Returns 300 Amount due before discount $3,500 2% discount 70 Net due $3,430
  • Purchase Discounts Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period. GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period. Accounts Payable Merchandise Inventory May 4 3,800 Cash May 4 3,800 May 8 300 May 8 300 May 14 70 May 14 3,500 May 14 3430 May 6 150 May 6 150
  • Payment of Invoice Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was NOT paid within the discount period. GENERAL JOURNAL Debit Credit June 3 Accounts Payable 3,500 Cash 3,500 To record payment NOT within discount period. Accounts Payable Merchandise Inventory May 4 3,800 May 4 3,800 May 8 300 May 8 300 Jun 3 3,500 Jun 3 3,500 Cash
  • Sales Invoice ...
    • a business document that provides written evidence of a credit sale.
    • are recorded when earned-revenue recognition principle
    • must be supported by a business document-written evidence
    • 2 entries are made for each sale
      • one to record sale
      • one to record cost of merchandise sold
    Sales Revenues - Under a Perpetual System
  • Sales Entries
    • Record Sale:
      • Debit to Cash or Accounts Receivable
      • Credit to Sales Revenue
    • Record Cost of Sale:
      • Debit to Cost of Goods Sold
      • Credit to Merchandise Inventory
  • Sales - under a perpetual system Assume a sale of $ 3,800 ON ACCOUNT May 4 3,800 May 4 2,400 May 4 2,400 For merchandise having a cost of $2,400 May 4 3,800 Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales
  • Sales Returns and Allowances
    • Flip side of purchase returns and allowance
    On buyer’s books GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account. On seller’s books GENERAL JOURNAL Debit Credit May 8 Sales Returns and Allowance 300 Accounts Receivable 300 To record return of goods delivered to Sauk Stero.
  • What Is the Sales Returns and Allowances Account?
    • Contra Revenue Account to sales
      • Normal Balance = Debit
    • Used to show how much came in on returns and allowances
    • Excessive returns and allowances suggest:
    • inferior merchandise
    • inefficiencies in filing orders
    • errors in billing customers
    • mistakes in delivery or shipment of goods
  • What Is the Sales Discount Account?
    • Contra Revenue Account to sales revenue
      • Normal balance = debit
    • Used to disclose amount of cash discounts taken by customers
  • Sales Discounts
    • Flip side of purchase discounts
    On seller’s books GENERAL JOURNAL Debit Credit May 14 Cash 3,430 Sales Discounts 70 Accounts Receivable 3500 To record collection within discount period. On buyer’s books GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period
  • Two Forms Of Income Statements
    • Single-step income statement
    • Multiple-step income statement
  • Single-Step Income Statement
    • One step… subtract total expenses from total revenues
    Revenues $10,000 Expenses 3,000 Net income $ 7,000
  • PW AUDIO, Inc. Single-step Income Statement For the Year Ended December 31, 2004 Sales $460,000 Interest Revenue 3,000 Gain on Sale of equipment 600 Total Revenues $463,600 Expenses Cost of goods sold $316,000 Selling expenses 76,000 Administrative expenses 38,000 Interest expense 1,800 Casualty Loss from vandalism 200 Income tax expense 10,100 Total expenses 442,100 Net income $ 21,500
  • Multiple-Step Income Statement
    • More useful than single-step income statement
    • Gives 3 useful line items:
      • Gross Profit
      • Operating Expenses
      • Total from Non-Operating Activities
  • Gross Profit
    • Is the Merchandising Profit of a company
    • Calculation:
    • Net Sales
    • Less: Cost of Goods Sold
    • = Gross Profit
  • Non-Operating Activities
    • Include:
      • Gains/Losses from Sale of Investments, Sale of Equipment, etc.
