AAccccoouunnttiinngg ffoorr 
MMeerrcchhaannddiissiinngg 
AAccttiivviittiieess 
CHAPTER 
5 
PowerPoint Slides to accompany ...
LLeeaarrnniinngg OObbjjeeccttiivveess 
1. Describe merchandising and identify and 
explain the important income statement ...
LLeeaarrnniinngg OObbjjeeccttiivveess 
4. Prepare adjustments for a merchandising 
company. (LO4) 
5. Define, prepare, and...
LLeeaarrnniinngg OObbjjeeccttiivveess 
7. Record and compare merchandising 
transactions using both periodic and 
perpetua...
MMeerrcchhaannddiissiinngg AAccttiivviittiieess 
Merchandiser: A company that earns net 
income by buying and selling merc...
CCoommppuuttiinngg NNeett IInnccoommee 
Merchandiser Service Company 
Net Sales 
Cost of Goods 
Sold 
Gross Profit 
Operat...
IInnvveennttoorryy 
Products a company owns for the purpose 
of selling to customers. 
• It is often referred to as Mercha...
MMeerrcchhaannddiissee IInnvveennttoorryy 
Cost of merchandise inventory 
includes: 
• Costs incurred to purchase the good...
MMeerrcchhaannddiissiinngg CCoosstt FFllooww 
Beginning 
Merchandise 
Inventory 
Ending 
Merchandise 
inventory 
Cost of g...
MMeerrcchhaannddiissee IInnvveennttoorryy SSyysstteemmss 
Perpetual 
Provides a continuous record of: 
• The amount of mer...
Perpetual System-Example 
Purchases 
Nov. 2 Merchandise Inventory 1,200 
Accounts Payabl1,200 e 
Purchased merchandise inv...
Terms 
Time 
Due 
PPuurrcchhaassee//SSaalleess DDiissccoouunnttss 
A deduction from the invoice price granted to 
induce e...
Perpetual System — Example 
Purchase Discounts- Assume the purchase of 
merchandise inventory on November 2 was on the 
te...
MMiinnii--QQuuiizz 
Prepare journal entries for each of the following 
transactions. Assume a perpetual merchandise 
inven...
MMiinnii--QQuuiizz 
Oct.6 Merchandise Inventory 3,250 
A/P 
3,250 
(650 x 5) 
8 A/P 125 
Merchandise Inventory 
125 
(25 x...
TTrraannssppoorrttaattiioonn CChhaarrggeess –– 
PPeerrppeettuuaall SSyysstteemm 
Seller Goods Buyer 
FOB Shipping Point 
(...
Perpetual System — Example 
Transportation Costs 
Nov.24 Merchandise Inventory 75 
Cash 75 
Paid freight charges on purcha...
Perpetual System — Example 
Sales of Merchandise 
Nov.12 Accounts Receivable 1,000 
Sales 1,000 
Sold merchandise on terms...
Perpetual System — Example 
Customer Payment 
Case 1-Customer pays in 60 days 
Jan.11 Cash 1,000 
Accounts receivable 1,00...
Perpetual System — Example 
Sales Returns and Allowances 
Nov.6 Sales Returns & Allowance 800 
Accounts Receivabl800 e 
Cu...
AAddjjuussttmmeennttss-- 
PPeerrppeettuuaall MMeerrcchhaannddiissee IInnvveennttoorryy 
• Perpetual merchandise inventory ...
Perpetual System — Example 
Inventory per accounting records: $21,250 
Inventory per physical count: -$21,000 
Difference ...
IInnccoommee SSttaatteemmeenntt FFoorrmmaattss 
Income statements may be formatted 
in a variety of ways. 
Typical formats...
MEC 
Income Statement 
For Year Ended December 31, 2014 
Sales $ 321,000 
Less: Sales discounts $ 4,300 
Sales returns and...
MEC 
Income Statement 
For Year Ended December 31, 2014 
Sales, net $ 314,700 
Cost of goods sold 230,400 
Gross profit 84...
Revenues: 
MEC 
Income Statement 
For Year Ended December 31, 2014 
Net $ 314,700 
Rent revenue 2,800 
Total revenues 317,...
GGrroossss PPrrooffiitt RRaattiioo 
• The amount of gross profit expressed as a 
percentage of net sales. 
• May be tracke...
