Chapter 6 Merchandising Operations © 2009 The McGraw-Hill Companies, Inc.

Operating Cycle for Service Companies Sell Services Service Company Receive Cash Incur Operating Expenses

Operating Cycle for Merchandising Companies Sell Products Merchandising Company Receive Cash Incur Operating Expenses Buy Products

Operating Cycle for Manufacturing Companies Sell Products Manufacturing Company Receive Cash Incur Operating Expenses Buy Raw Materials Make Products

Inventory Systems Perpetual Inventory System In a perpetual inventory system the inventory record shows the number of units and cost of each type of merchandise stocked. The inventory record is updated every time an item is bought, sold, or returned. With the introduction of relatively low cost computers, almost all companies use the perpetual system.

Inventory Systems Periodic Inventory System Rather than updating the inventory record each time an item is sold, bought, or returned, the periodic system updates the inventory record at the end of the accounting period. A physical count of inventory is used to update the inventory record.

Inventory Control The continuous tracking of transactions in a perpetual inventory system allows companies to keep just the right quantity of products on the shelves for just the right amount of time. New microchip technology allows the transmitting of data automatically from every inventory item that enters, moves within, and exits a store. Managers can estimate inventory theft, fraud, and error like this: Determine inventory on hand at the beginning of the period. Monitor every piece of inventory that enters and exits inventory. Add any purchases: Subtract any goods that are sold: Count inventory to determine what is actually there (on hand). Oct. 1 + - For October Quantity per accounting records Shrinkage (theft, fraud, error)

Managers can estimate inventory theft, fraud, and error like this:

Determine inventory on hand at the beginning of the period.

Monitor every piece of inventory that enters and exits inventory. Add any purchases: Subtract any goods that are sold:

Count inventory to determine what is actually there (on hand).

Recording Merchandise Purchases Inventory purchases should be recorded at the point at which ownership is transferred. Most purchase and sales agreements specify one of two possible times: When the goods leave the seller’s shipping department, known as the FOB (free on board) shipping point , or When the goods reach the customer at their destination point, known as FOB destination .

Inventory purchases should be recorded at the point at which ownership is transferred. Most purchase and sales agreements specify one of two possible times:

When the goods leave the seller’s shipping department, known as the FOB (free on board) shipping point , or

When the goods reach the customer at their destination point, known as FOB destination .

Purchase Discounts 2/10,n/30 Discount Percentage Offered Number of Days in Discount Period “ Net” Purchases (after returns & allowances) Maximum Credit Period Nov. 1 Date of purchase Nov. 10 End of discount period Nov. 30 End of credit period 2% discount period

Summary of Purchase-Related Transactions Effects of Purchase-Related Transactions on the Inventory Account Beginning inventory $ 75,000 Add: Purchases 105,000 Add: Transportation-in 300 Less: Purchase returns and allowances (400) Less: Purchase discounts (2,000) Cost of goods available for sale 177,900 Less: Cost of goods sold ? Ending Inventory $ ? Recorded as part of the sales transactions described in the next section of this presentation.

Recording Merchandise Sales For merchandisers , the sale should generally be recorded by the seller at the point at which ownership is transferred to the customer. For retail merchandisers , the transfer occurs when a customer buys and takes possession of the goods at checkout. For wholesale merchandisers , the transfer of ownership occurs at the time stated in the written sales agreement – either FOB shipping point or FOB destination.

For merchandisers , the sale should generally be recorded by the seller at the point at which ownership is transferred to the customer.

For retail merchandisers , the transfer occurs when a customer buys and takes possession of the goods at checkout.

For wholesale merchandisers , the transfer of ownership occurs at the time stated in the written sales agreement – either FOB shipping point or FOB destination.

Comparing Sales and Purchases Accounting HP, the seller, sold 1,000 laptop computer to Wal-Mart for $500,000 on terms of 3/10, n/30. The computers have a cost to HP of $300,000. The companies would make the following entries: HP (Seller) Wal-Mart (Purchaser) Debit Credit Debit Credit Accounts Receivable (+A) 500,000 Inventory (+A) 500,000 Sales Revenue (+R, +OE) 500,000 Accounts Payable (+L) 500,000 Cost of Goods Sold (+E, -OE) 300,000 Inventory (-A) 300,000

Comparing Sales and Purchases Accounting Wal-Mart returned 200 of those computers, for which the total purchase price was $100,000 (the cost to HP was $60,000). The companies will make the following entries: HP (Seller) Wal-Mart (Purchaser) Debit Credit Debit Credit Sales Returns & Allowances (+xR, -OE) 100,000 Accounts Payable (-L) 100,000 Accounts Receivable (-A) 100,000 Inventory (-A) 100,000 Inventory (+A) 60,000 Cost of Goods Sold (-E, +OE) 60,000

Comparing Sales and Purchases Accounting Wal-Mart paid HP for the remaining computers within the discount period. HP (Seller) Wal-Mart (Purchaser) Debit Credit Debit Credit Cash (+A) 388,000 Accounts Payable (-L) 400,000 Sales Discounts (+xR, -OE) 12,000 Cash (-A) 388,000 Accounts Receivable (-A) 400,000 Inventory (-A) 12,000 Amount subject to discount $400,000 Discount percentage 3% Amount of discount $12,000

Multistep Income Statement

Gross Profit Percentage Gross Profit Percentage = Net Sales – Cost of Goods Sold Net Sales × 100% Gross Profit Percentage = $312,427 - $240,391 $312,427 × 100% = 23.1%

Comparison to Benchmarks