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Accounting for Merchandising Businesses

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2021-10-12 published at Travel/ Places/ Nature category

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1.Chapter Four Accounting for Merchandising Businesses
2.5- 2 Inventory Inventory is tangible property that is held for resale or will be used in producing goods or services. Inventory is reported on the balance sheet as an asset. Types of inventory: Merchandise inventory Raw materials inventory Work in process inventory Finished goods inventory manufacturer
3.5- 3 Inventory Cost The cost principle requires that inventory be recorded for the price paid or the consideration given up. What type of transaction is the purchase of inventory? Asset Exchange if cash paid. Asset Source if “on account”.
4.5- 4 Inventory Cost The amount recorded for inventory should include: Invoice price (minus purchase discounts), transportation-in costs (also called “freight-in”), inspection costs, and preparation costs. The company should accumulate costs of purchases until raw materials are ready for use or until merchandise is ready for shipment to customers.
5.5- 5 Income Statement Change Net Sales 7,500 Less: Cost of goods sold -3,000 Gross Profit Margin 4,500 Because of Cost of Goods Sold, the format for the Income Statement is modified:
6.5- 6 Product Costs Versus Selling and Administrative Costs Product Costs Costs that are included in inventory. Selling & Admin. Costs Costs that are not included in inventory. They are sometimes called period costs.
7.5- 7 Cost of Goods Sold Cost of goods sold is calculated as the number of units sold during the period multiplied by their unit costs. Cost of goods sold is a major expense item for most non-service businesses. The measurement of cost of goods sold is an excellent example of the application of the matching principle Why? The Cost of Goods Sold EXPENSE is recorded in the period the units are SOLD (REVENUE is recognized), regardless of when the units are paid for. So, the EXPENSE is MATCHED against the related REVENUE.
8.5- 8 Cost of Goods Sold Beginning inventory Add: Purchases (net) Cost of Goods Available for Sale Deduct: Ending inventory Cost of goods sold Cost of Goods Available for Sale expresses the total cost of what has been available for sale throughout a given time period.
9.5- 9 5-9 Allocation of Inventory Cost Between Asset and Expense Accounts Cost of Goods Available for Sale Merchandise Inventory (Balance Sheet) Cost of Goods Sold (Income Statement)
10.5- 10 Purchase $4,000 of Office Supplies Date Account Title Debit Credit Jan. 6 Supplies 4,000 Cash 4,000 Post from General Journal to the General Ledger 4,000 4,000 Supplies Cash
11.5- 11 $1,000 of Supplies left over at the end of the month Date Account Title Debit Credit Jan. 30 Supplies Expense 3,000 Supplies 3,000 Record use of $3,000 of Supplies Post from General Journal to the General Ledger 3,000 3,000 Supplies Expense Supplies
12.5- 12 Purchase 1,000 units of Inventory for $4,000 Date Account Title Debit Credit Jan. 6 Inventory 4,000 Cash 4,000 Purchase 1,000 units @ $4.00 each Post from General Journal to the General Ledger 4,000 4,000 Inventory Cash
13.5- 13 $1,000 of Inventory left over at the end of the month Date Account Title Debit Credit Jan. 30 Cost of Goods Sold 3,000 Inventory 3,000 Record sale of 750 units of Inventory Post from General Journal to the General Ledger 3,000 3,000 Cost of Goods Sold Inventory
14.5- 14 $3,000 of Inventory was sold for $7,500 Cash Date Account Title Debit Credit Jan. 30 Cash 7,500 Revenue 7,500 Record sale of Inventory @ $10 each Post from General Journal to the General Ledger 7,500 7,500 Cash Sales Revenue
15.5- 15 A deduction from the invoice price granted to induce early payment of the amount due. Terms Time Due Discount Period Full amount less discount Credit Period Full amount due Purchase or Sale Cash Discounts
16.5- 16 Terms of Sales & Purchases Discount Terms: 2/10, n/30 (for example) 2% discount if balance paid in ten days, remainder to be paid within 30 days of sale tells when and how much must be paid There is a high interest cost of not taking purchase discounts when offered.
17.5- 17 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due Cash Discounts
18.5- 18 Terms of Sales & Purchases F. O. B. (Free On Board) shipping point or F.O.B. destination tells who pays for the shipping and when ownership “title” passes from the seller to the buyer.
