CH 8 - Merchandising Operations

Accounting for Merchandising
Operations
CHAPTER 8
Ma. Rona Corda- Prado, CPA
Uni versity of St. La Sal l e
1. Identify the differences between service and
merchandising companies.
2. Explain the recording of purchases under a perpetual and
periodic inventory system.
3. Explain the recording of sales revenues under a perpetual
and periodic inventory system.
4. Explain the steps in the accounting cycle for a
merchandising company.
5. Distinguish between a multiple-step and a single-step
income statement.
6. Explain the computation and importance of gross profit.
7. Determine cost of goods sold under a periodic system.
Prepared by: RCPrado
Chapter 8- 2
Accounting for Merchandising Operations
Freight costs
Purchase
returns and
allowances
Purchase
discounts
Summary of
purchasing
transactions
Merchandising
Operations
Recording
Purchases of
Merchandise
Recording
Sales of
Merchandise
Completing the
Accounting
Cycle
Forms of
Financial
Statements
Operating
cycles
Inventory
systems
perpetual and
periodic

Sales returns
and
allowances
Sales
discounts

Adjusting
entries
Closing entries
Summary of
merchandising
entries

Multiple-step
income
statement
Single-step
income
statement
Classified
balance sheet
Determining
cost of goods
sold under a
periodic system
Chapter 8- 3
SERVICE ORGANIZATIONS
Service organizations sell time (intangible
product) to earn revenue.

Examples: Accounting firms, law firms and plumbing services

Revenues Expenses
Minus
Net
income
Equals
Chapter 8- 4
Manufacturer Wholesaler Retailer Customer
MERCHANDISING COMPANIES
Chapter 8- 5
MERCHANDISING OPERATIONS
Merchandising Companies
Buy and Sell Goods
Wholesaler Retailer Consumer
The primary source of revenues is referred to as
sales revenue or sales.
Chapter 8- 6
MERCHANDISING OPERATIONS
Cost of goods sold is the total cost
of merchandise sold during the
period.
Not used in a
Service
business.
Net
Income
(Loss)
Less
Less
Equals
Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
Equals
Chapter 8- 7
REPORTING INCOME OF A
MERCHANDISER
Cost of
Goods Sold
Gross
Profit
Expenses
Net
Income
Net
Sales
Minus
Equals
Minus
Equals
Merchandising Company
Income Statement
For Year Ended December 31, 2007
Net sales 150,000 $
Cost of goods sold 80,000
Gross profit 70,000 $
Operating expenses 46,500
Net income 23,500 $
Chapter 8- 8
The operating
cycle of a
merchandising
company
ordinarily is
longer than that
of a service
company.
OPERATING CYCLES
Chapter 8- 9
TERMS OF SALE
Cash sale, spot cash or cash on delivery (COD) -
payment is made upon receipt of the goods
On account or on credit - payment is made after
the receipt of the goods