Closing EEnnttrriieess--PPeerrppeettuuaall SSyysstteemm 
• The closing process is similar for 
merchandising and service c...
RReevviieeww 
Q Identify and explain the components of income 
for a merchandising company. 
A The basic components of inc...
RReevviieeww 
Q Explain the difference between single-step and 
multiple-step income statements. 
A A single-step income s...
AAppppeennddiixx 55AA-- PPeerriiooddiicc aanndd PPeerrppeettuuaall 
MMeerrcchhaannddiissee IInnvveennttoorryy SSyysstteemm...
Appendix 5A - Example 
Periodic System Perpetual System 
Purchase of Merchandise 
Purchases 1200 Merchandise Inventory 120...
Appendix 5A - Example 
Periodic System Perpetual System 
Purchase Discount Taken (2/10, n30) 
Accounts Payable 900 Account...
Appendix 5A - Example 
Periodic System Perpetual System 
Sale of merchandise 
Accounts Receivable 2400 Accounts Receivable...
Appendix 5A - Example 
Periodic System Perpetual System 
Sales Returns & Allow. 800 Sales Returns & Allow. 800 
Accounts R...
Appendix 55BB –– SSaalleess TTaaxx 
Provincial Sales Tax (PST) 
A consumption tax applied on sales to the 
final consumers...
Appendix 55BB -- SSaalleess TTaaxx 
Goods and Services Tax (GST) 
A 5% tax on almost all goods and services 
provided in C...
AAppppeennddiixx 55BB -- SSaalleess TTaaxx 
Harmonized Sales Tax (HST) 
Is a combined GST and PST rate applied 
to taxable...
Appendix 5B - Example 
Purchase of Merchandise 
Assume: Perpetual system and 5% GST. 
Merchandise Inventory 600 
GST Recei...
Appendix 5B - Example 
Sale of Merchandise 
Assume: Perpetual system, 7% PST and 5% GST. 
Accounts Receivable 1,008 
Sale9...
EEnndd ooff CChhaapptteerr 
41 © 2013 McGraw-Hill Ryerson Limited.
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Chapter 5 power point( BUAD 111 Financial Accounting I)

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Chapter 5 power point( BUAD 111 Financial Accounting I)

  1. 1. AAccccoouunnttiinngg ffoorr MMeerrcchhaannddiissiinngg AAccttiivviittiieess CHAPTER 5 PowerPoint Slides to accompany Fundamental Accounting Principles, 14ce Prepared by Joe Pidutti, Durham College © 2013 McGraw-Hill Ryerson Limited.
  2. 2. LLeeaarrnniinngg OObbjjeeccttiivveess 1. Describe merchandising and identify and explain the important income statement and balance sheet components for a merchandising company. (LO1) 2. Describe both periodic and perpetual merchandise inventory systems. (LO2) 3. Analyze and record transactions for merchandise purchases and sales using a perpetual system. (LO3) 2 © 2013 McGraw-Hill Ryerson Limited.
  3. 3. LLeeaarrnniinngg OObbjjeeccttiivveess 4. Prepare adjustments for a merchandising company. (LO4) 5. Define, prepare, and use merchandising income statements. (LO5) 6. Prepare closing entries for a merchandising company. (LO6) © 2013 McGraw-Hill Ryerson Limited. 3
  4. 4. LLeeaarrnniinngg OObbjjeeccttiivveess 7. Record and compare merchandising transactions using both periodic and perpetual inventory systems. (Appendix 5A) (LO7) 8. Explain and record Provincial Sales Tax (PST) and Goods and Services Tax (GST). (Appendix 5B) (LO8) © 2013 McGraw-Hill Ryerson Limited. 4
  5. 5. MMeerrcchhaannddiissiinngg AAccttiivviittiieess Merchandiser: A company that earns net income by buying and selling merchandise. Wholesaler: A company that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers. © 2013 McGraw-Hill Ryerson Limited. LO 1 5
  6. 6. CCoommppuuttiinngg NNeett IInnccoommee Merchandiser Service Company Net Sales Cost of Goods Sold Gross Profit Operating Expenses Revenues Operating Expenses Net Income Net Income © 2013 McGraw-Hill Ryerson Limited. LO 1 6
  7. 7. IInnvveennttoorryy Products a company owns for the purpose of selling to customers. • It is often referred to as Merchandise Inventory. • Is classified as a current asset. © 2013 McGraw-Hill Ryerson Limited. LO 1 7