      • Interest Income
      • Interest Expense
    • Any revenue &/or expense not relating to the company’s main business operations
  • Net Sales
    • Total Sales
    • Less: Sales Returns & Allowances
    • Less: Sales Discounts
    • = Net Sales
  • Sales revenues Sales $ 480,000 Less: Sales returns and allowance $12,000 Sales discounts 8,000 20,000 Net sales 460,000 Cost of goods sold 316,000 Gross profit $ 144,000 Operating expenses Selling expenses: Store salaries expense $45,000 Advertising expense 16,000 Depreciation expense 8,000 Freight-out 7,000 Total selling expenses $76,000 Administrative expenses Salaries expense $19,000 Utilities expense 17,000 Insurance Expense 2,000 Total administrative expenses 38,000 Total operating expenses 114,000 Income from operations $ 30,000 PW AUDIO SUPPLY, INC. Multi-step Income Statement For the Year Ended December 31, 2004
  • Income from operations (continued) $ 30,000 Other revenues and gains Interest revenue $ 3,000 Gain on sale of equipment 600 $ 3,600 Other expenses and losses Interest expense $ 1,800 Casualty loss from vandalism 200 2,000 1,600 31,600 Income before income income taxes Income tax expense 10,100 Net income $21,500 PW AUDIO SUPPLY, INC. Multi-step Income Statement For the Year Ended December 31, 2004
  • Cost of Goods Sold -Periodic Method
    • A running account of changes in inventory is not maintained.
    • Separate accounts use to record freight costs, returns and discounts
    • Cost of goods sold and ending inventory are calculated at end of period.
  • Cost of goods sold Inventory, January 1 $ 36,000 Purchases $325,000 Less Purchase returns and allowances $10,400 Purchase discounts 6,800 17,200 Net purchases 307,800 Add: Freight-in 12,200 Cost of goods purchased 320,000 Cost of goods available for sale 356,000 Inventory, December 31 40,000 Cost of goods sold 316,000 PW AUDIO SUPPLY, INC. Cost of Goods Sold For the Year Ended December 31, 2004
  • Gross Profit Rate=
    • Gross Profit
    • Net Sales
    Company’s gross profit expressed as a percentage
  • Profit Margin Ratio
    • Measures the percentage of each dollar of sales that results in net income
    Profit Margin Ratio = Net Income Net Sales Higher value suggests favorable return on each dollar of sales.
  • Chapter 5 Appendix Periodic Inventory System
    • Main difference from Perpetual Inventory System:
      • When Cost of Goods Sold is Recorded
        • Perpetual – at time of sale
        • Periodic – at end of accounting period
  • Recording Merchandise Purchases (Periodic System)
    • Purchases recorded in:
      • Purchase account
        • Is a temporary account
        • Normal balance – Debit
  • Illustration: Merchandise Purchase (Periodic System)
    • Record purchase of $3,800 goods on account in a periodic system:
    • Debit Credit
    • Purchases 3,800
    • Accounts Payable 3,800
  • Recording Purchase Returns (Periodic System)
    • Uses Purchase Returns & Allowances Account
      • Is temporary account
      • Normal Balance: Credit
  • Illustration: Purchase Returns (Periodic System)
    • Record return of $300 goods purchased on account in a periodic system:
    • Debit Credit
    • Accounts Payable 300
    • Purchase Returns
    • and Allowances 300
  • Recording Freight Costs on Purchases (Periodic System)
    • Account used:
      • Freight-In (or Transportation-In)
        • Is a temporary account
        • Normal Balance = Debit
      • Freight-In becomes part of cost of goods purchased
  • Illustration: Freight Paid on Purchase (Periodic System)
    • Paid $150 in freight charges on merchandise purchased:
    • Debit Credit
    • Freight-In 150
    • Cash 150
  • Recording Discounts on Purchases (Periodic System)
    • Account used:
      • Purchase Discounts
        • Is a temporary account
        • Normal Balance = Credit
  • Illustration: Discount on Purchase (Periodic System)
    • Received $70 Discount on goods purchased (total of purchase = $3,500)
    • Debit Credit
    • Accounts Payable 3,500
    • Purchase Discounts 70
    • Cash 3,430
  • Recording Sales of Merchandise (Periodic System)
    • Single Entry only:
      • Debit Accounts Receivable (or Cash)
      • Credit to Sales Revenue
    • Entry to record Cost of Goods Sold done at end of period
  • Recording Sales Returns & Allowances (Periodic System)
    • Same Entry as perpetual system:
      • Debit to Sales Returns & Allowances
      • Credit to Accounts Receivable
  • Recording Sales Discounts (Periodic System)
    • Same Entry as perpetual system:
      • Debits:
        • Cash
        • Sales Discounts
      • Credit to Accounts Receivable
  • Chapter 5 Homework
    • Brief Exercises: BE 5-1, 5-2, 5-3, 5-4, 5-5, 5-9
    • Exercises: E5-1, 5-2, 5-3, 5-5, 5-11
    • Problems: P5-1A, 5-4A, 5-7A, 5-7B
    • Due Date: Wednesday, 10/6/04