19.5- 19 FOB Shipping and FOB Destination FOB Shipping Point: Buyer pays the shipping costs because ownership “title” transfers to buyer at the point the shipment starts on its journey. FOB Destination: Seller pays shipping costs because title does not transfer to the buyer until the goods reach their destination (the buyer’s place of business).
20.Who Pays for FOB? 5- 20 Business Supplier Customer Shipping Point Shipping Point Destination Destination Shipping Pt – Business pays Shipping Pt – Customer pays Destination – Business pays Destination – Supplier pays
21.5- 21 Purchased 1000 units for $4 each on account. (Terms: 2/10, n/30) Asset Source Transaction
22.5- 22 1. Journalize & Post the purchase.
23.5- 23 Paid a trucking company $500to deliver the purchased unitsto our warehouse. Freight charges paid to get inventory to our place of business (called TRANSPORTATION IN) is part of the cost of the purchase. It is added to the Inventory account, thus increasing the asset value. It is NOT “expensed”. Asset Exchange Transaction
24.5- 24 2. Journalize & Post the transportation cost
25.5- 25 3. Sold 620 units on account for $6 each. (Terms 1/10, n/30) $6 sales price x 620 units = $3720 3a. Record the Sales Revenue and related Receivable. Asset Source Transaction
26.5- 26 3a. Journalize and Post the sale.
27.5- 27 620 units sold x $4.50 cost each = $2790 3b. Record the Cost of the Goods Sold and their removal from inventory. What is the cost of each item in inventory? $4.00 invoice price + $0.50 transportation = $4.50 per unit $500 transport / 1000 units
28.5- 28 620 units sold x $4.50 cost each = $2790 3b. Record the Cost of the Goods Sold and their removal from inventory. Cost of goods sold Asset Use Transaction
29.5- 29 3b. Journalize and Post the cost of the sale.
30.5- 30 4. The customer in Transaction #3A returned 20 units for credit. $6 sales price x 20 units = $120 4a. Remove the previously recorded Sales Revenue and related Account Receivable. A separate “Sales Return” contra-revenue account may be used. Asset Use Transaction
31.5- 31 4a. Journalize and Post the sales return.
32.5- 32 4b. Put the cost of the 20 returned units back into inventory and out of Cost of Goods Sold. (Recall, the units were “costed out” of inventory and charged to Cost of Goods Sold at $4.50 each in Tr. #3b.) $4.50 x 20 units = $90 Reduction in “Cost of Goods Sold”. Asset Source Transaction
33.5- 33 4b. Journalize and Post the return to inventory.
34.5- 34 5a. The Transaction #3a customer paid within the ten day discount period.Record the Sales Discount. (1/10, n/30) Original Account Receivable (Transaction 3a) $3,720 Less: Sales Return (Transaction 4a) 120 Amount owed by customer before discount 3,600 x 1% sales discount 1% Sales Discount $ 36 Asset Source Transaction
35.5- 35 5a. Journalize and Post the 1% Sales Discount.
36.5- 36 5b. The Transaction #3a customer paid within the ten day discount period. Record the cash collection. Original Account Receivable (Transaction 3a) $3,720 Less: Sales Return (Transaction 4a) (120) Less: Sales Discount (Transaction 5a) (36) Cash receipt that will satisfy the account $3,564 Asset Exchange Transaction
37.5- 37 5b. Journalize and Post the cash collection.
38.5- 38 Returned 50 units to our supplier who granted us credit for the cost of the items but not for any transportation costs. Technically, this LOSS should be reported in the operating expense section of the income statement. However, this loss is usually NOT MATERIAL, so most companies record it as an increase in the COST OF GOODS SOLD expense account. That’s what we’ll do here. Supplier cost was $4.00 per unit x 50 = $200. Transportation cost recorded when units were purchased was $0.50 per unit x 50 = $25.
39.5- 39 6. Returned 50 units to our supplier who granted us credit for the cost of the items but not for any transportation costs.
