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1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
1. Merchandising business
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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:
    Provide services to customers
    In the fiancial statement the revenue is reported as “Fees Earned”
    Incurred operating expenses are substracted from Fees Earned to arrive at “Net Incomw”

    Merchandising Business:
    Buying and Selling of merchandise.
    The cost of merchandise sold is substracted from sales to arrive at gross profit. Because is the profit before deducting the operating expenses.
    Merchandise on hand (not sold) is called merchandise inventory. Reported as a current asset in the BS.
  • Large retailers such as Wal-Mart, Kmart and Sears, and many small merchandising business use computarized perpetual inventory systems. Such systems normally use barcodes. An optical scanner reads the barcode to record merchandise purchase and sold.
  • The ability to manage the credit terms in both the Purchase and Sales discounts have a direct impact on the company profit.
  • FOB Shipping Point:
    The buyer pays for the transportation cost from the shipping point to the destination point.
    Buyer adds this purchasing cost to the inventory cost.

    FOB Destination:
    This term means that the seller delivers the merchandise to the buyers final destination, free of transportation charges to the buyer.
    The sellers register the transportation cost as an operating expense
  • Give copies to the group of the Incomce Statement, Balance Sheet, Retained Earnings and Chart of Accounts.
    As an excercise we can match the COA number with the IS and BS.
  • Transcript

    • 1. Universidad Cuauhtémoc Campus Aguascalientes Maestría en Administración Accounting for Merchandising Business Análisis de Costos
    • 2. Accounting for Merchandising Business Contents Nature of Merchandising Business1 Accounting for Inventory Purchases2 Purchases and Sales Discounts3 Transportation Cost4
    • 3. Accounting for Merchandising Business Contents Financials5 Analysis and Interpretation6 Class Discussions7 Presentations8
    • 4. Nature of Merchandising Business  How do activities of an attorney and an architect, which are service businesses, differ from those of Wal-Mart or Kmart, which are merchandising businesses?  These differences are best illustrated by focusing on the revenues and expenses in the following condensed income statements. Category 2009 Model Fees Earned $XXX 100% Operating Expenses -XXX 75% Net Income $XXX 25% Service Business Category 2009 Model ebay Sales $XXX 100% 100% Cost of Merchandise Sold -XXX 70% 26% Gross Profit $XXX 30% 74% Operating Expenses -XXX 15% 53% Net Income $XXX 15% 21% Merchandising Business Accounting for Merchandising Business
    • 5. Wal Mart Income Statement http://finance.yahoo.com/q/is?s=WMT&annual 75% 6% 19% 25% 100% All numbers in $K Accounting for Merchandising Business
    • 6. Wal Mart Strategic Model Accounting for Merchandising Business • Always Low Prices (from 8% to 39% lower than competition) • Lowest cost suppliers • Perpetual Inventory system • Internal Controls in place • Employee wages below average
    • 7. Accounting for Inventory Purchases  There are two systems that can be used to account for merchandise purchases: Perpetual and Periodic.  In the perpetual inventory system, each purchase and sale of merchandise is recorded in an inventory account. As a result the inventory balance is always up to date.  In the periodic inventory system, the current inventory balance is not available in the accounitng records, instead a detailed listing of the merchandise for sale (called a physical inventory) at the end of the accounting period is prepared. This report is used to determine the following: 1. The cost of the merchandise on hand 2. The cost of the merchandise sold during the period. Accounting for Merchandising Business
    • 8. Purchases and Sales Discounts Sales Discount Reduce sales revenue. Purchase Discount Is determined by the credit terms that the buyer and the seller agree. Most commonly used are: 2/10 = 2% discount if paid within 10 days. n/30 = net amount due within 30 days. Direct Impact to Profit ($) Accounting for Merchandising Business Savings Calculation $USD Discount of 2% on $1500 $30.00 Interest for 20 days at rate of 12% on $1470 -9.80 Savings from borrowing $20.20
    • 9. 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. SELLER Warehouse SHIPPING • Title passes to buyer • Buyer pays for freight cost • Freight cost included to buyer Inventory cost. Transportation Cost BUYER Warehouse DESTINATION • Title passes to buyer • Seller pays for freight cost • Freight cost included to seller operating expense. Accounting for Merchandising Business • Transportation cost • Insurance • Delivery associated risksFOB Osaka FOB Chicago FOB Shipping Point FOB Destination
    • 10. Financials 1. COA 2. IS 3. RE 4. BS Analysis and Decision Making COA is used to group transactions by type Cash, Inventory, Account Receivables, Accounts Payable & stock equity. • Revenue • Cost • Expense • Income The RE shows the business accumulated profit or loss and the dividends delivered to stock holders. 2. Income Statement The income statement shows the performance of the Merchandise Business in a given period. 1. Chart of Accounts Reflects the type of merchandising transactions. 3. Retained Earnings Shows the net proft/loss of the business since it started operations and the dividends delivered to the stock holders. 4. Balance Sheet Shows the financial position of the business in terms of assets, liabilities and stock equity. The financial information is used for the analysis and decision making. Accounting for Merchandising Business
    • 11. Financial Analysis and Interpretation $in millions Sears J.C. Penney Net Sales $38,236 $23,649 Total Assets BOP 33,130 17,102 Total Assets EOP 36,137 22,088 Ratio of Net Sales to Assets X.XX X.XX Accounting for Merchandising Business Ratio of Net Sales to Assets = 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. Use previous formula to compute the ratio for below merchandising companies:
    • 12. Financial Analysis and Interpretation $in millions Sears J.C. Penney Net Sales $38,236 $23,649 Total Assets BOP 33,130 17,102 Total Assets EOP 36,137 22,088 Ratio of Net Sales to Assets 1.10 1.21 Net Sales to Assets 1.10 1.21 Sears J.C Penney Delta 10.0% Accounting for Merchandising Business Ratio of Net Sales to Assets = Net Sales Average Total Assets 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. Wal-Mart Ratio 2.48
    • 13. 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
    • 14. 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
    • 15. Universidad Cuauhtémoc Campus Aguascalientes

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