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MERCHANDISING OPERATIONS AND THE ..., Study Guides, Projects, Research of Accounting

Middle Georgia State University (MGA)Accounting

Contra-revenue account on the income statement and has a Debit balance. SALES DISCOUNTS. • Issued by the seller to obtain their money from the customer faster.

Typology: Study Guides, Projects, Research

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Chapter 5 11th edition
1
MERCHANDISING OPERATIONS AND THE MULTI-STEP
INCOME STATEMENT
LO 1: Describe merchandising operations and inventory systems.
• Primary source of revenue for merchandisers like Walmart that buy and sell goods is referred to as
sales revenue.
• Cost of goods sold is the total cost of merchandise sold during the period.
o It is an EXPENSE that is directly related to the revenue recognized from the sale of goods.
Ex: Company C, a retailer, bought chairs from a wholesaler for $15 each. Company C then sold the
chairs to their customers for $20 each.
• The $20 represents Company C’s sales revenue for each chair.
• The $15 that Company C spent on each chair represents Company C’s cost of goods sold and
is recognized when each chair is sold to customers.
***Key Formula: Sales Revenue – Cost of Goods Sold = Gross Profit
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MERCHANDISING OPERATIONS AND THE MULTI-STEP

INCOME STATEMENT

LO 1: Describe merchandising operations and inventory systems.

  • Primary source of revenue for merchandisers like Walmart that buy and sell goods is referred to as sales revenue.
  • Cost of goods sold is the total cost of merchandise sold during the period. o It is an EXPENSE that is directly related to the revenue recognized from the sale of goods. Ex: Company C, a retailer, bought chairs from a wholesaler for $15 each. Company C then sold the chairs to their customers for $20 each.
    • The $20 represents Company C’s sales revenue for each chair.
    • The $15 that Company C spent on each chair represents Company C’s cost of goods sold and is recognized when each chair is sold to customers.

***Key Formula: Sales Revenue – Cost of Goods Sold = Gross Profit

FLOW OF COSTS

  • Companies use either a perpetual inventory system or a periodic inventory system to account for inventory. 1. Perpetual : CONTINUOUSLY updates accounting records for merchandising transactions – SPECIFICALLY reduction of inventory and increasing cost of goods sold.
    • Advantages of perpetual inventory system.
      1. Traditionally used for merchandise with high unit values.
      2. Shows the quantity and cost of the inventory that should be on hand at any time.
      3. Provides better control over inventories than a periodic system. 2. Periodic : updates the accounting records for merchandise transactions at the END OF A PERIOD.
    • Cost of goods sold determined by count at the end of the accounting period. ***Key Formula… Cost of Goods Sold = Beginning Inventory + Net Purchases – Ending Inventory Beginning Inventory $ 200, Add: Purchases, net $ 900, Goods available for sale $ 1,100, Less: Ending Inventory $ 400, Cost of Goods Sold $ 700,

PURCHASE DISCOUNTS (Cont.)

PURCHASE RETURNS AND ALLOWANCES

  • Purchase Returns: Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash.
  • Purchase Allowances: May choose to keep the merchandise if the seller will grant a reduction of the purchase price. 1% discount if paid within first 10 days of next month. Net amount due within the first 10 days of the next month. DEBIT CREDIT Inventory xxx Accounts Payable xxx Inventory xxx Cash xxx Inventory xxx Cash xxx Accounts Payable xxx Inventory (For purchase discount) xxx Cash xxx Accounts Payable xxx Cash xxx Cash or Accounts Payable xxx Inventory xxx
  1. Purchase inventory for CASH. Summary of Purchasing Journal Entries- Perpetual

B

U

Y

E

R

  1. Purchase inventory ON ACCOUNT.
  2. Paying freight costs on purchases (FOB Shipping Point)
  3. Paying WITHIN discount period.
  4. Paying OUTSIDE discount period.
  5. Recording Purchase Returns and Allowances.

