Slide 5-1

Chapter

Accounting for Merchandising Operations

Financial Accounting, IFRS Edition Weygandt Kimmel Kieso
Slide 5-2

Study Study Objectives Objectives

1. 2. 3. 4. 5. 6.
Slide 5-3

Identify the differences between service and merchandising companies. Explain the recording of purchases under a perpetual inventory system. Explain the recording of sales revenues under a perpetual inventory system. Explain the steps in the accounting cycle for a merchandising company. Prepare an income statement for a merchandiser. Explain the computation and importance of gross profit.

Accounting Accounting for for Merchandising Merchandising Operations Operations

Merchandising Operations

Recording Purchases of Merchandise Freight costs Purchase returns and allowances Purchase discounts Summary of purchasing transactions

Recording Sales of Merchandise Sales returns and allowances Sales discounts

Completing the Accounting Cycle Adjusting entries Closing entries Summary of merchandising entries

Forms of Financial Statements Income statement Classified statement of financial position

Operating cycles Flow of costs perpetual and periodic inventory systems

Slide 5-4

Merchandising Merchandising Operations Operations Merchandising Companies

Buy and Sell Goods

Wholesaler

Retailer

Consumer

The primary source of revenues is referred to as sales revenue or sales.

Slide 5-5

SO 1 Identify the differences between service and merchandising companies.

Merchandising Merchandising Operations Operations Income Measurement

Sales Revenue
Less

Not used in a Service business.

Illustration 5-1

Cost of Goods Sold

Gross Profit

Less

Cost of goods sold is the total cost of merchandise sold during the period.

Operating Expenses

Net Income (Loss)

Slide 5-6

SO 1 Identify the differences between service and merchandising companies.

Merchandising Merchandising Operations Operations Operating Cycle

The operating cycle of a merchandising company ordinarily is longer than that of a service company.
Illustration 5-2

Slide 5-7

SO 1 Identify the differences between service and merchandising companies.

Merchandising Merchandising Operations Operations Flow of Costs

Illustration 5-3

Slide 5-8

SO 1 Identify the differences between service and merchandising companies.

Merchandising Merchandising Operations Operations Flow of Costs

Perpetual System
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.
Slide 5-9

SO 1 Identify the differences between service and merchandising companies.

Merchandising Merchandising Operations Operations Flow of Costs

Periodic System
1. Purchases of merchandise increase Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold: Beginning inventory Add: Purchases, net Goods available for sale Less: Ending inventory Cost of goods sold
Slide 5-10

$ 100,000 + 800,000 900,000 - 125,000 $ 775,000

SO 1 Identify the differences between service and merchandising companies.

Slide 5-11

Answers on notes page

Recording Recording Purchases Purchases of of Merchandise Merchandise

Illustration 5-5

Made using cash or credit (on account). Normally recorded when goods are received. Purchase invoice should support each credit purchase.

Slide 5-12

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise

Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they intend to sell.
Illustration: From INVOICE NO. 731 (Illustration 5-5) record the

journal entry Sauk Stereo would make to record its purchase from PW Audio Supply. May 4 Merchandise inventory Accounts payable 3,800 3,800

Slide 5-13

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise Freight Costs Terms of Sale
Illustration 5-6

Seller places goods Free On Board the carrier, and buyer pays freight costs.

Seller places goods Free On Board to the buyers place of business, and seller pays freight costs.

Slide 5-14

Freight costs incurred by the seller are an operating expense.

SO 2

Recording Recording Purchases Purchases of of Merchandise Merchandise

Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Acme Freight Company 150 for freight charges, the entry on Sauk Stereos books is: May 6 Merchandise inventory Cash 150 150

Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would have been: May 4 Freight-out (or Delivery Expense) Cash
Slide 5-15

150 150

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise Purchase Returns and Allowances
Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications. Purchase Return
Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash.
Slide 5-16

Purchase Allowance
May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price.

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise

Question
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
Answer on notes page Slide 5-17

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise

Illustration: Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing 300. May 8 Accounts payable Merchandise inventory 300 300

Slide 5-18

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise Purchase Discounts

Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Purchaser saves money. Seller shortens the operating cycle.
Example: Credit terms of 2/10, n/30, is read two-ten, net thirty. 2% cash discount if payment is made within 10 days.
Slide 5-19

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise Purchase Discount Terms

2/10, n/30
2% discount if paid within 10 days, otherwise net amount due within 30 days.

