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1. Merchandising business

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These are the key points to consider in a merchandising business.

These are the key points to consider in a merchandising business.

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  • Service Business:ProvideservicestocustomersInthefiancialstatementtherevenueisreported as “FeesEarned”Incurredoperating expenses are substractedfromFeesEarnedtoarrive at “Net Incomw”Merchandising Business:Buying and Selling of merchandise.Thecost of merchandisesoldissubstractedfrom sales toarrive at grossprofit. Becauseistheprofitbeforedeductingtheoperating expenses.Merchandiseonhand (notsold) iscalledmerchandiseinventory. Reported as a currentasset in the BS.
  • Largeretailerssuch as Wal-Mart, Kmart and Sears, and manysmallmerchandisingbusiness use computarizedperpetualinventorysystems. Suchsystemsnormally use barcodes. Anoptical scanner readsthebarcodeto record merchandisepurchase and sold.
  • Theabilitytomanagethecreditterms in boththePurchase and Sales discountshave a directimpactonthecompanyprofit.
  • FOBShipping Point:Thebuyerpaysforthetransportationcostfromtheshippingpointtothedestinationpoint.Buyeraddsthispurchasingcosttotheinventorycost.FOB Destination:Thistermmeansthatthesellerdeliversthemerchandisetothebuyers final destination, free of transportationchargestothebuyer.Thesellersregisterthetransportationcost as anoperating expense
  • Give copies tothegroup of theIncomceStatement, Balance Sheet, RetainedEarnings and Chart of Accounts.As anexcercisewe can match the COA numberwiththe IS and BS.

1. Merchandising business 1. Merchandising business Presentation Transcript

  • Maestría en Administración
    Accounting for Merchandising BusinessAnálisis de Costos
  • Contents
    Nature of Merchandising Business
    1
    Accounting for Inventory Purchases
    2
    Purchases and Sales Discounts
    3
    Transportation Cost
    4
    Accounting for Merchandising Business
  • Contents
    Financials
    5
    Analysis and Interpretation
    6
    Class Discussions
    7
    Presentations
    8
    AccountingforMerchandising Business
  • Nature of Merchandising Business
    How do activities of an attorney and an architect, which are servicebusinesses, differ from those of Wal-Mart or Kmart, which are merchandisingbusinesses?
    These differences are best illustrated by focusing on the revenues and expenses in the following condensed income statements.
    Service Business
    Merchandising Business
    Accounting for Merchandising Business
  • Wal Mart Income Statement
    All numbers in $K
    100%
    75%
    25%
    19%
    6%
    http://finance.yahoo.com/q/is?s=WMT&annual
    Accounting for Merchandising Business
  • Wal Mart Strategic Model
    • Always Low Prices (from 8% to 39% lower than competition)
    • Lowest cost suppliers
    • Perpetual Inventory system
    • Internal Controls in place
    • Employee wages below average
    Accounting for Merchandising Business
  • Accounting for Inventory Purchases
    There are two systems that can be used to account for merchandise purchases:
    Perpetualand Periodic.
    In the perpetual inventory system, each purchase and sale of merchandise is recorded in an inventory account. As a result the inventory balance is always up to date.
    In the periodic inventory system, the current inventory balance is not available in the accounitng records, instead a detailed listing of the merchandise for sale (called a physical inventory) at the end of the accounting period is prepared. This report is used to determine the following:
    The cost of the merchandise on hand
    The cost of the merchandise sold during the period.
    AccountingforMerchandising Business
  • Purchases and Sales Discounts
    Direct Impact to
    Profit($)
    Sales Discount Reduce sales revenue.
    Purchase DiscountIs determined by the credit terms that the buyer and the seller agree. Most commonly used are:
    2/10 = 2% discount if paid within 10 days.
    n/30 = net amount due within 30 days.
    Accounting for Merchandising Business
  • The terms of a sale indicate when the ownership (title) of the merchandise passes to the buyer. This point determines which party, the buyer or the seller, must pay for the transportation cost.
    Terms FOB (Free on Board)
    Transportation Cost
    BUYER
    Warehouse
    DESTINATION
    SELLER
    Warehouse
    SHIPPING
    FOB Destination
    FOB
    Shipping Point
    • Transportation cost
    • Insurance
    • Delivery associated risks
    FOB Chicago
    FOB Osaka
    • Title passes to buyer
    • Buyer pays for freight cost
    • Freight cost included to
    buyer Inventory cost.
    • Title passes to buyer
    • Seller pays for freight cost
    • Freight cost included to
    seller operating expense.
    Accounting for Merchandising Business
  • Financials
    The financial information is used for the analysis and decision making.
    COA is used to group transactions by type
    1. Chart of Accounts
    Reflects the type of merchandising
    transactions.
    1. COA
    2. IS
    • Revenue
    • Cost
    • Expense
    • Income
    2. Income Statement
    The income statement shows the performance of the Merchandise Business in a given period.
    Analysis and Decision Making
    3. Retained Earnings
    Shows the net proft/loss of the business since it started operations and the dividends delivered to the stock holders.
    The RE shows the business accumulated profit or loss and the dividends delivered to stock holders.
    3. RE
    4. BS
    4. Balance Sheet
    Shows the financial position of the business in terms of assets, liabilities and stock equity.
    Cash, Inventory, Account Receivables, Accounts Payable & stock equity.
    Accounting for Merchandising Business
  • Financial Analysis and Interpretation
    Net Sales
    Average Total Assets
    The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. A high ratio indicates an effective use of assets. The assets used in computing the ratio may be the total assets at the ending of the year or the year average.
    Ratio of Net Sales to Assets =
    Use previous formula to compute the ratio for below merchandising companies:
    Accounting for Merchandising Business
  • Financial Analysis and Interpretation
    Net Sales
    Average Total Assets
    Ratio of Net Sales to Assets =
    Wal-Mart Ratio 2.48
    Net Sales to Assets
    Delta 10.0%
    Based on these ratios J.C. Penney appears better than
    Sears in utilizing its Assets to generate sales.
    For J.C. Penney the $1.21 can be read as follows:
    Every $1.0 invested as an asset generates $1.21 of sales.
    Accounting for Merchandising Business
  • Class Discussions
    What distinguishes a merchandising business from a service business?
    Can a business earn a gross profit but incurr a net loss? Explain.
    What is the meaning of:
    1/10, n/60
    n/30
    n/eom
    Who pays for transportation cost when the terms of sale are:
    FOB shipping point
    FOB destination
    During the current year, merchandise is sold for $180,000 cash and for $520,000 on account. The cost of the merchandise sold is $420,000.
    What is the amount of the gross profit
    Will the income statement necessarily report a net income? Explain.
    Accounting for Merchandising Business
  • Class Discussions
    What distinguishes a merchandising business from a service business? The primary differences relate to revenue activities. Merchandising business purchase merchandise for selling to customers
    Can a business earn a gross profit but incur a net loss? Yes, if operating expenses become greater than gross profit, then the result will be a net loss.
    What is the meaning of:
    1/10, n/60 1% discount within 10 days, Net due balance 60 days
    n/30 Net due balance 30 days
    n/eom Net due balance at end of month
    Who pays for transportation cost when the terms of sale are:
    FOB shipping point Buyer
    FOB destination Seller
    During the current year, merchandise is sold for $180,000 cash and for $520,000 on account. The cost of the merchandise sold is $420,000.
    What is the amount of the gross profit $280,000
    Will the income statement necessarily report a net income? Not necessarily, if operating expenditures become greater than gross profit, then the income statement will report a net loss.
    Accounting for Merchandising Business
  • Questions?