Comparison of Income Statements Operating Cycle of a Merchandising Business Purchase Transaction Terms of Transactions Inventory Systems Sales Transactions Net Sales/Gross Sales Cost of Goods Sold Net Purchases Operating Cost
Comparison of IncomeStatement Net sales arise from the sale of goods Cost of goods sold represents the cost of inventory, the entity has sold to customers Gross margin from sales (gross profit) Difference between net sales and cost of goods sold Operating expenses – other that cost of goods sold, which are incurred to generate sales
Operating Cycle of aMerchandising Business Purchases inventory, sells the inventory and uses the cash to purchase more inventory The faster the sale of inventory and the collection of cash, the higher the profits
Source Documents Sales invoice Bill of landing Statement of account Official receipt Deposit slip Check Purchase requisition Purchase order Receiving report Credit memorandum
Steps in purchasetransaction1. Fills a purchase requisition form and sends to purchasing department2. Purchasing department prepares a purchase order after checking descriptions3. Seller forwards an invoice to the purchaser upon shipment of the merchandise4. The purchaser’s receiving department sees to it that the terms in the purchase order are complied with and prepares a receiving report5. Before approval of invoice payment, the AP department compares copies to the previous documents
Terms of Transactions Merchandise may be purchased and sold either on credit terms or for cash on delivery When goods are sold on account, a period of time called credit period is allowed for payment If the credit period is 30 days, then payment is expected within 30 days from the invoice date Described as the net credit period on net tems 30 days is noted as “n/30” 10 days after the end of the month “n/10 eom”
Cash Discounts For prompt payment (called cash discount) This practice improves the seller’s cash position by reducing the amount of money is accounts receivable Designed by such notation as “2/10” The buyer may avail of two percent discount if the invoice is paid within ten days from the invoice date 10 days (discount period) covered by the discount Cash discounts are called purchase discount from the buyer’s view point and sales discount from the seller’s point of view.
exampleCash Discount of 2% on P150,000 3,000Interest for 20 days at an annual rate of18% on the amount due within thediscount period:P147,000 * 18% * 20/360Savings effected by barrowing 1,470Amount due = 150,000 invoice price – 1,5303,000 cash discounts
Trade Discount Encourage the buyers to purchase products because of markdown from the list price Enables the suppliers to vary prices periodically without the inconvenience of revising price lists and catalogs There is no trade discount account, instead, all accounting entries are based on the invoice price which is obtained by subtracting the trade discount from the list price
Transportation Cost Freight bill designates which party shoulders the costs, and whether the shipment is freight prepaid or freight collect FOB (free on board) Shipping point: the buyer shoulders the shipping costs; ownership over the goods passes from seller to the buyer. Buyer already owns the goods while still in transit and therefore, shoulders the transportation cost
FOB Destination The seller bears the shipping cost Title passes only when the goods are received by the buyer at the point of destination; while in transit The seller is still the owner of the goods so the seller shoulders the transportation costs
Freight prepaid The seller pays the transportation costs before shipping the goods sold Freight collect The freight company collects from the buyer Payments by either party will not dictate who should ultimately shoulder the costs
Who Who Pays Freight terms shoulders the Shipper? the Tc?FOB Destination, Freight Prepaid Seller SellerFOB Shipping Point, Freight Collect Buyer BuyerFOB Destination, Freight Collect Seller BuyerFOB Shipping Point, Freight Prepaid Buyer Seller
Shipping cost borne by the buyer using the periodic inventory system are debited to transportation in account Shipping cost borne by the seller are debited to transportation out account, also called delivery expense, an operating expense in the income statement
Inventory Systems Key factor in determining cost of goods sold Merchandising inventory represents goods available for sale, there must be method of determining both the quantity and the cost of these goods. Periodic Inventory or Perpetual Inventory
Periodic Inventory System Primarily used by businesses that sell relatively inexpensive goods and that are not yet using computerized scanning system to analyze good sold No entries are made to the inventory account as the merchandise is bought and sold When goods are purchased, a separate set of accounts is used to accumulate information on the net cost of the purchases Only at the end of the period, when the inventory is counted, will entries be made to the inventory account to establish its proper balance
Perpetual Inventory System Inventory account is continuously updated Perpetually updating the inventory account requires that at the time of purchase, merchandise acquisitions be recorded as debit to the inventory account. At the time of sale, the cost of goods sold is determined and recorded by a debit to the cost of goods sold account and a credit to the inventory account Both the inventory and cost of goods sold accounts receive entries throughout the accounting period.