Chapter 8- 10
OPERATING CYCLE FOR A
MERCHANDISER
Begins with the purchase of merchandise and ends with
the collection of cash from the sale of merchandise.
Purchases
Merchandise
inventory
Credit sales
Account
receivable
Cash
collection
Purchases
Merchandise
inventory
Cash
sales
Cash Sale
Credit Sale
Chapter 8- 11
PURCHASE PROCESS
Purchase
Requisition
Form
USER DEPT PURCHASING
DEPT
Purchase
Order
SELLER
Sales
Invoice
RECEIVING
DEPT
Receiving
Report
ACCOUNTS
PAYABLE and
INVENTORY
Chapter 8- 12
INVENTORY SYSTEMS
Perpetual
Inventory
System
Periodic
Inventory
System
- Primarily used by businesses that
sell relatively inexpensive goods and
that are not yet using POS systems
- No entries are made to the inventory
account as the merchandise is
brought and sold
- Purchase and related accounts are
used to accumulate the net cost of
purchase
- Inventory is established at the end of
the period, after the inventory count
- Used by merchandisers using point of
sale (POS) equipment
- Inventory account is continuously
updated both at the time of purchase
and the time of sale
- In the absence of POS, this system is
more suited to low volume, high
priced goods such as motor vehicles,
jewelry and furniture
- Inventory records are reconciled with
the physical count
Chapter 8- 13
Features:
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:
Beginning inventory $ 100,000
Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $ 775,000
INVENTORY SYSTEMS
PERIODIC
Chapter 8- 14
INVENTORY SYSTEMS -
PERIODIC
+
+
Beginning
inventory
Net cost of
purchases
Merchandise
available for sale
Ending inventory
Cost of goods
sold
=
Chapter 8- 15
Features:
1. Purchases increase Merchandise Inventory.
2. Freight costs, Purchase Returns and Allowances and
Purchase Discounts are included in Merchandise Inventory.
3. Cost of Goods Sold is increased and Merchandise Inventory
is decreased for each sale.
4. Physical count done to verify Merchandise Inventory
balance.
The perpetual inventory system provides a continuous record of
Merchandise Inventory and Cost of Goods Sold.
INVENTORY SYSTEMS -
PERPETUAL
Chapter 8- 16
Made using cash or
credit (on account).
Normally recorded
when
goods are received.
Purchase invoice
should
support each credit
purchase.
RECORDING PURCHASES OF
MERCHANDISE
Chapter 8- 17
TRADE DISCOUNTS
Used by manufacturers and
wholesalers to offer better prices for
greater quantities purchased.
Example
Matrix, 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.
Quantity sold 1,000
Price per unit 5.25 $
Total 5,250
Less 30% discount (1,575)
Invoice price 3,675 $
Chapter 8- 18
CASH DISCOUNTS
A deduction from the invoice price granted to induce
early or prompt payment of the amount due.
Terms

Time

Due
Discount Period
Due: Invoice
price minus
discount
Credit
Period
Due: Full Invoice Price

Invoice Date
Note: When counting the days for the
discount period, do not include the day
when the invoice was issued .
Chapter 8- 19
2/10,n/30
CASH DISCOUNTS
Discount
Percent
Number of
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due in 30
Days
Credit
Period
Chapter 8- 20
Account is due
30 days from
invoice date, no
cash discount
available.
n/30
Account is due
within 10 days
from the end of
the month of
purchase, no
cash discount
available.
n/10, EOM
COMMON CREDIT TERMS
Account is due
within 30 days
from invoice date;
2% cash discount
if paid within 10
days; 1 %
discount if 10
days < payment
date < 15 days
2/10, 1/15, n/30
Chapter 8- 21
CASH DISCOUNTS
On May 7, Jason, Inc. purchased
P27,000 of merchandise inventory on
account, credit terms are 2/10, n/30.
Jason paid on May 12.
Invoice Amount P27,000
Less: Discount (540)
Net Payment P26,460
Boardwork : Problem # 1 pp 402
Chapter 8- 22
Terms
FOB shipping point - seller places goods Free On
Board the carrier, and buyer pays freight costs.
FOB destination - seller places the goods Free On
Board to the buyers place of business, and seller
pays freight costs.
RECORDING PURCHASES OF MERCHANDISE
SHIPPING TERMS
Freight costs incurred by the seller on outgoing merchandise are an
operating expense to the seller (Freight-out or Delivery Expense).
Freight costs incurred by the buyer on incoming merchandise are capitalized
as part of inventory purchases (Freight-in or Transportation-in).
Chapter 8- 23
TRANSPORTATION COSTS
FOB shipping point
(buyer pays)
FOB destination
(seller pays)
Merchandise
Seller
Buyer
Terms
Ownership transfers
to buyer when goods
are passed to
Transportation
costs paid by
FOB shipping point Carrier Buyer
FOB destination Buyer Seller
FOB - Free
on Board
Chapter 8- 24
FOB Destination Point
Public
Carrier
Seller Buyer
GOODS IN TRANSIT
Public
Carrier
Seller Buyer
FOB Shipping Point
Ownership passes
to the buyer here.
Chapter 8- 25
FOB shipping point
(buyer pays)
FOB destination
(seller pays)
Merchandise
Seller
Buyer
Freight prepaid - Seller pays the transportation costs before
shipping the goods sold
Freight collect - The freight company collects from the buyer
upon delivery
Chapter 8- 26