  8. 8. MMeerrcchhaannddiissee IInnvveennttoorryy Cost of merchandise inventory includes: • Costs incurred to purchase the goods. • Shipping costs. • Other costs required to make goods ready for sale. © 2013 McGraw-Hill Ryerson Limited. LO 1 8
  9. 9. MMeerrcchhaannddiissiinngg CCoosstt FFllooww Beginning Merchandise Inventory Ending Merchandise inventory Cost of goods © 2013 McGraw-Hill Ryerson Limited. sold LO 1 9 Net cost of Purchases Merchandise available for sale
  10. 10. MMeerrcchhaannddiissee IInnvveennttoorryy SSyysstteemmss Perpetual Provides a continuous record of: • The amount of merchandise inventory on hand. • Cost of goods sold to date. Periodic Requires a physical count of goods to determine: • The amount of merchandise inventory on hand. • Cost of goods sold. © 2013 McGraw-Hill Ryerson Limited. LO 2 10
  11. 11. Perpetual System-Example Purchases Nov. 2 Merchandise Inventory 1,200 Accounts Payabl1,200 e Purchased merchandise inv. on account Purchase Returns and Allowances Nov.5 Accounts Payable 300 3 0 0 Merchandise Inventory Purchase allowance re: debit memo © 2013 McGraw-Hill Ryerson Limited. LO 3 11
  12. 12. Terms Time Due PPuurrcchhaassee//SSaalleess DDiissccoouunnttss A deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30 Discount Period = 10 days Credit Period = 30 days Nov.2 Nov.12 Dec.2 (Full amount minus 2% discount) due between Nov.2 and Nov.12 Full amount due anytime between Nov.13 and Dec.2 Purchase or Sale © 2013 McGraw-Hill Ryerson Limited. LO 3 12
  13. 13. Perpetual System — Example Purchase Discounts- Assume the purchase of merchandise inventory on November 2 was on the terms 2/10,n30. Case 1-Discount taken Nov.12 Accounts Payable 900 Merchandise 18 Inventory 8 8 2 Cash 2% x (1,200 - 300) = 18 Case 2-Discount not taken Nov.12 Accounts Payable 900 9 0 0 Cash © 2013 McGraw-Hill Ryerson Limited. LO 3 13
  14. 14. MMiinnii--QQuuiizz Prepare journal entries for each of the following transactions. Assume a perpetual merchandise inventory system. October 6: Purchased 650 units of merchandise inventory at $5 per unit. The seller offered a cash discount of 2/10, n/30. October 8: Returned 25 defective units and received full credit. October 10:Paid the amount in full, less the returned items. © 2013 McGraw-Hill Ryerson Limited. LO 3 14
  15. 15. MMiinnii--QQuuiizz Oct.6 Merchandise Inventory 3,250 A/P 3,250 (650 x 5) 8 A/P 125 Merchandise Inventory 125 (25 x 5) 11 A/P 3,125 Merchandise Inventory 62.50 © 2013 McGraw-Hill Ryerson Limited. LO 3 Cash 15 3,062.50 (3,250-125) x
  16. 16. TTrraannssppoorrttaattiioonn CChhaarrggeess –– PPeerrppeettuuaall SSyysstteemm Seller Goods Buyer FOB Shipping Point (Buyer pays shipping charges) FOB Destination (Seller pays for shipping charges) Carrier © 2013 McGraw-Hill Ryerson Limited. LO 3 16
  17. 17. Perpetual System — Example Transportation Costs Nov.24 Merchandise Inventory 75 Cash 75 Paid freight charges on purchased merchandise. © 2013 McGraw-Hill Ryerson Limited. LO 3 17
  18. 18. Perpetual System — Example Sales of Merchandise Nov.12 Accounts Receivable 1,000 Sales 1,000 Sold merchandise on terms 2/10,n60 Cost of goods sold 600 Merchandise Inventor600 y To record cost of merchandise sold © 2013 McGraw-Hill Ryerson Limited. LO 3 18
  19. 19. Perpetual System — Example Customer Payment Case 1-Customer pays in 60 days Jan.11 Cash 1,000 Accounts receivable 1,000 Received payment for Nov. 12 sale Case 2-Customer pays in 10 days © 2013 McGraw-Hill Ryerson Limited. LO 3 Nov.22 Cash 980 Sales discounts 20 Accounts receivable 1,000 Received payment less the discount 19
  20. 20. Perpetual System — Example Sales Returns and Allowances Nov.6 Sales Returns & Allowance 800 Accounts Receivabl800 e Customer returned merchandise Merchandise Inventory 600 6 0 0 Cost of Goods Sold Returned goods to merchandise inventory © 2013 McGraw-Hill Ryerson Limited. LO 3 20