POS scanners built into checkout counters to collect transactional data for the cash register and to update their perpetual inventory system Is more advisable for forms that sell low- volume, high-priced goods
The ending inventory should reconcile with the actual physical count at the end of the period assuming that no theft, spoilage, or error has occurred account is adjusted for any inaccuracies discovered The count provides as independent check on the amount of inventory that should be reported at the end of the period
Net Sales Net sales is the first part of the merchandising income statement as presented belowNet Sales Gross Sales 2,463,500 Less: Sales Returns and 27,500 Allowances Sales Discount 42,750 70,250Net Sales 2,393,250
Gross Sales Under accrual accounting, revenues form the sale of merchandise are considered to be earned in the accounting period in which the title of goods passes-usually at the point of delivery – from the seller to the buyer Gross sales consist of total sales for cash and on credit during an accounting period Cash for sale is uncollected, the revenue is recognized as earned at the time of sale
As an income account, the sales account is credited whenever sales on account or cash are made. Only sales of merchandise held for resale are recorded in the sales account If the firm sold one of its delivery trucks, the credit would be made to the delivery equipment account, not to sales account
9-16 Cash 25,000 Sales 25,000 To record sale of merchandise for cash9-16 Accounts Receivable 25,000 Sales 25,000 To record sale of merchandise on credit
Sales Discount Assume that Corleto delights sold merchandise on 9-20 for P30,000; terms 2/10, n/60. at the time of sale, the entry9-20 Account Receivable 3,000 Sales 3,000 To record sales on credit; terms 2/10, n/60
The customer may take advantage of the sales discount any time on or before 9-30, which is 10 days after the date of the invoice9-30 Cash 2,940 Sales Discounts 60 Accounts Receivable 3,000 To record collection on the 9-20 sale, discounts taken.• At the end of the accounting period, the sales discounts account has accumulated all the sales discount for the period.• The account is considered a contra-income account and deducted from gross sales in the income statement.
Sales Returns andAllowances The buyer may return the goods to the seller for credit if the sale was made on account or for cash refund if the sale was for cash The seller may just grant an allowance or deduction from the selling price A high sales returns and allowances figure is not commendable because it may signal poor quality of goods and thus may result to dissatisfied customers
Each return or allowance is recorded as a debit to an account called sales returns and allowances. 9-17 Sales Returns and 760 Allowances Accounts Receivable (or 760 Cash) To record return or allowance on unsatisfactory merchandise• The seller usually issues the customer a credit memorandum, which is a formal acknowledgement that the seller has reduced the amount owned by the customer.• Sales returns and allowances is a contra-income account and is accordingly deducted from gross sales in the income statement
Transportation Out When the freight term is FOB destination, the seller shoulders the transportation costs; when the term is FOB shipping point, the buyer bears the shipping costs
Case1: Assume that an entity sold merchandisetotaling P17,000 FOB destination, freightprepaid; terms 2/10, n/30. the transportation costamounted to P1,90011-25 Accounts Receivable 17,000 Transportation Out 1,900 Sales 17,000 Cash 1,900 Sales on account; terms 2/10, n/30; FOB destination, freight prepaid, P1,900
If the invoice is collected on Dec 5, the salesdiscount will be P340 (P17,000 * 2%).Transportation out is an operating expense.12-5 Cash 16,600 Sales Discount 340 Accounts Receivable 17,000
Case2: Assume that an entity sold merchandisetotaling P17,000 FOB shipping point, freightcollect; terms 2/10, n/30. the transportation costamounted to P1,90011-25 Accounts Receivable 17,000 Sales 17,000 Sold merchandise on account; terms 2/10, n/30; FOB shipping point, freight collect.
If the invoice is collected on Dec 5, the salesdiscount will be P340 (P17,000 * 2%).12-5 Cash 16,600 Sales Discount 340 Accounts Receivable 17,000
Case3: Assume that an entity sold merchandisetotaling P17,000 FOB destination, freight collect;terms 2/10, n/30. the transportation costamounted to P1,90011-25 Accounts Receivable 15,100 Transportation out 1,900 Sales 17,000 Sales on account; terms 2/10, n/30; FOB destination, freight collect, P1,900
If the invoice is collected on Dec 5, the salesdiscount will be P340 (P17,000 * 2%) since thediscount applies to total sales12-5 Cash 14,760 Sales Discounts 340 Accounts Receivable 15,100
Case4: Assume that an entity sold merchandisetotaling P17,000 FOB shipping point, freightperpaid; terms 2/10, n/30. the transportation costamounted to P1,90011-25 Accounts Receivable 18,900 Sales 17,000 Cash 1,900 Sales on account; terms 2/10, n/30; FOB shipping point, freight prepaid, P1,900
If the invoice is collected on Dec 5, the salesdiscount will be P340 (P17,000 * 2%) since thediscount applies to total sales12-5 Cash 18,560 Sales Discounts 340 Accounts Receivable 18,900
Cost of Goods Sold Or cost of sales is the largest single expense of the merchandising business Cost of inventory that the entity has sold to customers Goods available for sale during the year = merchandise inventory at the beginning of the year + net purchases during the period
Entity sold all goods available for sale during a given acctg period, cost of goods sold = goods that had been available for sale Actual cost of goods sold = goods available for sale - merchandise inventory at the end of the period
Corleto Delights Partial Income Statement For the Year Ended Dec. 31, 2000Cost of Goods SoldMerchandise Inventory, 1/1/00 528,000Purchases 1,264,000Less: Purchases Returns and Allowances 56,400 Purchases Discounts 21,360 77,760 1,186,240Transportation In 82,360Net Purchases 1,268,600Goods Available for Sale 1,796,600Less: Merchandise Inventory, 12/31/00 483,000Cost of Goods Sold 1,313,600
Merchandise inventory Consists of goods purchased for resale. Beginning inventory = merchandise inventory at the start of the acctg period Ending inventory = inventories at the end Merchandise inventory to be reported in the balance sheet Beginning inventory of the next acctg period
Net Purchases Under periodic inventory method Net purchases = GP – (Pdra) + Tc GP: gross purchases Pdra: purchases discounts, returns, allowances Tc: transportation costs
Purchases Purchases account, a temporary account, is used only for merchandise purchased for resale Purpose: accumulate the total cost of merchandising purchased during an accounting period At invoice price is known as the gross price method of recording purchases
All purchases of merchandise are debited to the purchasesaccount as shown below11-12 Purchases 15,000 Accounts Payable 15,000 To record purchases of merchandise; term 2/10, n/30.
