Merchandising Transactions

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Merchandising Transactions

  1. 1. M ERCHANDISING T RANSACTIONS CHAPTER 6
  2. 2. Service Organizations vs. Merchandising Companies <ul><li>Service organizations sell time to earn revenue </li></ul><ul><ul><li>Examples include accounting firms, law firms, and plumbing services </li></ul></ul><ul><ul><li>These have been our emphasis up to now </li></ul></ul>Not a plumber! Service Company Income Statement For the Year Ended December 31, 1999 Service revenues 150,000 $ Expenses 137,500 Net income 12,500 $
  3. 3. Service Organizations vs. Merchandising Companies <ul><li>Merchandising companies sell products to earn revenue </li></ul><ul><ul><li>Examples include sporting goods, clothing, and auto parts stores </li></ul></ul><ul><ul><li>These will be our emphasis for the rest of the semester </li></ul></ul>Merchandising Company Income Statement For the Year Ended December 31, 1999 Sales revenues 150,000 $ Cost of goods sold 80,000 Gross margin 70,000 Expenses 46,500 Net income 23,500 $
  4. 4. Merchandising Companies Seller Customer/ Buyer Transfers Products Cash or Promise to Pay
  5. 5. <ul><li>Inventory </li></ul><ul><ul><li>Products held for sale </li></ul></ul><ul><ul><li>Classified as asset </li></ul></ul><ul><li>Sales </li></ul><ul><ul><li>Exchange of merchandise for an asset </li></ul></ul><ul><ul><li>Classified as revenue </li></ul></ul><ul><li>Cost of Goods Sold (COGS) </li></ul><ul><ul><li>Cost of inventory sold during the period </li></ul></ul><ul><ul><li>Classified as expense </li></ul></ul>Merchandising Companies
  6. 6. <ul><li>CLASSIFIED INCOME STATEMENT </li></ul><ul><li>a/k/a </li></ul><ul><li>MULTIPLE STEP INCOME STATEMENT </li></ul><ul><li>a/k/a </li></ul><ul><li>“SATURDAY NIGHT” PAGE </li></ul>Merchandising Companies 226
  7. 7. ROLL ‘EM ! Video #1 (Approx. 6 min.) Video #2 (Approx. 8 min.)
  8. 8. Merchandising Companies Manufacturer Wholesaler Retailer Final Customer “ Channel of Distribution” (5 points on next test) Can manufacturer sell direct to final customer? (i.e., can green box be skipped?) 210
  9. 9. Accounting Terminology <ul><li>Sales Invoice </li></ul><ul><li>vs. </li></ul><ul><li>Purchase Invoice </li></ul><ul><li>What’s the difference? </li></ul>Who cares? prepares ? 211
  10. 10. Recording and Reporting Sales Gross sales Less: Sales discounts Less: Sales returns and allowances Net sales
  11. 11. Recording Gross Sales <ul><li>On May 13, TCom sold $25,000 of merchandise for cash. </li></ul>If the sale had been on account, we would debit Accounts Receivable instead of Cash. GENERAL JOURNAL Page 74 Date Description PR Debit Credit May 13 Cash 25,000 Sales 25,000 To record the sale of merchandise for cash
  12. 12. Two Types of Discounts <ul><li>Trade Discounts </li></ul><ul><ul><li>A percentage deduction from the list or catalog price to arrive at the gross selling (invoice) price </li></ul></ul><ul><ul><li>Know the three reasons for using (p. 213) </li></ul></ul><ul><ul><li>Not recorded on either seller’s or buyer’s books!! </li></ul></ul>Example FastBan, Inc. offers a 30% trade discount if you purchase at least 1,000 of their most popular product known as Zippy. Each Zippy has a list price of $5.25. Quantity sold 1,000 Price per unit 5.25 $ Total 5,250 Less 30% discount (1,575) Invoice price 3,675 $
  13. 13. Two Types of Discounts <ul><li>Cash Discounts </li></ul><ul><ul><li>A deduction from the invoice price granted to induce early payment of the amount due </li></ul></ul><ul><ul><li>Two other names for cash discounts </li></ul></ul><ul><ul><ul><li>Sales discounts </li></ul></ul></ul><ul><ul><ul><li>Purchase discounts </li></ul></ul></ul><ul><ul><li>Recorded on whose books? </li></ul></ul><ul><ul><ul><li>Both seller’s and buyer’s books </li></ul></ul></ul><ul><ul><li>They are pervasive </li></ul></ul>