  21. 21. AAddjjuussttmmeennttss-- PPeerrppeettuuaall MMeerrcchhaannddiissee IInnvveennttoorryy • Perpetual merchandise inventory systems keep a running total of inventory levels by recording sales and purchase transactions. • Periodic adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory). © 2013 McGraw-Hill Ryerson Limited. LO 4 21
  22. 22. Perpetual System — Example Inventory per accounting records: $21,250 Inventory per physical count: -$21,000 Difference (shrinkage) $250 Adjustment required: Dec.31 Cost of Goods Sold 250 Merchandise Inventory 250 To record inventory shrinkage revealed by physical count. © 2013 McGraw-Hill Ryerson Limited. LO 4 22
  23. 23. IInnccoommee SSttaatteemmeenntt FFoorrmmaattss Income statements may be formatted in a variety of ways. Typical formats are: • Classified, Multiple-Step • Multiple-Step • Single-Step © 2013 McGraw-Hill Ryerson Limited. LO 5 23
  24. 24. MEC Income Statement For Year Ended December 31, 2014 Sales $ 321,000 Less: Sales discounts $ 4,300 Sales returns and allowances 2,000 6,300 Net sales 314,700 Cost of goods sold 230,400 Gross profit 84,300 Operating expenses: Selling expenses: Sales salaries expense $ 18,500 Advertising expense 11,300 Rent expense, selling space 8,100 Depreciation expense, store equipment 3,000 Store supplies expense 1,200 Total selling expenses $ 42,100 General and administrative expenses: Office salaries expense $25,300 Office supplies expense 1,800 Rent expense,office space 900 Depreciation expense, office equipment 700 Insurance expense 600 Total general and administrative expenses 29,300 Total operating expenses 71,400 Income from operations $ 12,900 Other revenues and expenses: Rent revenue $ 2,800 Interest expense (360) 2,440 Net income $ 15,340 Classified Multi-step Format (for internal reporting) © 2013 McGraw-Hill Ryerson Limited. LO 5 24
  25. 25. MEC Income Statement For Year Ended December 31, 2014 Sales, net $ 314,700 Cost of goods sold 230,400 Gross profit 84,300 Operating expenses: Sales salaries expense $ 43,800 Advertising expense 11,300 Rent expense 9,000 Depreciation expense 3,700 Supplies expense 3,000 Insurance expense 600 Total operating expense 71,400 Income from operations $ 12,900 Other revenues and expenses: Rent revenue 2,800 Interest expense (360) 2,440 Net income $ 15,340 Multi-step Format (for external reporting) © 2013 McGraw-Hill Ryerson Limited. LO 5 25
  26. 26. Revenues: MEC Income Statement For Year Ended December 31, 2014 Net $ 314,700 Rent revenue 2,800 Total revenues 317,500 Expenses: Cost of goods sold $ 230,400 Selling expense 42,100 General and administrative expense 29,300 Interest expense 360 Total expenses 302,160 Net income $ 15,340 Single-step Format (for external reporting) © 2013 McGraw-Hill Ryerson Limited. LO 5 26
  27. 27. GGrroossss PPrrooffiitt RRaattiioo • The amount of gross profit expressed as a percentage of net sales. • May be tracked over time and/or compared to similar businesses. • May be calculated for whole business, departments, products. Gross profit from sales Net sales © 2013 McGraw-Hill Ryerson Limited. Gross profit ratio = X 100% LO 5 27
  28. 28. Closing EEnnttrriieess--PPeerrppeettuuaall SSyysstteemm • The closing process is similar for merchandising and service companies. • Merchandising companies have additional temporary accounts that must be closed. These include: • Sales • Sales Returns & Allowances • Sales Discounts • Cost of Goods Sold © 2013 McGraw-Hill Ryerson Limited. LO 6 28