40.5- 40 7. A physical inventory count shows 340 units on-hand, indicating 10 units have been lost. Units in Beginning Inventory 0 + Units Purchased this period (1000- 50 purchase returns) 950 = Units Available for Sale 950 Units Sold (620 – 20 sales returns) (600) = Units that should be in ending inventory 350 Actual ending inventory from count (340) = Units missing 10 x $4.50 cost per unit $45.00
41.5- 41 7. A physical inventory count shows 340 units on-hand, indicating 10 units have been lost. Technically, this LOSS should be reported in the operating expense section of the income statement. However, this loss is usually NOT MATERIAL, so most companies record it as an increase in the COST OF GOODS SOLD expense account. That’s what we’ll do here.
42.5- 42 7. A physical inventory count shows 340 units on-hand, indicating 10 units have been lost.
43.5- 43 8a. Paid within discount period, so record the 2% discount on the $4000 Tran. #1 purchase less $200 Tran. #6 return. Purchase (Transaction #1) $4000 Less Purchase Return (Trans. #6) 200 Amount owed 3800 X discount % 2% Amount of Purchase Discount $ 76 This reduces the cost of the inventory and the amount we owe the supplier.
44.5- 44 8a. Paid within discount period, so record the discount on the $4000 Tr. #1 purchase less $200 Tr. #6 return.
45.5- 45 8b. Paid the remaining balance on the Transaction #1 inventory purchase. $4000 purchase (Trans. #1) - 200 purchase return (Trans. #6) - 76 purchase discount (Trans. #8a) $3724 remainder to pay supplier
46.5- 46 8b. Paid the remaining balance on the Transaction #1 inventory purchase. ($4000-200-76=$3724 to pay)
47.5- 47 9. The Sale recorded in Transaction #3a was made with terms of F.O.B. destination. Record payment of the $340 shipping cost. Transportation charges on PURCHASES are added to the cost of the asset, INVENTORY. (Transportation IN) Transportation charges to ship products TO CUSTOMERS are reported as operating expenses on the income statement. The appropriate account title is TRANSPORTATION OUT (or FREIGHT OUT or SHIPPING EXPENSE).
48.5- 48 9. The Sale recorded in Transaction #3a was made with terms of F.O.B. destination. Record payment of the $340 shipping cost.
49.5- 49 Clock CompanyEnding Balances of LEDGER Accounts
50.5- 50 Transaction Analysis The following selected events occurred during 2004 at Clock Company which uses the PERPETUAL INVENTORY SYSTEM. For each event: Determine the effect on the financial statements. Record the event in the journal and ledger.
51.5- 51 Lost, Damaged, or Stolen Inventory Most merchandise companies experience some level of inventory shrinkage, a term that reflects decreases in inventory for reasons other than sales to customers.
52.5- 52 Lost, Damaged, or Stolen Inventory Assume a company determined that $500 of inventory was lost through shrinkage. Here is how it would effect the statements: In general journal form, the entry is as follows:
53.5- 53 Timing is EVERYTHING... Recognize revenue when “earned” earned when an exchange (seller to buyer) occurs Three levels of the matching principle Product costs (e.g., inventory costs): assets until produce revenue direct cause & effect relationship between revenue and expense Period costs: systematic & rational allocation e.g., depreciation costs Period costs: recognize as expense as incurred e.g., advertising costs
54.5- 54 Perpetual Inventory Systems The inventory account is continuously updated for the following events: Purchases Purchase Discounts Taken Purchase Returns & Allowances Sales (remove from inventory the COST of the units sold) Sales Returns (add to inventory the COST of units returned) The necessary detailed record-keeping required by the perpetual system has become much easier with current computer technology. A physical count of the inventory is still required at the end of the accounting period to assure accurate inventory records in case of errors or theft.
55.5- 55 Perpetual Inventory Systems Cost of Goods Sold . . . Contains the cost of units that have been sold to customers. Is a temporary account. (It will be closed out at the end of the period.) Is an expense account.
56.5- 56 When using the Periodic system, inventory transactions are not recorded directly in the INVENTORY account. Instead, separate accounts are used for PURCHASES PURCHASE RETURNS & ALLOWANCES PURCHASE DISCOUNTS TRANSPORTATION IN Periodic Inventory SystemSeparate Accounts Used Let’s look at another Inventory system.