  14. 14. Two Types of Discounts <ul><li>Cash Discounts </li></ul><ul><ul><li>A deduction from the invoice price granted to induce early payment of the amount due </li></ul></ul><ul><ul><li>Two other names for cash discounts </li></ul></ul><ul><ul><ul><li>Sales discounts </li></ul></ul></ul><ul><ul><ul><li>Purchase discounts </li></ul></ul></ul><ul><ul><li>Recorded on whose books? </li></ul></ul><ul><ul><ul><li>Both seller’s and buyer’s books </li></ul></ul></ul><ul><ul><li>They are pervasive </li></ul></ul>3/15,n/30 Number of Days Discount is Available Otherwise, Net (or All) is Due In This Number of Days Discount Percent
  15. 15. Cash (Sales) Discount Example <ul><li>On November 8, Borey Co. sold merchandise to West, Inc. for $6,000 on account; credit terms 2/10, n/30. </li></ul>General Journal Page 61 Date Description PR Debit Credit Nov. 8 Accounts Receivable 6,000 Sales 6,000 To record the sale on account
  16. 16. Cash (Sales) Discount Example <ul><li>On November 14, West, Inc. paid its account in full. </li></ul>Discount = $6,000 × 2% = $120 General Journal Page 68 Date Description PR Debit Credit Nov. 14 Cash 5,880 Sales Discount 120 Accounts Receivable 6,000 To record cash received on account
  17. 17. Other Deductions from Sales <ul><li>Sales Return </li></ul><ul><ul><li>Merchandise returned by the buyer as unsatisfactory or defective. </li></ul></ul><ul><li>Sales Allowance </li></ul><ul><ul><li>A deduction from the original invoice price when the customer keeps merchandise but is dissatisfied with it. </li></ul></ul>
  18. 18. Sales Returns and Allowances Example <ul><li>Before making a payment to you, a customer returns $135 of goods sold on account. </li></ul>General Journal Page 68 Date Description PR Debit Credit Sales Returns and Allowances 135 Accounts Receivable 135 To record return of defective item.
  19. 19. Partial Income Statement Gross sales Less: Sales discounts Less: Sales returns and allowances Net sales Sales discounts and Sales returns and allowances are Contra Revenue accounts.
  20. 20. Inventory Methods <ul><li>Perpetual Method </li></ul><ul><li>Periodic Method </li></ul>
  21. 21. Perpetual Method <ul><li>The inventory account is continuously up-dated as purchases and sales of inventory occur. </li></ul>
  22. 22. Perpetual Method <ul><li>The inventory account is continuously up-dated as purchases and sales of inventory occur. </li></ul><ul><li>More on this method in Chapter 7. </li></ul>
  23. 23. Periodic Method <ul><li>This is the method used in this chapter. </li></ul><ul><li>Entries are not made to the inventory account during the year. </li></ul><ul><li>At the end of the accounting period, a physical count of inventory is needed to update the inventory account and calculate cost of goods sold. </li></ul><ul><li>What is the mechanism for updating the inventory account? </li></ul><ul><li>Closing entries </li></ul>
  24. 24. Closing Entries for Merchandising Company Closing Entry #1 General Journal Page 88 Date Description PR Debit Credit Sales Purchase Discounts Purchase Returns and Allowances Merchandising Inventory (ending) Income Summary To close accounts with credit balances and set up proper balance in ending inventory account. Dec. 31 XXX XXX XXX XXX XXX 232 233
  25. 25. Closing Entries for Merchandising Company General Journal Page 88 Date Description PR Debit Credit Other accounts including all expenses Sales Discounts Sales Returns and Allowances Merchandising Inventory (beginning) Income Summary To close accounts with debit balances including the beginning inventory account. Dec. 31 XXX XXX XXX XXX XXX Closing Entry #2
  26. 26. Cost of Goods Sold <ul><li>...is an expense representing the cost of the inventory sold during the period. </li></ul><ul><li>...appears on the income statement. </li></ul><ul><li>...must be calculated using a multiple-step process when using the periodic method. </li></ul>
  27. 27. <ul><li>Beginning Inventory </li></ul><ul><li>+ Purchases </li></ul><ul><li>- Purchase Discounts </li></ul><ul><li>- Purchase Returns and Allowances </li></ul><ul><li>+ Transportation-in </li></ul><ul><li>= Cost of Goods Available for Sale </li></ul><ul><li>- Ending Inventory </li></ul><ul><li>= Cost of Goods Sold </li></ul>Calculation of Cost of Goods Sold Multiple-Step Process