1/10 EOM
1% discount if paid within first 10 days of next month.

n/10 EOM
Net amount due within the first 10 days of the next month.

Slide 5-20

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise

Illustration: Assume Sauk Stereo pays the balance due of 3,500 (gross invoice price of 3,800 less purchase returns and allowances of 300) on May 14, the last day of the discount period. Prepare the journal entry Sauk makes to record its May 14 payment. May 14 Accounts payable Cash Merchandise Inventory 3,500 3,430 70

Slide 5-21

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise

Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of 3,500 on June 3, the journal entry would be: June 3 Accounts payable Cash 3,500 3,500

Slide 5-22

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise Purchase Discounts

Should discounts be taken when offered?
Passing up the discount offered equates to paying an interest rate of 2% on the use of $3,500 for 20 days. Example: 2% for 20 days = Annual rate of 36.5% (365/20 = 18.25 twenty-day periods x 2% = 36.5%)

Slide 5-23

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Purchases Purchases of of Merchandise Merchandise Summary of Purchasing Transactions

Illustration

Merchandise Inventory
Debit Credit
300

4th - Purchase 6th Freight-in Balance

3,800

150
3,580

70

8th - Return 14th - Discount

Slide 5-24

SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Recording Sales Sales of of Merchandise Merchandise

Illustration 5-5

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.
SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Slide 5-25

Recording Recording Sales Sales of of Merchandise Merchandise

Two Journal Entries to Record a Sale
#1

Cash or Accounts receivable Sales

XXX XXX

Selling Price

#2

Cost of goods sold Merchandise inventory

XXX XXX

Cost

Slide 5-26

SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Recording Recording Sales Sales of of Merchandise Merchandise

Illustration: Assume PW Audio Supply records its May 4 sale of 3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume the merchandise cost PW Audio Supply 2,400. May 4 Accounts receivable Sales 4 Cost of goods sold Merchandise inventory 2,400 2,400 3,800 3,800

Slide 5-27

SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Recording Recording Sales Sales of of Merchandise Merchandise Sales Returns and Allowances
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.

SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Slide 5-28

Recording Recording Sales Sales of of Merchandise Merchandise

Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a 300 selling price (assume a 140 cost). Assume the goods were not defective.

May 8

Sales returns and allowances Accounts receivable

300 300 140 140

Merchandise inventory Cost of goods sold

Slide 5-29

SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Recording Recording Sales Sales of of Merchandise Merchandise

Illustration: Assume the returned goods were defective and had a scrap value of 50, PW Audio would make the following entries:

May 8

Sales returns and allowances Accounts receivable

300 300 50 50

Merchandise inventory Cost of goods sold

Slide 5-30

SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Recording Recording Sales Sales of of Merchandise Merchandise

Review Question
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.

Slide 5-31

Answer on notes page

SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Slide 5-32

Answers on notes page

Recording Recording Sales Sales of of Merchandise Merchandise Sales Discount

Offered to customers to promote prompt payment. Flipside of purchase discount. Contra-revenue account (debit).

Slide 5-33

SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Recording Recording Sales Sales of of Merchandise Merchandise

Illustration: Assume Sauk Stereo pays the balance due of 3,500 (gross invoice price of 3,800 less purchase returns and allowances of 300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14. May 14 Cash Sales discounts Accounts receivable 3,430 70 * 3,500

* [(3,800 300) X 2%]

Slide 5-34

SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Completing Completing the the Accounting Accounting Cycle Cycle Adjusting Entries
Generally the same as a service company. One additional adjustment to make the records agree with the actual inventory on hand. Involves adjusting Merchandise Inventory and Cost of Goods Sold.

Slide 5-35

SO 4 Explain the steps in the accounting cycle for a merchandising company.

Completing Completing the the Accounting Accounting Cycle Cycle

Illustration: Suppose that PW Audio Supply has an unadjusted balance of 40,500 in Merchandise Inventory. Through a physical count, PW Audio determines that its actual merchandise inventory at year-end is 40,000. The company would make an adjusting entry as follows. Cost of goods sold Merchandise inventory 500 500

Slide 5-36

SO 4 Explain the steps in the accounting cycle for a merchandising company.

Completing Completing the the Accounting Accounting Cycle Cycle

Closing Entries

Slide 5-37

Forms Forms of of Financial Financial Statements Statements Income Statement

Primary source for evaluating a companys performance. Format designed to differentiate between the various sources of income and expense.