Freight Terms
Who Shoulders the
Transportation
Costs?
Who Pays the
Shipper?
FOB Destination, Freight Prepaid Seller Seller
FOB Shipping Point, Freight
Collect
Buyer Buyer
FOB Destination, Freight Collect Seller Buyer
FOB Shipping Point, Freight
Prepaid
Buyer Seller
Boardwork : Problem # 4 pp 404
Provide solutions to Problem #5 pp 205 for self-study.
Chapter 8- 27
PERIODIC PERPETUAL
Purchase of Merchandise for Cash
Purchases xxx
Cash xxx
Merchandise Inventory xxx
Cash xxx
Purchase of Merchandise on account, the freight
charges to be shouldered by the buyer
Purchases xxx
Freight-in xxx
Accounts Payable xxx
Chapter 8- 28
Information related to Steffens Co. is presented below.
Prepare the journal entry to record the transaction
under the periodic and perpetual inventory system.
On April 5, purchased merchandise from Bryant Company
for P25,000 terms 2/10, net/30, FOB shipping point.
Merchandise inventory 25,000 April 5
Accounts payable 25,000
MERCHANDISE
Purchases 25,000
April 5
Chapter 8- 29
On April 6, paid freight costs of P900 on merchandise
purchased from Bryant.
Merchandise inventory 900 April 6
Cash 900
Freight-in 900 April 6
Cash 900
MERCHANDISE
Chapter 8- 30
On April 7, purchased equipment on account for P26,000.
Equipment 26,000 April 7
MERCHANDISE
Not all purchases increase Purchases or Merchandise Inventory.
Equipment 26,000 April 7
Chapter 8- 31
Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not
meet specifications.
Return goods for credit if
the sale was made on
credit, or for a cash refund
if the purchase was for
cash.
May choose to keep the
merchandise if the seller
will grant an allowance
(deduction) from the
purchase price.
Purchase Return Purchase Allowance
PURCHASE RETURNS AND
ALLOWANCES
Chapter 8- 32
PERIODIC PERPETUAL
Return of merchandise to seller due to defect or damage -
Cash refund for cash purchases
Cash xxx
Purchase Returns and
Allowances xxx
Cash xxx
Return of merchandise to seller due to defect or damage -
Debit memo for credit purchases
Purchase Returns and
Allowances xxx
Chapter 8- 33
On April 8, returned damaged merchandise to Bryant
Company and was granted a P4,000 credit for returned
merchandise.
Accounts payable 4,000 April 8
Merchandise inventory 4,000
Purchase Returns & Allowances 4,000
Chapter 8- 34
In a perpetual inventory system, a return of
defective merchandise by a purchaser is recorded
by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Merchandise Inventory
Review Question
Chapter 8- 35
Credit terms may permit buyer to claim a cash
discount for prompt payment.
Advantages:
Purchaser saves money.
Seller shortens the operating cycle.
Purchase Discounts
Chapter 8- 36
PERIODIC PERPETUAL
Payment of account, less of cash discount
Purchases Discount xxx
Cash xxx
Cash xxx
Payment of account, no discount taken
Cash xxx
Cash xxx
Chapter 8- 37
On April 15, paid the amount due to Bryant Company in
full. (Remember the return of P4,000 of merchandise.)
Cash 20,580
Merchandise Inventory 420
(Discount = P21,000 x 2% = P420)
Cash 20,580
Purchase discounts 420
Chapter 8- 38
or later
Cash 21,000
What entry would be made if the company failed to pay
within 10 days?
or later
Cash 21,000
Chapter 8- 39
WHEN DISCOUNT IS NOT TAKEN
If we fail to take a 2/10, n/30
discount, is it really expensive?
365 days 20 days 2% = 36.5% annual rate
Days in a
Year. Could
also be
360.
Number
of additional
days before
payment
Percent
paid to
keep
money
Chapter 8- 40
Should discounts be taken when offered?
Discount of 2% on P21,000 P 420.00
P21,000 invested at 10% for 20 days 115.07
Savings by taking the discount P 304.93
Example: 2% for 20 days = Annual rate of 36.5%
(365/20 = 18.25 twenty-day periods x 2% = 36.5%)
Passing up the discount offered equates to paying an
interest rate of 2% on the use of P21,000 for 20 days.
WHEN DISCOUNT IS NOT TAKEN
Chapter 8- 41
- PERIODIC
Transaction
Purchases P25,000
Less: Purchase Returns & Allowances P 4,000
Purchase discounts 420 4,420
Net Purchases P20,580
Freight-in 900
Net Cost of Purchases P21,480
Chapter 8- 42
Merchandise Inventory
Debit Credit
$25,000 8
th
- Return $4,000
Balance
5
th
- Purchase
$21,480
420 15
th
- Discount 900 6
th
Freight-in
- PERPETUAL
Chapter 8- 43
SEATWORK/ASSIGNMENT
Problem #10 pp 408
Journalize instead of using T-accounts (use #
in lieu of an explanation).
Record assuming
(1) periodic inventory system is used
(2) perpetual inventory system is used
Chapter 8- 44
Made for cash or credit (on account).
Normally recorded when
earned, usually when
goods transfer from
seller to buyer.
Sales invoice should
support each credit
sale.
RECORDING SALES OF MERCHANDISE
Chapter 8- 45
Main Source, Inc. Invoice
614 Tech Avenue Date Number
Nashville, TN 37651 5/4/07 358-BI
S
o
l
d