Purchases Returns and Allowances Is a contra account and is accordingly deducted from purchases in the income statement Cost that cannot be recovered, or lost sales resulting from poor ordering or unsaleable goods
Sales R&A in the seller’s books are recorded as purchasesreturns and allowances in the books of the buyer11-14 Accounts Payable 2,000 Purchases R&A 2,000 Return of damaged merchandise purchased on Nov 12.
Purchases Discounts Purchases are usually made on credit and commonly involve purchases discounts for early payment Is a contra account that is deducted from purchases on the income statement Does not apply to transportation or other charges that might appear on the invoice
In relation with the purchase last Nov 12, discount terms2/10, n/30, and Nov 14 Purchases R&A11-22 Accounts Payable 13,000 Purchases discount 260 Cash 12,740 Record Purchases discount of (P13,000 * 2%)
Transportation INCase1: Assume that an entity made purchasestotaling P17,000 FOB destination, freightprepaid; terms 2/10, n/30. the transportation costamounted to P1,90011-25 Purchases 17,000 Account Payable 17,000 Purchased merchandise on account; terms 2/10, n/30; FOB destination, freight prepaid
No debit to transportation in account since theshipping term provided that the seller shouldshoulder the transportation cost.If the invoice is paid on Dec 5, the purchasesdiscount will be P340 (P17,000 * 2%).12-5 Accounts Payable 17,000 Purchase Discount 340 Cash 16,600
Case2: Assume that an entity purchasesmerchandise totaling P17,000 FOB shippingpoint, freight collect; terms 2/10, n/30. thetransportation cost amounted to P1,90011-25 Purchases 17,000 Transportation In 1,900 Accounts Payable 17,000 Cash 1,900 Purchase merchandise on account; terms 2/10, n/30; FOB shipping point, freight collect.
If the invoice is paid on Dec 5, the purchasesdiscount will be P340 (P17,000 * 2%).Transportation in will form part of net purchases.12-5 Accounts Payable 17,000 Purchases Discounts 340 Cash 16,660
Case3: Assume that an entity made purchasestotaling P17,000 FOB destination, freight collect;terms 2/10, n/30. the transportation costamounted to P1,90011-25 Purchases 17,000 Account Payable 15,100 Cash 1,900 Purchases on account; terms 2/10, n/30; FOB destination, freight collect, P1,900
Accounts payable is decreased by thetransportation charges paid by the buyer for thebenefit of the sellerIf the invoice is paid on Dec 5, the purchasesdiscount will be P340 (P17,000 * 2%) since thediscount applies to total purchases12-5 Accounts Payable 15,100 Purchases Discounts 340 Cash 14,760
Case4: Assume that an entity purchasesmerchandise totaling P17,000 FOB shippingpoint, freight prepaid; terms 2/10, n/30. thetransportation cost amounted to P1,90011-25 Purchases 17,000 Transportation In 1,900 Accounts Payable 18,900 Purchased merchandise on account; terms 2/10, n/30; FOB shipping point, freight prepaid, P1,900
If the invoice is paid on Dec 5, the purchasesdiscount will be P340 (P17,000 * 2%) since thediscount applies to total salesBuyer not entitled to discounts on thetransportation costs.Discounts apply only to total purchases.12-5 Accounts Payable 18,900 Purchases Discounts 340 Cash 18,560
Operating Expenses Make up the third major part of the income statement for a merchandising entity Expenses other than the cost of goods sold, which are incurred to generate income from the entity’s ,major line of business- merchandising Categories: Selling, Administrative, Other operating expenses
Selling: related directly to the entity’s efforts to generates sales Payroll accounts, advertising, traveling, store supplies used, depreciation, transportation out Administrative: related to the general administration of the business Officers and office salaries, office supplies, depreciation, business taxes, professional services, uncollectible accounts and other general office expenses
Other operating: are not related to the central operations of the business Expenses and loses from peripheral or incidental transactions of the enterprise; for example, loss on sale of investments or loss on sale of property and equipment