Slide 5-38

SO 5 Prepare an income statement for a merchandiser.

Forms Forms of of Financial Financial Statements Statements

Income Statement Presentation of Sales
Illustration 5-13

Slide 5-39

SO 5 Prepare an income statement for a merchandiser.

Forms Forms of of Financial Financial Statements Statements

Gross Profit
Illustration 5-13

Illustration 5-10

Slide 5-40

SO 6 Explain the computation and importance of gross profit.

Forms Forms of of Financial Financial Statements Statements

Operating Expenses

Illustration 5-13

IFRS allows presentation by nature and presentation by function.

Slide 5-41

SO 5 Distinguish between a multiple-step and a single-step income statement.

Forms Forms of of Financial Financial Statements Statements

Various revenues and gains and expenses and losses that are unrelated to the companys main line of operations.

Other Income and Expense

Slide 5-42

SO 5

Illustration 5-13

Forms Forms of of Financial Financial Statements Statements

Interest expense, if material, must be disclosed on the face of the income statement.

Interest Expense
Slide 5-43

SO 5

Illustration 5-13

Forms Forms of of Financial Financial Statements Statements

Comprehensive Income
Includes certain adjustments to pension plan assets, gains and losses on foreign currency translation, and unrealized gains and losses on certain types of investments.

Illustration 5-14

Reported in a combined statement of net income and comprehensive income, or in a separate schedule that reports only comprehensive income.
Slide 5-44

SO 6 Explain the computation and importance of gross profit.

Forms Forms of of Financial Financial Statements Statements

Review Question
The multiple-step income statement for a merchandiser shows each of the following features except: a. gross profit. b. cost of goods sold. c. a sales revenue section. d. investing activities section.
Slide 5-45

SO 5 Distinguish between a multiple-step and a single-step income statement.

Forms Forms of of Financial Financial Statements Statements

Classified Statement of Financial Position
Illustration 5-15

Slide 5-46

SO 5 Distinguish between a multiple-step and a single-step income statement.

Forms Forms of of Financial Financial Statements Statements

Indicate in which financial statement (Income Statement, IS; Statement of Financial Position, SFP; or Retained Earnings Statement, RES) and under what classification each of the following would be reported. Accounts Payable Accounts Receivable Accumulated Depreciation Advertising Expense Depreciation Expense Dividends Cash
Slide 5-47

SFP SFP SFP IS IS RES SFP

Current liabilities Current assets Property, plant, and equipment Operating expenses Operating expenses Deduction section Current assets

SO 5 Distinguish between a multiple-step and a single-step income statement.

Forms Forms of of Financial Financial Statements Statements

Indicate in which financial statement (Income Statement, IS; Statement of Financial Position, SFP; or Retained Earnings Statement, RES) and under what classification each of the following would be reported. Freight-out Gain on Sale of Equipment Insurance Expense Interest Expense Interest Payable Land Merchandise Inventory
Slide 5-48

IS IS IS IS SFP SFP SFP

Operating expenses Other income and expense Operating expenses Interest expense Current liabilities Property, plant, and equipment Current assets

SO 5 Distinguish between a multiple-step and a single-step income statement.

Forms Forms of of Financial Financial Statements Statements

Indicate in which financial statement (Income Statement, IS; Statement of Financial Position, SFP; or Retained Earnings Statement, RES) and under what classification each of the following would be reported. Notes Payable Office Building Property Tax Payable Salaries Expense Salaries Payable Share CapitalOrdinary
Slide 5-49

SFP SFP SFP IS SFP SFP

Non-current liabilities Property, plant, and equipment Current liabilities Operating expenses Current liabilities Sales revenues Equity

Sales Returns and Allowances IS

SO 5 Distinguish between a multiple-step and a single-step income statement.

Forms Forms of of Financial Financial Statements Statements

Indicate in which financial statement (Income Statement, IS; Statement of Financial Position, SFP; or Retained Earnings Statement, RES) and under what classification each of the following would be reported. Store Equipment Sales Revenue Utilities Expense SFP IS IS Property, plant, and equipment Sales revenues Operating expenses

Slide 5-50

SO 5 Distinguish between a multiple-step and a single-step income statement.

Understanding Understanding U.S. U.S. GAAP GAAP

Key Differences
Accounting for Merchandising Operations

Under both GAAP and IFRS, a company can choose to use either a perpetual or a periodic system. Inventories are defined in IAS 2 as held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services. The definition under GAAP is essentially the same.