T
o
Name: Barbee, Inc.
Attn: Tom Bell
Address: One Willow Plaza
Cookeville, Tennessee
38501
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx Prepaid
Item Description Quanity Price Amount
AC417 250 Backup System 500 54.00 $ 27,000 $
Sub Total 27,000
We appreciate your business! Ship Chg. -
Tax -
Total 27,000 $
Invoice
OSeller
OInvoice date
OPurchaser
OOrder number
OCredit terms
OFreight terms
OGoods
OInvoice amount
O
O O
O
O
O
O
O
SALES INVOICE
Chapter 8- 46
1. On December 3,Wheeler Company sold P500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping
point. The cost of the merchandise sold was P350,000.
2. On December 8, Hashmi Co. was granted an allowance of
P27,000 for merchandise purchased on December 3.
3. On December 13,Wheeler Company received the balance
due from Hashmi Co.
Instructions: Prepare the journal entries to record these
transactions on the books of Wheeler Company under the
periodic and perpetual inventory system.
Chapter 8- 47
PERIODIC PERPETUAL
Sales of Merchandise for Cash
Cash xxx
Sales xxx
Cash xxx
Sales xxx
Recording of cost of merchandise sold
No Entry Cost of Goods Sold xxx
Chapter 8- 48
PERIODIC PERPETUAL
Sales of Merchandise on Account
Accounts Receivable xxx
Sales xxx
Sales xxx
Recording of cost of merchandise sold
No Entry Cost of Goods Sold xxx
Chapter 8- 49
PERIODIC PERPETUAL
Payment of Freight Charges (FOB Destination)
Freight-Out or Delivery
Expense xxx
Cash xxx
Freight-Out or Delivery
Expense xxx
Cash xxx
Payment of Freight Charges (FOB Shipping Point)
Cash xxx
Cash xxx
Chapter 8- 50
On December 3, Wheeler Company sold P500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping
point. Cost of merchandise sold was P350,000.
Accounts receivable 500,000 Dec. 3
Sales 500,000
Accounts receivable 500,000 Dec. 3
Sales 500,000
Chapter 8- 51
Flipside of purchase returns and allowances.
Contra-revenue account (debit).
Sales not reduced (debited) because:
would obscure importance of sales returns and
allowances as a percentage of sales.
could distort comparisons between total sales
in different accounting periods.
Sales Returns and Allowances
SALES RETURNS AND
ALLOWANCES
Chapter 8- 52
PERIODIC PERPETUAL
Sales Returns - Cash Sales
Sales Returns and
Allowances xxx
Cash xxx
Sales Returns and
Allowances xxx
Cash xxx
Recording the Cost of Returned Merchandise
No Entry Merchandise Inventory xxx
Cost of Goods Sold xxx
Chapter 8- 53
PERIODIC PERPETUAL
Sales Returns - Credit Sales
Sales Returns and
Allowances xxx
Sales Returns and
Allowances xxx
Recording the Cost of Returned Merchandise
No Entry Merchandise Inventory xxx
Cost of Goods Sold xxx
Chapter 8- 54
PERIODIC PERPETUAL
Sales Allowances - Cash Sales
Sales Returns and
Allowances xxx
Cash xxx
Sales Returns and
Allowances xxx
Cash xxx
Sales Allowances - Credit Sales
Sales Returns and
Allowances xxx
Sales Returns and
Allowances xxx
Chapter 8- 55
On December 8, Hashmi Co. was granted an allowance of
P27,000 for merchandise purchased on December 3.
Sales returns and allowances 27,000
Dec. 8
Accounts receivable 27,000
Dec. 8
Chapter 8- 56
Variation: On Dec. 8, Hashmi Co. returned merchandise for
credit of P27,000. The original cost of the merchandise to