57.5- 57 Periodic Inventory Systems Because entries are not made to the inventory account during the accounting period, the amount of inventory is not known until the end of the period when the inventory count is done. The PERIODIC system is being used less and less due to advancements in technology that make the extra record keeping of the perpetual system easy and inexpensive. Periodic inventory systems require more closing entries at the end of the period. (Purchases, Purchase Returns and Allowances, Purchase Discounts, and Transportation In are all separate TEMPORARY accounts that must be closed out at the end of the period.)
58.5- 58 Periodic Inventory System Purchases and Purchase Returns and Allowances Purchases is an account that holds the current period’s inventory purchases (a debit balance) and is used in the calculation of Cost of Goods Sold on the Income Statement. The Purchase Returns and Allowances account also is used to calculate Cost of Goods Sold on the income statement. It is a deduction from the cost of purchases in a periodic inventory system. Bar codes/scanners
59.5- 59 When using the Periodic system Purchase Discounts are recorded in a separate account. This helps managers keep track of the company’s performance in taking advantage of discounts. Periodic Inventory SystemPurchase Discounts
60.5- 60 Periodic Inventory Systems The ending inventory is determined at the end of the period by taking a physical count of the goods remaining on hand. Cost of goods sold is calculated at the end of the accounting period by subtracting the ending inventory (determined from the physical count) from the Cost of Goods Available for Sale. Beginning Inventory $ 400 + Purchases, net 2000 = Goods Available for Sale 2400 Ending Inv. (from count) 500 = Cost of Goods Sold $1900
61.5- 61 Gross Margin Percentage Gross Margin Net Sales This measure indicates how much of each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit. Other things being equal, the company with the higher gross margin percentage is pricing its products higher.
62.5- 62 Ratios: Gross Margin Percentage Gross margin %: Gross margin as a percent of sales Net sales – CGS gross margin Net sales net sales =
63.5- 63 Ratios: Gross Margin Percentage Net sales – CGS = $1,000 – 400 Net sales $1,000 = $600___ = 60% or $.60 $1,000 This tells us that each dollar of sales contributes 60 cents to the Gross Margin.
64.5- 64 Return on Sales Net Income Net Sales Net income expressed as a percentage of sales provides insight as to how much of each sales dollar is left as net income after all expenses are paid. Other things being equal, the company with the higher return on sales percentage is doing a better job of controlling costs.
65.5- 65 Ratios: Return on sales Return on sales = Net income Net sales Revenues - expenses Net sales
66.5- 66 Ratios: Return on sales Return on sales = Net income = Net sales $500___ = 50% or $.50 $1,000 Each dollar of sales is generating 50 cents of Net Income
67.5- 67 Income Statement Formats Single Step - with details Single Step - condensed Multi-step - with details Multi-step - condensed Let’s look at examples…..
68.5- 68 Income Statement Formats Net Sales 100 Less: Cost of goods sold 60 Gross Profit Margin 40 Operating Expenses: Selling: Sales Salaries 8 Advertising 2 Total Selling 10 Administrative: Admin. Salaries 3 Building Rent 8 Total Adm. Exp. 11 Total Operating Exp. 21 Operating Income 19 Non-Operating Rev. (Exp.) Interest Expense (1) Income before tax 18 Income Tax expense 3 Net Income 15 Multi-step with details Multi-step: condensed Net Sales 100 Less: Cost of goods Sold 60 Gross Profit Margin 40 Operating Expenses: Selling Expenses 10 Administrative Exp. 11 Total Operating Exp. 21 Operating Income 19 Non-Operating Rev. (Exp.) Interest Expense (1) Income before tax 18 Income Tax expense 3 Net Income 15
69.5- 69 Income Statement Formats Net Sales 100 Less: Cost of goods sold 60 Gross Profit Margin 40 Operating Expenses: Selling: Sales Salaries 8 Advertising 2 Total Selling 10 Administrative: Admin. Salaries 3 Building Rent 8 Total Adm. Exp. 11 Total Operating Exp. 21 Operating Income 19 Non-Operating Rev. (Exp.) Interest Expense (1) Income before tax 18 Income Tax expense 3 Net Income 15 Multi-step with details Multi-step: condensed Net Sales 100 Less: Cost of goods Sold 60 Gross Profit Margin 40 Operating Expenses: Selling Expenses 10 Administrative Exp. 11 Total Operating Exp. 21 Operating Income 19 Non-Operating Rev. (Exp.) Interest Expense (1) Income before tax 18 Income Tax expense 3 Net Income 15 The multi-step INCOME Statement format classifies interest as a NON-operating item. But, interest is still an OPERATING ACTIVITY on the CASHFLOW Statement.