Slide 5-51

Understanding Understanding U.S. U.S. GAAP GAAP

Key Differences
Accounting for Merchandising Operations

As noted in the chapter, under IFRS companies must classify expenses by either nature or by function. Classification by nature leads to descriptions such as the following: salaries, depreciation expense, and utilities expense. If a company uses the functional expense method on the income statement, disclosure by nature is required in the notes to the financial statements. In contrast, under GAAP, companies generally classify income statement items by function. Classification by function leads to descriptions such as administration, distribution, and manufacturing.
Slide 5-52

Understanding Understanding U.S. U.S. GAAP GAAP

Key Differences
Accounting for Merchandising Operations

Presentation of the income statement under GAAP follows either a single-step or multiple-step format. IFRS does not mention a single-step or multiple-step approach although the approach used is similar to that referred to as a multiplestep statement under GAAP. IFRS requires that two years of income statement information be presented, whereas GAAP requires three years.

Slide 5-53

Understanding Understanding U.S. U.S. GAAP GAAP

Looking to the Future
Accounting for Merchandising Operations

The IASB and FASB are working on a project that would rework the structure of financial statements. Specifically, this project will address the issue of how to classify various items in the income statement. A main goal of this new approach is to provide information that better represents how businesses are run. In addition, this approach draws attention away from just one numbernet income. It will adopt major groupings similar to those currently used by the statement of cash flows (operating, investing, and financing), so that numbers can be more readily traced across statements. Finally, this approach would also provide detail, beyond that currently seen in most statements (either GAAP or IFRS), by requiring that line items be presented both by function and by nature.

Slide 5-54

Periodic Periodic Inventory Inventory System System

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.

Slide 5-55

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Periodic Periodic Inventory Inventory System System

Calculation of Cost of Goods Sold
Illustration 5A-1

Slide 5-56

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Recording Recording Purchases Purchases under under Periodic Periodic System System
Illustration: On the basis of the sales invoice (Illustration 5-5) and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the 3,800 purchase as follows. May 4 Purchases Accounts payable 3,800 3,800

Slide 5-57

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Recording Recording Purchases Purchases under under Periodic Periodic System System
Freight Costs
Illustration: If Sauk pays Acme Freight Company 150 for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauks books is: May 6 Freight-in (Transportation-in) Cash 150 150

Slide 5-58

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Recording Recording Purchases Purchases under under Periodic Periodic System System
Purchase Returns and Allowances
Illustration: Sauk Stereo returns 300 of goods to PW Audio Supply and prepares the following entry to recognize the return.

May 8

Accounts payable

300 300

Purchase returns and allowances

Slide 5-59

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Recording Recording Purchases Purchases under under Periodic Periodic System System
Purchase Discounts
Illustration: On May 14 Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2% cash discount allowed by PW Audio for payment within 10 days. Sauk Stereo records the payment and discount as follows. May 14 Accounts payable Purchase discounts Cash 3,500 70 3,430

Slide 5-60

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Recording Recording Sales Sales under under Periodic Periodic System System
Illustration: PW Audio Supply, records the sale of 3,800 of merchandise to Sauk Stereo on May 4 (sales invoice No. 731, Illustration 5-5) as follows. May 4 Accounts receivable Sales 3,800 3,800

No entry is recorded for cost of goods sold at the time of the sale under a periodic system.
Slide 5-61

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Recording Recording Sales Sales under under Periodic Periodic System System
Sales Returns and Allowances
Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the 300 sales return as follows. May 4 Sales returns and allowances Accounts receivable 300 300

Slide 5-62

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Recording Recording Sales Sales under under Periodic Periodic System System
Sales Discounts
Illustration: On May 14, PW Audio Supply receives payment of 3,430 on account from Sauk Stereo. PW Audio honors the 2% cash discount and records the payment of Sauks account receivable in full as follows. May 14 Cash Sales discounts Accounts receivable 3,430 70 3,500

Slide 5-63

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Comparison -Perpetual vs. Comparison of of Entries Entries-Perpetual vs. Periodic Periodic

Illustration 5A-2

Slide 5-64

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Comparison -Perpetual vs. Comparison of of Entries Entries-Perpetual vs. Periodic Periodic

Illustration 5A-2

Slide 5-65

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Worksheet Worksheet for for a a Merchandising Merchandising Company Company

Illustration 5B-1 Slide 5-66

SO 8

Copyright Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Slide 5-67