Example Journal Entries Jay Company bought inventory from Z Company on January 1 for $10,000 under the credit terms 3/15, n/60. On January 10 , Jay Company returned goods costing $1,000 to Z Company. Jay Company paid Z Company for the remaining goods on Jan. 12. What are the journal entries that need to be recorded in January for Jay Company? Date Debit Credit Inventory Jan. 1 10, Accounts Payable- Z Company 10, Accounts Payable- Z Company Jan. 10 1, Inventory 1, Accounts Payable- Z Company (10,000 – 1,000) Jan. 12 9, Inventory (9,000 × 3% = $270) 270 Cash 8,

Example Journal Entries

  • Jay Company sold goods costing $6,000 to X Company for $10,000 on March 1 under the terms 2/10, net 30. On March 5, X Company returned goods to Jay Company with a selling price of $3, and a cost of $1,800. On March 10, Jay Company received payment from X Company for the remainder of the goods. What are the journal entries that need to be recorded on in March for Jay Company? Date Debit Credit Accounts Receivable- X Company Mar. 1 10, Sales Revenue 10, Cost of Goods Sold Mar. 1 6 , Inventory 6 , Sales Returns and Allowances Mar. 5 3, Accounts Receivable- X Company 3, Inventory Mar. 5 1, Cost of Goods Sold 1, Cash Mar. 10 6, Sales Discounts (7,000 × 2% = $140) 140 Accounts Receivable- X Company (10,000 - 3,000) 7, LO 5: Apply the steps in the accounting cycle to a merchandising company.

Each of the required steps described in Chapter 4 for service companies applies to

merchandising companies.

Adjusting Entries

A merchandising company generally has the same types of adjusting entries as a service

company. However, a merchandiser using a perpetual system will require one additional

adjustment to make the records agree with the actual inventory on hand. Here’s why: At the end

of each period, for control purposes, a merchandising company that uses a perpetual system will

take a physical count of its goods on hand.

The company’s unadjusted balance in Inventory usually does not agree with the actual amount of

inventory on hand. The perpetual inventory records may be incorrect due to recording errors,

theft, or waste. Thus, the company needs to adjust the perpetual records to make the recorded

inventory amount agree with the inventory on hand.

  • This adjustment impacts Inventory and Cost of Goods Sold.

For example, suppose that PW Audio Supply, Inc. has an unadjusted balance of $40,500 in

Inventory.

Through a physical count, PW Audio Supply determines that its actual merchandise inventory at

December 31 is $40,000. The company would make an adjusting entry as follows.

Dec. 31 Cost of Goods Sold 500

Inventory ($40,500 – $40,000) 500

(To adjust inventory to physical count)

Closing Entries

A merchandising company, like a service company, closes to Income Summary all accounts that

affect net income. In journalizing, the company credits all temporary accounts with debit

balances, and debits all temporary accounts with credit balances. It also closes both Income

Summary and Dividends to Retained Earnings. (Hint – R.E.D – temporary accounts are

Revenue, Expense, and Dividends)

The following are the closing entries for PW Audio Supply using assumed amounts from its

year-end adjusted trial balance.

  • Cost of Goods Sold is an expense account with a normal debit balance,
  • Sales Returns and Allowances and Sales Discounts are contra revenue accounts with

normal debit balances

The easiest way to prepare the first two closing entries is to identify the temporary

accounts by their balances and then prepare one entry for the credits and one for the

debits.

Dec.31 Sales Revenue 480,

Income Summary 480,

(To close income statement accounts with credit

balances)

31 Income Summary 450,

Sales Returns and Allowances 12,

Sales Discounts 8,

Cost of Goods Sold 316,

Salaries and Wages Expense 64,

Freight-Out 7,

Advertising Expense 16,

MULTI-STEP INCOME STATEMENT

  • Highlights the components of net income.
  • Three important line items: 1. Gross profit 2. Income from Operations **3. Net Income *ALL OF THESE ITEMS ARE • PART OF NONOPERATING ACTIVITIES AND ARE ADDED OR DEDUCTED FROM INCOME FROM OPERATIONS TO GET INCOME BEFORE TAXES.