Financial Accounting

Allama Iqbal Open University 1
1Allama Iqbal Open University

Accounting for
Merchandizing Business
Presented By
M.Adeel (0323-4481864)
Course : Financial Accounting
2

Contents
 Merchandising Activities:
• Operating Cycle of Merchandising Companies
• Income statement of Merchandising Companies
• Perpetual and Periodic Inventory Systems
 Case Study
• Introduction
• Vision and Mission Statement
• Practical and theoretical review
• SWOT Analysis
• Conclusion & Recommendation
• References

Difference Between
Merchandising and Service
Business Revenue
activities of a
merchandising
business involve
the buying and
selling of
merchandise
 Comparison to
service business
Service Business Merchandising Business
Fees earned Sales
Less Operating
expenses
Less Cost of merchandise
sold
=Net income =Gross Profit
Less Operating expenses
=Net Income

Merchandising Activities
 What is Inventory?
“Goods that are purchased for the purpose to resale
to customers ”
 Operating cycle of a Merchandising Company:
“The series of transactions through which a
business generate its revenue and its
cash receipts from consumer.”
 What is Cost of Goods Sold?
“It is the cost which a company pays for making
a product or for inventory purchased”
 What is Goods Available for sale?
“ It is the total goods which you could have
sold in your interim period
of company”

Types of Merchandise Company
Whole Seller & Retailer:
 Wholesaler buy large quantity of merchandise from
several different manufactures and then resell this
merchandise to many different retailers.
 A retailer is a business that sells merchandise directly
to the public.
Manufacturer Wholesaler Retailer Customer

Measuring Net Income
Net
Income
(Loss)
Less
LessEqual
Equal
Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
Sales Revenue – income
earned in selling merchandise
Cost of Goods Sold – cost of
merchandise sold during the
period
Operating Expenses – expenses
incurred in running the business

Income Statement contd..
Sales - Cost of goods sold = Gross profit
Gross Profit - Other Expenses = Net Income
Example
Sales $15,000
Less : Cost of goods sold (3500)
Gross profit $11,500
Operating Expenses:
Wages Exp 620
Adv Exp 150
Depreciation Exp 430 (1200)
Net Income $10,300

Operating Cycle for a
Merchandiser
Purchases
Merchandise
inventory
Credit sales
Account
receivable
Cash
collection
Purchases
Merchandise
inventory
Cash
sales

Approaches used in Accounting for
Inventories
 Perpetual System:
All Transaction including Costs of merchandise are
recorded immediately as they occur. Record is up-to-
date all the time.
 Periodic System:
No effort is made to keep records up-to-date neither
inventory nor Cost of goods sold and are only updated
at the end of interim period.

Perpetual inventory system
The following example contains several journal entries used to
account for transactions in a perpetual inventory system:
Purchase of Merchandise:
Purchase of inventory is recorded at cost.
To record a purchase of $5,000 of 5 items that are stored in
inventory each item has cost $1,000.
Account Title Debit Credit
Inventory $5000
Cash $5000

Perpetual inventory system
Sales of Merchandise:
Sold 3 items $1200 each, for $3,600. for which the cost is 3,000.
Debit Credit
Cash $3600
Revenue $3600
Cost of Goods
Sold
$3000
Inventory $3000
Gross Profit: 3600 – 3000 = $600
Let Expenses are $200. Then,
Net Income = 600 – 200 = $400

If inventory is purchased and sold on account, Then entries will be:
Debit Credit
A/C Receivables $3600
Sale $3600
Account Title Debit Credit
Inventory $5000
A/C Payable $5000
Selling of Inventory: (On Account)
Debit Credit
Cost of Goods Sold $3000
Inventory $3000
Inventory Record
Purchase of Inventory: (On Account)

Payment of A/C Payables to Suppliers:
Collection of Accounts Receivable from
Customers:
Debit Credit
Cash $3600
A/C Receivable $3600
Debit Credit
A/C Payables $5000
Cash $5000

Periodic Inventory System
Its an alternative to a perpetual inventory
system
When merchandise is purchased, its cost
is debited to an account entitled
Purchases.

Example
 The inventory on hand at the end of
2011 cost $20000.
 During 2012, purchases of merchandise
for resale of customers totaled $100000
 Inventory on hand at the end of 2012
cost $15000.

