Chapter 5: Accounting for Merchandising Operations
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1 Chapter 5: Accounting for Merchandising Operations DO IT! 1 Merchandising Operations and Inventory Systems Indicate whether the following statements are true or false. 1. The primary source of revenue for a merchandising company results from performing services for customers. 2. The operating cycle of a service company is usually shorter than that of a merchandising 3. Sales revenue less cost of goods sold equals gross profit. 4. Ending inventory plus the cost of goods purchased equals cost of goods available for sale. 1. False. The primary source of revenue for a service company results from performing services for customers. 2. True. 3. True. 4. False. Beginning inventory plus the cost of goods purchased equals cost of goods available for sale. Related exercise material: BE5-1, BE5-2, E5-1, and DO IT! 5-1. Review merchandising concepts. Understand the flow of costs in a merchandising DO IT! 2 Purchase Transactions On September 5, De La Hoya Company buys merchandise on account from Junot Diaz Company. The selling price of the goods is $1,500, and the cost to Diaz Company was $800. On September 8, De La Hoya returns defective goods with a selling price of $200. Record the transactions on the books of De La Hoya Company. Sept. 5 Inventory 1,500 Accounts Payable 1,500 (To record goods purchased on account) 8 Accounts Payable 200 Inventory 200 (To record return of defective goods) Purchaser records goods at cost. When goods are returned, purchaser reduces Inventory. Related exercise material: BE5-3, BE5-5, E5-2, E5-3, E5-4, and DO IT! 5-2. D-1
2 D-2 DO IT! DO IT! 3 Sales Transactions On September 5, De La Hoya Company buys merchandise on account from Junot Diaz Company. The selling price of the goods is $1,500, and the cost to Diaz Company was $800. On September 8, De La Hoya returns defective goods with a selling price of $200 and a fair value of $30. Record the transactions on the books of Junot Diaz Company. Seller records both the sale and the cost of goods sold at the time of the sale. When goods are returned, the seller records the return in a contra account, Sales Returns and Allowances, and reduces Accounts Receivable. Any goods returned increase Inventory and reduce Cost of Goods Sold. Defective or damaged inventory is recorded at fair value (scrap value). Related exercise material: BE5-3, BE5-4, E5-3, E5-4, E5-5, and DO IT! 5-3. Sept. 5 Accounts Receivable 1,500 Sales Revenue 1,500 (To record credit sale) 5 Cost of Goods Sold 800 Inventory 800 (To record cost of goods sold on account) 8 Sales Returns and Allowances 200 Accounts Receivable 200 (To record credit granted for receipt of returned goods) 8 Inventory 30 Cost of Goods Sold 30 (To record fair value of goods returned) DO IT! 4 Closing Entries The trial balance of Celine s Sports Wear Shop at December 31 shows Inventory $25,000, Sales Revenue $162,400, Sales Returns and Allowances $4,800, Sales Discounts $3,600, Cost of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out $1,800, Rent Expense $8,800, and Salaries and Wages Expense $22,000. Prepare the closing entries for the above accounts. Close all temporary accounts with credit balances to Income Summary by debiting these accounts. Close all temporary accounts with debit balances, except drawings, to Income Summary by crediting these accounts. The two closing entries are: Dec. 31 Sales Revenue 162,400 Rent Revenue 6,000 Income Summary 168,400 (To close accounts with credit balances) 31 Income Summary 151,000 Cost of Goods Sold 110,000 Sales Returns and Allowances 4,800 Sales Discounts 3,600 Freight-Out 1,800 Rent Expense 8,800 Salaries and Wages Expense 22,000 (To close accounts with debit balances) Related exercise material: BE5-6, BE5-7, E5-6, E5-7, E5-8, and DO IT! 5-4.
