Accounting Chapter 6

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  • Accounting Chapter 6

    1. 1. 6 Accounting for Merchandising Activities
    2. 2. Merchandising Activities Manufacturer Wholesaler Retailer Customer Merchandising Companies
    3. 3. Reporting Financial Performance <ul><li>Service organizations sell time to earn revenue. </li></ul><ul><ul><li>Examples: accounting firms, law firms, and plumbing services </li></ul></ul>Revenues Expenses Minus Net income Equals
    4. 4. Reporting Financial Performance <ul><li>Merchandising companies sell products to earn revenue. </li></ul><ul><ul><li>Examples: sporting goods, clothing, and auto parts stores </li></ul></ul>Net Sales Cost of Goods Sold Gross Profit Expenses Net Income Minus Equals Minus Equals
    5. 5. Reporting Financial Condition
    6. 6. Operating Cycle <ul><li>Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. </li></ul>Purchases Merchandise inventory Credit sales Account receivable Cash collection Purchases Merchandise inventory Cash sales Cash Sale Credit Sale
    7. 7. Inventory Systems Exh. 6-5 + + Beginning inventory Net cost of purchases Merchandise available for sale Ending Inventory Cost of Goods Sold =
    8. 8. Inventory Systems <ul><li>Perpetual Method Gives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account. </li></ul><ul><li>Periodic Method Requires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account. </li></ul>
    9. 9. <ul><li>Perpetual Method Gives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account. </li></ul><ul><li>Periodic Method Requires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account. </li></ul>Inventory Systems Because of advances in computer technology, the perpetual method is widely used in practice and will be the focus of our discussion.
    10. 10. Merchandise Purchases On June 20, Melton Company purchased $14,000 of Merchandise Inventory paying cash.
    11. 11.  Seller  Invoice date  Purchaser  Order number  Credit terms  Freight terms  Goods  Invoice amount        
    12. 12. Trade Discounts <ul><li>Used by manufacturers and wholesalers to change selling prices without republishing their catalogs. </li></ul>Example JenCo, Inc. offers a 30% trade discount on orders of 1,000 units or more of their popular product Racer. Each Racer has a list price of $5.25.
    13. 13. Purchase Discounts <ul><li>A deduction from the invoice price granted to induce early payment of the amount due. </li></ul>Terms Time Due Discount Period Full amount less discount Credit Period Full amount due Purchase or Sale Exh. 6-7
    14. 14. Purchase Discounts 2/10,n/30 Discount Percent Number of Days Discount Is Available Otherwise, Net (or All) Is Due Credit Period
    15. 15. Purchase Discounts <ul><li>On May 7, Martin, Inc. purchased $27,000 of Merchandise Inventory on account, credit terms are 2/10, n/30. </li></ul>
    16. 16. Purchase Discounts <ul><li>On May 15, Martin, Inc. paid the amount due on the purchase of May 7. </li></ul>$27,000 × 2% = $540 discount
    17. 17. Purchase Discounts <ul><li>After we post these entries, the accounts involved look like this: </li></ul>Merchandise Inventory Accounts Payable 5/7 27,000 5/7 27,000 5/15 540 5/15 27,000 Bal. 26,460 Bal. 0
    18. 18. Managing Discounts <ul><li>If we fail to take a 2/10, n/30 discount, is it really expensive? </li></ul>365 days ÷ 20 days × 2% = 36.5% annual rate Days in a year Number of additional days before payment Percent paid to keep money
    19. 19. Purchase Returns and Allowances <ul><li>Purchase Return . . . </li></ul><ul><ul><li>Merchandise returned by the purchaser to the supplier. </li></ul></ul><ul><li>Purchase Allowance . . . </li></ul><ul><ul><li>A reduction in the cost of defective merchandise received by a purchaser from a supplier. </li></ul></ul>
    20. 20. Purchase Returns and Allowances <ul><li>On May 9, Barbee, Inc. purchased $20,000 of Merchandise Inventory on account, credit terms are 2/10, n/30. </li></ul>
    21. 21. Purchase Returns and Allowances <ul><li>On May 10, Barbee, Inc. returned $500 of defective merchandise to the supplier. </li></ul>
    22. 22. Purchase Returns and Allowances <ul><li>On May 18, Barbee, Inc. paid the amount owed for the purchase of May 9. </li></ul>
    23. 23. Transportation Costs FOB shipping point (buyer pays) FOB destination (seller pays) Merchandise Seller Buyer Exh. 6-9
    24. 24. Transportation Costs <ul><li>On May 12, Barbee, Inc. purchased $8,000 of Merchandise Inventory for cash and also paid $100 transportation costs. </li></ul>
    25. 25. Question On July 6, 2002 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will be part of Buyer’s July 6 journal entry? a. Credit Sales $7,500 b. Credit Purchase Discounts $150 c. Debit Merchandise Inventory $100 d. Debit Accounts Payable $7,450 FOB shipping point indicates the buyer ultimately pays the freight. This is recorded with a debit to Merchandise Inventory .
    26. 26. Recording Purchases Information
    27. 27. Recording Purchases Information Sales Invoice Exh. 6-11 Sales discounts and returns and allowances are Contra Revenue accounts.
    28. 28. Sales Transactions <ul><li>On March 18, TwoCom sold $25,000 of merchandise on account. The merchandise was carried in inventory at a cost of $18,000. </li></ul>
    29. 29. Sales Discounts <ul><li>On June 8, Borey Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. Let’s prepare the journal entries. </li></ul>
    30. 30. Sales Discounts <ul><li>On June 17, Borey Co. received a check for $5,880 in full payment of the June 8 sale. </li></ul>
    31. 31. Sales Returns and Allowances <ul><li>On June 12, Borey Co. sold merchandise costing $4,000 for $7,500 on account The credit terms were 2/10, n/30. </li></ul>
    32. 32. Sales Returns and Allowances <ul><li>On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Borey. The return is related to the June 12 sale. </li></ul>
    33. 33. Sales Returns and Allowances <ul><li>On June 20, Borey received the amount owed to it from the sale of June 12. </li></ul>
    34. 34. Let’s prepare the closing entries for Bob’s Shop for Men.
    35. 35. Step 1: Close Credit Balances in Temporary Accounts to Income Summary.
    36. 36. Step 2: Close Debit Balances in Temporary Accounts to Income Summary.
    37. 37. Step 3: Close Income Summary to Owner’s Capital
    38. 38. Step 4: Close Withdrawals Account to Owner’s Capital.
    39. 39. Merchandising Cost Accounts + + Beginning inventory Year 1 Net cost of purchases Merchandise available for sale Ending Inventory Year 1 Cost of Goods Sold = Income Statement Becomes beginning inventory of Year 2 Balance Sheet
    40. 40. Income Statement Formats <ul><li>Multiple-Step </li></ul><ul><li>Single-Step </li></ul>
    41. 41. Multiple-Step Income Statement
    42. 42. Single-Step Income Statement
    43. 43. Merchandising Cash Flows Exh. 6.19
    44. 44. Acid-Test Ratio A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future. = Quick Assets Current Liabilities Acid-Test Ratio Acid-Test Ratio = Cash + S-T Investments + Receivables Current Liabilities
    45. 45. Gross Margin Ratio Percentage of dollar sales available to cover expenses and provide a profit. Gross Margin Ratio Net Sales - Cost of Goods Sold Net Sales =
    46. 46. End of Chapter 6

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