  29. 29. RReevviieeww Q Identify and explain the components of income for a merchandising company. A The basic components of income start with net sales. From net sales is subtracted the cost of goods sold. The resulting amount is called gross profit or gross margin. Selling and general and administrative expenses are subtracted from gross profit to determine income from operations. © 2013 McGraw-Hill Ryerson Limited. 29
  30. 30. RReevviieeww Q Explain the difference between single-step and multiple-step income statements. A A single-step income statement format includes cost of goods sold as an operating expense, and shows only one subtotal for total expenses. Operating expenses are highly summarized. A multiple-step income statement shows intermediate totals between sales and net income. It also includes detailed computations of net sales and cost of goods sold. © 2013 McGraw-Hill Ryerson Limited. 30
  31. 31. AAppppeennddiixx 55AA-- PPeerriiooddiicc aanndd PPeerrppeettuuaall MMeerrcchhaannddiissee IInnvveennttoorryy SSyysstteemmss CCoommppaarreedd Periodic systems Merchandise Inventory is updated at the end of the period based on a physical count. Perpetual systems Merchandise Inventory is updated after each sale or purchase. © 2013 McGraw-Hill Ryerson Limited. LO 7 31
  32. 32. Appendix 5A - Example Periodic System Perpetual System Purchase of Merchandise Purchases 1200 Merchandise Inventory 1200 Accounts Payable 1200 Accounts Payable 1200 Return of Merchandise Accounts Payable 300 Accounts Payable 300 Purchase Returns 300 Merchandise Inventory 300 © 2013 McGraw-Hill Ryerson Limited. LO 7 32
  33. 33. Appendix 5A - Example Periodic System Perpetual System Purchase Discount Taken (2/10, n30) Accounts Payable 900 Accounts Payable 900 Purchase Discounts 18 Merchandise Inventory 18 Cash 882 Cash 882 Transportation Charges Transportation-in 75 Merchandise Inventory 75 Cash 75 Cash 75 © 2013 McGraw-Hill Ryerson Limited. LO 7 33
  34. 34. Appendix 5A - Example Periodic System Perpetual System Sale of merchandise Accounts Receivable 2400 Accounts Receivable 2400 Sales 2400 Sales 2400 © 2013 McGraw-Hill Ryerson Limited. LO 7 34 Cost of Goods Sold 1600 Merchandise Inventory 1600
  35. 35. Appendix 5A - Example Periodic System Perpetual System Sales Returns & Allow. 800 Sales Returns & Allow. 800 Accounts Receivable 800 Accounts Receivable 800 © 2013 McGraw-Hill Ryerson Limited. Sales Return LO 7 35 Merchandise Inventory 600 Cost of Goods Sold 600
  36. 36. Appendix 55BB –– SSaalleess TTaaxx Provincial Sales Tax (PST) A consumption tax applied on sales to the final consumers of products or services. •Is not applicable to all sales. •Varies from province to province. •Amount collected is a liability. © 2013 McGraw-Hill Ryerson Limited. LO 8 36
  37. 37. Appendix 55BB -- SSaalleess TTaaxx Goods and Services Tax (GST) A 5% tax on almost all goods and services provided in Canada. •Is ultimately paid by the final consumer. •Is uniform from province to province. •Amount collected by a business is a liability. •Amount paid by a business offsets the GST owing. © 2013 McGraw-Hill Ryerson Limited. LO 8 37
  38. 38. AAppppeennddiixx 55BB -- SSaalleess TTaaxx Harmonized Sales Tax (HST) Is a combined GST and PST rate applied to taxable supplies. © 2013 McGraw-Hill Ryerson Limited. LO 8 38
  39. 39. Appendix 5B - Example Purchase of Merchandise Assume: Perpetual system and 5% GST. Merchandise Inventory 600 GST Receivable 30 Accounts Payable 630 © 2013 McGraw-Hill Ryerson Limited. LO 8 39
  40. 40. Appendix 5B - Example Sale of Merchandise Assume: Perpetual system, 7% PST and 5% GST. Accounts Receivable 1,008 Sale900 s 6 3 PST Payable 4 5 GST Payable T o record sale of merchandise Cost of goods sold 600 6 0 0 Merchandise Inventory To record cost of merchandise sold © 2013 McGraw-Hill Ryerson Limited. LO 8 40
  41. 41. EEnndd ooff CChhaapptteerr 41 © 2013 McGraw-Hill Ryerson Limited.

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