70.5- 70 Income Statement Formats Net Sales 100 Less Expenses: Cost of goods sold 60 Sales Salaries 8 Advertising 2 Admin. Salaries 3 Building Rent 8 Interest Expense 1 Income Tax Expense 3 Total Expenses 85 Net Income 15 Single-step with details Single-step: condensed Net Sales 100 Less Expenses: Cost of goods sold 60 Selling 10 Administrative 11 Interest Expense 1 Income Tax Expense 3 Total Expenses 85 Net Income 15
71.5- 71 Income Statement Formats Net Sales 100 Less Operating Exp. Cost of goods sold 60 Sales Salaries 8 Advertising 2 Admin. Salaries 3 Building Rent 8 Interest Expense 1 Total Oper. Exp. 82 Income before taxes 18 Income Tax Expense 3 Net Income 15 Single-step with details Single-step: condensed Net Sales 100 Less Expenses: Cost of goods sold 60 Selling 10 Administrative 11 Total Oper. Exp. 81 Income before taxes 19 Income Tax Expense 4 Net Income 15 A common modification of the single-step method is to have the income tax expense separated out.
72.5- 72 Common-size Income Statement Each item on the income statement is expressed as a % of that year’s Net Sales. Comparisons are made to: Budget Previous year(s) Competitors % Net Sales 100.0 - Cost 60.0 =G.P 40.0
73.5- 73 Comparative Common-size Income Statements 2013 2012 Net Sales $3,000 $2,000 Cost of Goods Sold 2,000 1,200 Gross Profit 1,000 800 Operating Expenses: Selling Expenses 600 400 Administrative Exp. 700 300 Total Oper. Exp. 1,300 700 Net Income ($300) $100 % of N.Sales 100.0 % of N.Sales 100.0
74.5- 74 Comparative Common-size Income Statements 2013 2012 Net Sales $3,000 $2,000 Cost of Goods Sold 2,000 1,200 Gross Profit 1,000 800 Operating Expenses: Selling Expenses 600 400 Administrative Exp. 700 300 Total Oper. Exp. 1,300 700 Net Income ($300) $100 % of N.Sales 100.0 66.7 33.3 20.0 23.3 43.3 (10.0) % of N.Sales 100.0 60.0 40.0 20.0 15.0 35.0 5.0
75.5- 75 Income Statement Trend Analysis Trend Analysis shows both Dollar and % changes from one year to the next year for each item on the income statement. Example: From 2012 to 2013 Net Sales increased from $2,000 to $3,000. So…… Net Sales increased $1,000 which is a 50% increase over 2012 Net Sales. ($1,000 incr./$2,000 Net Sales of 2012 = 50%)
76.5- 76 Income Statement Trend Analysis 2013 2012 Net Sales $3,000 $2,000 Cost of Goods Sold 2,000 1,200 Gross Profit 1,000 800 Operating Expenses: Selling Expenses 600 400 Administrative Exp. 700 300 Total Oper. Exp. 1,300 700 Net Income ($300) $100 % inc.(dec) 50.0 66.7 25.0 50.0 133.3 85.7 (400.0) $ inc.(dec.) $1,000 800 200 200 400 600 ($400)
77.5- 77 How about analyzing the Balance Sheet? The same techniques are used to analyze the Balance Sheet. Common-size Analysis: Use the TOTAL ASSETS amount as the 100% figure. So, …….. Express each Balance Sheet item as a % of Total Assets. Trend Analysis: Same approach as used on the income statement. 1. Calculate the $ change for each bal. sheet item. 2. Express the $ change as a % of the previous year’s (or base year’s) amount.
78.5- 78 End of Chapter 4 Remember, Your objectives are to understand what you are doing and to be able to analyze the financial information. Memorization without understanding is meaningless!

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