Cont…
Recording Purchases of Merchandises:
Suppose from total purchases of $100,000
the first purchase was of $10,000 so
purchase entry will be:
Debit Credit
Purchases 10000
Cash 10000

Computing the cost of goods sold:
Inventory(beginning of the year 2012)………… $20000
Add : Purchases……………………....................100000
Cost of goods available for sale………………..$120000
Less : Inventory (end of the year 2012)………….15000
Cost of goods sold…………………………….$105000

 Purchase discount is based on the invoice
cost less returns and allowances, if any.
 The Purchase Discount account is used to
record the amount saved by paying promptly.
It is a contra account having a normal credit
balance.
Periodic Inventory System

Types of Discount
DISCOUNT
CASH
DISCOUNT
TRADE
DISCOUNT
PURCHASE
DISCOUNT
SALE
DISCOUNT

 Trade discounts are given to reduce the list
price to actual sales price which may be due
to the volume of transactions.
 A buyer and or the seller does not record the
list prices and the trade discounts in its
accounts. Instead, a buyer/seller records
purchases or sales net of the trade discount
(at invoice price).
Trade Discount

 Cash discounts are normally given to
encourage prompt payment.
 For example
 2/10, n/30
Cash Discount

Transportation Costs
 The terms of a sale should indicate when the
ownership of the merchandise passes to the
buyer.
○ This point determines which party, the buyer or the seller
must pay the transportation costs.

Transportation Costs
 FOB – shipping point
○ The ownership of the merchandise passes to the
buyer when the seller delivers the merchandise
to the transportation company.
○ Buyer pays the transportation costs
 FOB – destination point
○ The ownership of the merchandise passes to the
buyer when the seller delivers the merchandise
to the buyer.
○ Seller pays the transportation costs

Transportation Cost
FREIGHT TERMS
FOB FOB
Shipping Point Destination
Ownership (title)
passes to buyer
when merchandise Delivered to Received
is freight carrier by buyer
Transportation
costs are paid
by Buyer Seller
Risk of loss during
transportation
belongs to Buyer Seller

CASE STUDY

Haleeb Foods Introduction
 Fast Growing food product in Pakistan
 Established in 1984
 Commercial Production start in 1987
 HFL installed Powder plant in 1992
 Pakistan first food company get ISO-9002 in 1997
 Annual turnover of Rs 9.2 Billion
 3 Leading Brand including Haleeb, Candia and Tropico
 Thickest milk for best tea

Vision and Mission Statement

Practical and Theoretical Review
Accounting for merchandizing business and different aspects of
business volume can define in this process and report
• Tough old days seem coming to end as HFL slowly recover from its losses
• HFL lost many market share to multinational giants, many ups and downs
faced which is a good case study for medium scale industries
• Previous management took wrong decisions specially capitalization on
the popularity of milk product
• In 2008 Nestle give tough time to its product milk pack
• In 2008 HFL took loan while its competitor Nestle and Engro were awash
with fund
• Haleeb market share decline from 52% to 10% where another product
Tea Max is doing well in tea whitener category
• Now they are offering eight different products and plan to introduce a
few more this year which will help to regain lost momentum and pay off
debts

SWOT ANALYSIS
Strengths
 No. 1 Dairy Company
 Major share holder in food
industry of Pakistan
 Friendly Environment
Weaknesses
 Depend on 3rd Party for supply of
milk
 Low Promotional Activity
 Low sales margin due to high
value added products
Opportunities Threats
 HFL can go for joint venture with
other company to attract market
share
 Expand its product range
specially milk product
 Uncertainty of economic condition
 Price fluctuation due to rupee
devaluation
 Dependency on contractors for
supply of milk

Recommendation
 HFL should allocate a healthy budget for the advertising of its products.
 HR Department of HFL should introduce HRIS to increase the efficiency
of the company.
 The co-operation among the different departments of HFL should also
improve which increase the efficiency of the company.
 The activities like customer satisfaction day should be performed on
regular basis so the company should know about the feedback of the
customers regarding the products and image of the company.
 The shopkeeper complains that HFL don’t provide replacement to the
expired products so they should provide proper replacements to the
shopkeepers.
 HFL should improve its distribution system especially the retailers are not
happy with distribution of Haleeb Milk.

Conclusion
 As a whole HFL is a good organization to work
 Certain departments that need improvements
 It is surviving in the FMCG’s sector with some strengths
and weaknesses.
 I am of the view that if the management of HFL wants to
show the same results in the future that it should have to
take some decisions before time, because in the 21st
century only those organizations can survive who are
utilizing all their resources efficiently and effectively.

References
 www.haleebfood.com
 www.sikiwho.com
 www.about.com
 www.generalfoods.com
 www.worldfoodprogramme.edu
 Relevant text book of AIOU
 Personal observations

Financial Accounting

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