3 DO IT! D-3 DO IT! 5 Financial Statement Classifications You are presented with the following list of accounts from the adjusted trial balance for merchandiser Gorman Company. Indicate in which financial statement and under what classification each of the following would be reported. Accounts Payable Accounts Receivable Accumulated Depreciation Buildings Accumulated Depreciation Advertising Expense Buildings Cash Depreciation Expense Freight-Out Gain on Disposal of Plant Assets Insurance Expense Interest Expense Interest Payable Inventory Land Notes Payable (due in 3 years) Owner s Capital (beginning balance) Owner s Drawings Property Taxes Payable Salaries and Wages Expense Salaries and Wages Payable Sales Returns and Allowances Sales Revenue Utilities Expense Financial Account Statement Classification Accounts Payable Balance sheet Current liabilities Accounts Receivable Balance sheet Current assets Accumulated Depreciation Balance sheet Property, plant, and Buildings Accumulated Depreciation Balance sheet Property, plant, and Advertising Expense Income statement Operating expenses Buildings Balance sheet Property, plant, and Cash Balance sheet Current assets Depreciation Expense Income statement Operating expenses Balance sheet Property, plant, and Freight-Out Income statement Operating expenses Gain on Disposal of Plant Income statement Other revenues and Assets gains Insurance Expense Income statement Operating expenses Interest Expense Income statement Other expenses and losses Interest Payable Balance sheet Current liabilities Inventory Balance sheet Current assets Land Balance sheet Property, plant, and Notes Payable (due in 3 years) Balance sheet Long-term liabilities Owner s Capital Owner s equity Beginning balance statement Owner s Drawings Owner s equity Deduction section statement Property Taxes Payable Balance sheet Current liabilities Salaries and Wages Expense Income statement Operating expenses Salaries and Wages Payable Balance sheet Current liabilities Sales Returns and Allowances Income statement Sales Sales Revenue Income statement Sales Utilities Expense Income statement Operating expenses Review the major sections of the income statement: sales, cost of goods sold, operating expenses, other revenues and gains, and other expenses and losses. Add net income and investments to beginning capital and deduct drawings to arrive at ending capital in the owner s equity statement. Review the major sections of the balance sheet, income statement, and owner s equity statement. Related exercise material: BE5-8, BE5-9, E5-9, E5-10, E5-12, E5-13, E5-14, and DO IT! 5-5.
4 D-4 DO IT! DO IT! Exercises Answer general questions about merchandisers. (LO 1) Record transactions of purchasing (LO 2) Record transactions of selling (LO 3) Prepare closing entries for a merchandising (LO 4) Classify financial statement accounts. (LO 5) DO IT! 5-1 Indicate whether the following statements are true or false. 1. A merchandising company reports gross profit but a service company does not. 2. Under a periodic inventory system, a company determines the cost of goods sold each time a sale occurs. 3. A service company is likely to use accounts receivable but a merchandising company is not likely to do so. 4. Under a periodic inventory system, the cost of goods on hand at the beginning of the accounting period plus the cost of goods purchased less the cost of goods on hand at the end of the accounting period equals cost of goods sold. DO IT! 5-2 On October 5, Wang Company buys merchandise on account from Davis Company. The selling price of the goods is $4,800, and the cost to Davis Company is $3,100. On October 8, Wang returns defective goods with a selling price of $650 and a fair value of $100. Record the transactions on the books of Wang Company. DO IT! 5-3 Assume information similar to that in DO IT! 5-2: On October 5, Wang Company buys merchandise on account from Davis Company. The selling price of the goods is $4,800, and the cost to Davis Company is $3,100. On October 8, Wang returns defective goods with a selling price of $650 and a fair value of $100. Record the transactions on the books of Davis Company. DO IT! 5-4 The trial balance of Beads and Bangles at December 31 shows Inventory $21,000, Sales Revenue $156,000, Sales Returns and Allowances $4,000, Sales Discounts $3,000, Cost of Goods Sold $92,400, Interest Revenue $5,000, Freight-Out $1,800, Utilities Expense $7,700, and Salaries and Wages Expense $19,500. Prepare the closing entries for Beads and Bangles for these accounts. DO IT! 5-5 Pfannes Company is preparing its multiple-step income statement, owner s equity statement, and classified balance sheet. Using the column headings Account, Financial Statement, and Classification, indicate in which financial statement and under what classification each of the following would be reported. Account Financial Statement Classification Accounts Payable Accounts Receivable Accumulated Depreciation Buildings Cash Casualty Loss From Vandalism Cost of Goods Sold Depreciation Expense Freight-Out Insurance Expense Interest Payable Inventory Land Notes Payable (due in 5 years) Owner s Capital (beginning balance) Owner s Drawings Property Taxes Payable Salaries and Wages Expense Salaries and Wages Payable Sales Returns and Allowances Sales Revenue Unearned Rent Revenue Utilities Expense
5 DO IT! D-5 CONTINUING PROBLEM COOKIE CREATIONS: AN ENTREPRENEURIAL JOURNEY (Note: This is a continuation of the Cookie Creations problem from Chapters 1 through 4.) CC5 Because Natalie has had such a successful first few months, she is considering other opportunities to develop her business. One opportunity is the sale of fine European mixers. The owner of Kzinski Supply Company has approached Natalie to become the exclusive U.S. distributor of these fine mixers. The current cost of a mixer is approximately $525 (U.S.), and Natalie would sell each one for $1,050. Natalie comes to you for advice on how to account for these mixers. Go to the book s companion website, to see the completion of this problem. leungchopan/ Shutterstock
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