  28. 28. Calculation of Cost of Goods Sold Formal Income Statement Presentation Cost of goods sold: Merchandise inventory, January 1, 1999 24,000 $ Purchases: 167,000 $ Less: Purchase discounts 3,000 $ Purchase returns and allowances 8,000 11,000 Net purchases 156,000 Add: Transportation-in 10,000 Net cost of purchases 166,000 Cost of goods available for sale 190,000 Less: Merchandise inventory, December 31, 1999 31,000 Cost of goods sold 159,000 $
  29. 29. Purchase of Merchandise <ul><li>One May 7, Barbee, Inc. purchased $27,000 of merchandise on account; terms 2/10, n/30. </li></ul>General Journal Page 26 Date Description PR Debit Credit May 7 Purchases 27,000 Accounts Payable 27,000 Purchase merchandise on account
  30. 30. Purchase of Merchandise <ul><li>One May 16, Barbee, Inc. paid for the purchase of May 7 in full. </li></ul>$27,000 × 2% = $540 discount General Journal Page 41 Date Description PR Debit Credit May 16 Accounts Payable 27,000 Cash 26,460 Purchase Discounts 540 Payment on account
  31. 31. Purchase of Merchandise <ul><li>One May 16, Barbee, Inc. paid for the purchase of May 7 in full. </li></ul>$27,000 × 2% = $540 discount Purchase Discounts is a Contra Purchases account. General Journal Page 41 Date Description PR Debit Credit May 16 Accounts Payable 27,000 Cash 26,460 Purchase Discounts 540 Payment on account
  32. 32. Purchase Returns and Allowances <ul><li>The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller. </li></ul><ul><li>On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before payment is made to the supplier. </li></ul>
  33. 33. Purchase Returns and Allowances <ul><li>The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller. </li></ul><ul><li>On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before payment is made to the supplier. </li></ul>General Journal Page 88 Date Description PR Debit Credit May 27 Accounts Payable 200 Purchase Returns and Allowances 200 Returned defective merchandise
  34. 34. Transportation Costs <ul><li>Transportation-In </li></ul><ul><ul><li>Inward freight costs of acquiring merchandise. </li></ul></ul>Transportation-In is part of cost of goods sold!
  35. 35. Transportation Costs <ul><li>Transportation Out/Delivery Expense </li></ul><ul><ul><li>Outgoing freight costs that must be paid by the seller. </li></ul></ul>Delivery Expense is a selling expense on the income statement!
  36. 36. Transportation Costs <ul><li>Free on Board (FOB) Shipping Point. </li></ul><ul><li>FOB Destination. </li></ul><ul><li>Freight Prepaid </li></ul><ul><li>Freight Collect </li></ul>Who pays the freight charges?
  37. 37. FOB Points ABC Wholesalers Shipping Point Destination Rice's Deartment Store FOB what? (Pick one)
  38. 38. <ul><li>FOB Shipping Point </li></ul><ul><ul><li>“Free on board” at the shipping (selling) point </li></ul></ul><ul><ul><li>Title passes to buyer upon shipment </li></ul></ul><ul><ul><li>Buyer owns en route and... </li></ul></ul><ul><ul><ul><li>Ultimately bears the cost of the freight </li></ul></ul></ul><ul><ul><ul><li>Assumes risk of loss in transit </li></ul></ul></ul><ul><li>FOB Destination </li></ul><ul><ul><li>“Free on board” at the destination point </li></ul></ul><ul><ul><li>Seller owns en route and... </li></ul></ul><ul><ul><ul><li>Ultimately bears the cost of the freight </li></ul></ul></ul><ul><ul><ul><li>Assumes risk of loss in transit </li></ul></ul></ul>FOB Points
  39. 39. Transportation Cost Summary Terms Initially Pays Ultimately Bears Expense FOB Shipping Point - Freight Collect Buyer Buyer FOB Destination - Freight Prepaid Seller Seller FOB Destination - Freight Collect Buyer Seller FOB Shipping Point - Freight Prepaid Seller Buyer 223
  40. 40. Transportation Cost Summary Terms Initially Pays Ultimately Bears Expense FOB Shipping Point - Freight Collect Buyer Buyer FOB Destination - Freight Prepaid Seller Seller FOB Destination - Freight Collect Buyer Seller FOB Shipping Point - Freight Prepaid Seller Buyer
  41. 41. Periodic Method Prepare the journal entries for Jackson Co. Use the periodic inventory method. July 5, 1998 Purchased 1,000 units of inventory for $25,000 cash. July 9, 1998 Sold 300 units of inventory to a customer on account for $35 per unit.