Wheeler was P19,800.
Dec. 8
Dec. 8
Chapter 8- 57
The cost of goods sold is determined and recorded
each time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory
system.
d. neither a periodic nor perpetual inventory
system.
Review Question
Chapter 8- 58
Offered to customers to promote prompt payment.
Flipside of purchase discount.
Contra-revenue account (debit).
Sales Discount
Chapter 8- 59
PERIODIC PERPETUAL
Collection from Customer, less discount
Cash xxx
Sales Discounts xxx
Cash xxx
Sales Discounts xxx
Collection from Customer, no discount
Cash xxx
Cash xxx
Chapter 8- 60
On December 13, Wheeler Company received the balance
due from Hashmi Co.
Cash 463,540 Dec. 13
Sales discounts 9,460
Sales Discounts = [(P500,000 P27,000) X 2%]
Cash 463,540 Dec. 13
Sales discounts 9,460
Chapter 8- 61
Prepare the sales revenue section of the income
statement for Wheeler Company.
Sales revenue
Sales P 500,000
Less: Sales returns and allowances (27,000)
Sales discounts (9,460)
Net sales P 463,540
Income Statement (Partial)
For the Month Ended Dec. 31, 2010
Wheeler Company
Gross Sales
Chapter 8- 62
SEATWORK/ASSIGNMENT
Problem #11 pp 409
Follow instructions as provided in the book
Problem # 17 pp 415
Journalize using both periodic and perpetual
inventory systems.
Assume 25% mark-up on cost in recognizing cost of
goods sold under the perpetual system
Chapter 8- 63
ACCOUNTING FOR VAT
Under Philippine tax laws, a 12% value added tax
(VAT) is levied by the government to both the buyer
and the seller for every purchase and sale of goods
and services, unless exempted by law.
When merchandise is purchased, VAT will increase the
amount paid by the buyer but would not increase the
cost of good purchased. VAT paid is debited to Input
Tax account.
When goods are sold, VAT will increase the amount
collected by the seller but would not increase sales.
VAT collected is credited to Output Tax account.
Chapter 8- 64
ACCOUNTING FOR VAT
At the end of the accounting period, Input VAT is
offset against Output VAT.
If input tax > output tax: debit the difference to
Prepaid Tax which can be offset or used against
future Output Tax
If input tax < output tax: credit the difference to
VAT Payable. This amount would be remitted to the
government.
Chapter 8- 65
COST OF GOODS SOLD
Seller
Buyer
Largest single expense of the merchandising business
Cost of inventory that the business has sold to
customers
Chapter 8- 66
Periodic System
Separate accounts used to record purchases,
freight costs, returns, and discounts.
Company does not maintain a running account of
changes in inventory.
Ending inventory determined by physical count.
DETERMINING COST OF GOODS SOLD
UNDER A PERIODIC SYSTEM
Chapter 8- 67
COST OF GOODS SOLD
Cost of Goods Available for Sale
(COGAS)
Beginning
Inventory
Purchases
Ending
Inventory
Cost of
Goods Sold
Chapter 8- 68
Calculation of Cost of Goods Sold
$316,000
DETERMINING COST OF GOODS SOLD
UNDER A PERIODIC SYSTEM
Chapter 8- 69
CALCULATION OF GROSS PROFIT
Key Items:
Net sales
Gross profit
Gross profit
rate
Chapter 8- 70

CH 8 - Merchandising Operations

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