  42. 42. Periodic Method GENERAL JOURNAL Page 1 Date Description PR Debit Credit July 5 Purchases 25,000 Cash 25,000 To record inventory purchases At Cost
  43. 43. Periodic Method GENERAL JOURNAL Page 1 Date Description PR Debit Credit July 5 Purchases 25,000 Cash 25,000 To record inventory purchases July 9 Accounts Receivable 10,500 Sales 10,500 To record inventory sales 300 units × $35 = $10,500 At Retail
  44. 44. Saturday Night Page, Again P. 226
  45. 45. Classified Income Statement: Revenue Earned from the sale of inventory Alternative way to express income statement relationships? (Hint: 8th Grade) Net sales = Gross sales - (Sales disc.+ SR&A) Sales 250,000 $ Less: Sales Discounts 3,000 $ Sales Ret. & Allow. 1,500 4,500 Net Sales 245,500 $ 227
  46. 46. Classified Income Statement: Cost of Goods Sold <ul><li>Three approaches to Cost of Goods Sold: </li></ul><ul><ul><li>(1) Simplified Income Statement Approach </li></ul></ul><ul><li>(2) Equation Approach </li></ul><ul><ul><li>COGS = BI + P - EI </li></ul></ul>Beginning Inventory (BI) 55,000 $ “ Purchases” (P) 176,500 Cost of Goods Avail. for Sale (GAS) 231,500 Less: Ending Inventory (EI) 64,000 Cost of Goods Sold (COGS) 167,500 $
  47. 47. Classified Income Statement: Cost of Goods Sold <ul><li>(3) Formal Income Statement Approach </li></ul>Beginning Inventory 55,000 $ Purchases 175,000 $ Less: Purchase Discounts 6,000 $ Purchase Ret. & Allow. 2,500 8,500 Net Purchases 166,500 $ Add: Transportation-in 10,000 Net Cost of Purchases 176,500 Cost of Goods Avail. for Sale 231,500 $ Less: Ending Inventory 64,000 Cost of Goods Sold 167,500 $
  48. 48. Classified Income Statement: Gross Margin Gross Margin = Net Sales - COGS Gross Margin is also called Gross Profit Net Sales 245,500 $ Cost of Goods Sold 167,500 Gross Margin 78,000 $
  49. 49. Classified Income Statement: Types of Operating Expenses <ul><li>Selling Expenses </li></ul><ul><li>Administrative Expenses </li></ul>
  50. 50. Classified Income Statement: Income from Operations Gross margin 78,000 $ Operating expenses: Selling expenses: Sales salaries 26,000 $ Delivery expense 3,000 Advertising expense 2,000 Rent - store building 4,000 Depreciation - store equip. 2,500 37,500 Administrative expenses: Executive salaries 29,000 Rent - office building 1,600 Insurance expense 1,500 Supplies expense 1,100 33,200 Total operating expenses 70,700 Income from operations 7,300 $
  51. 51. Classified Income Statement: Types of Nonoperating Items <ul><li>Nonoperating Revenues </li></ul><ul><li>Nonoperating Expenses </li></ul>Income from operations 7,300 $ Nonoperating revenues and expenses Nonoperating revenues: Interest revenue 400 Rent Revenue 2,000 Nonoperating expenses: Interest expense (700) Safe deposit box rental 100 Net income 9,100 $
  52. 52. Work Sheet and Closing Entries Appx. 231
  53. 53. Gross Margin Percentage Percentage of each sales dollar available to cover expenses and a profit GROSS MARGIN NET SALES GM% =
  54. 54. WE CAN LOOK FORWARD TO A CLOSER INSPECTION OF INVENTORY IN CHAPTER 7! THE END

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