After studying this chapter, you should be able to: financial statements of service and merchandising businesses.

Transcription

1 1 6 Accounting for Merchandising Businesses 1

2 2 After studying this chapter, you should be able to: 1. Distinguish between the activities and financial statements of service and merchandising businesses. 2. Describe and illustrate the financial statements of a merchandising business. 2

3 3 After studying this chapter, you should be able to: 3. Describe and illustrate the accounting for merchandise transactions including: sale of merchandise purchase of merchandise transportation costs, sales taxes, trade discounts dual nature of merchandising transactions. 4. Describe the adjusting and closing process for a merchandising business. 3

4 4 6-1 Objective 1 Distinguish between the activities and financial statements of service and merchandising businesses. 4

5 5 6-1 Service Business Fees earned Operating expenses Net income $XXX XXX $XXX 5

6 6 6-1 Merchandising Business Sales Cost of Merchandise Sold Gross Profit Operating Expenses Net Income $XXX XXX $XXX XXX $XXX 6

7 7 6-1 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold. 7

8 8 6-1 The cost of merchandise sold is subtracted from sales to arrive at gross profit. This amount is called gross profit because it is the profit before deducting the operating expenses. 8

9 9 6-1 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory. 9

10 Example Exercise 6-1 On August 25, Gallatin Repair Service extended an offer of $125,000 During the for current land that year, had merchandise been priced for is sale sold at for $150,000. $250,000 On September cash and for 3, Gallatin $975,000 Repair on account. Service accepted The cost the of seller s the counteroffer merchandise of sold $137,000. is $735,000. On October What 20, is the land amount was assessed of the at gross a value profit? $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service s records? Follow My Example 6-1 The gross profit is $490,000 ($250,000 + $975,000 Follow $735,000). My Example 1-1 $137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service. 10 For Practice: PE 6-1A, PE 6-1B 31

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12 Objective 2 Describe and illustrate the financial statements of a merchandising business. 12

13 13 Multiple-Step Income Statement 6-2 The multiple-step income statement contains several sections, subsections, and subtotals. 13

14 The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account. 14

15 Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. 15

16 Sales discounts are granted by the seller to customers for early payment of amounts owed. 16

17 Net sales is determined by subtracting sales returns and allowances and sales discounts from sales. 17

18 18 Multiple-Step Income Statement 6-2 NetSolutions Income Statement For the Year Ended December 31, 2009 Revenue from sales: Sales $720,185 Less: Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930 Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950 (Continued) 18

19 19 Operating expenses: Selling expenses: Sales salaries expense $53,430 Advertising expense 10,860 Depr. Expense store equipment 3,100 Delivery Expense 2,800 Miscellaneous selling expense 630 Total selling expenses $ 70,820 Administrative expenses: Office salaries expense $21,020 Rent expense 8,100 Depr. expense office equipment 2,490 Insurance expense 1,910 Office supplies expense 610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 (Continued) Income from operations $ 77,

20 Other income and expenses: Rent revenue $ 600 Interest expense (2,440) (1,840) Net income $75,400 (Concluded) 20

21 Cost of merchandise sold was discussed earlier. It is the cost of the merchandise sold to customers. 21

22 As we discussed in Slide 16, sellers may offer customers sales discounts for early payment of their bills. From the buyer s perspective, such discounts are referred to as purchase discounts. 22

23 The buyer may return merchandise to the seller (a purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (a purchase allowance). 23

24 24 Cost of Merchandise Sold

25 25 Single-Step Income Statement An alternative form of income statement is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues

26 26 Exhibit 3: Single-Step Income Statement 6-2 NetSolutions Income Statement For the Year Ended December 31, 2009 Revenues: Net sales $708,255 Rent revenue 600 Total revenues $708,855 Expenses: Cost of merchandise sold $525,305 Selling expenses 70,820 Administrative expenses 34,890 Interest expense 2,440 Total expenses 633,455 Net income $ 75,400 26

27 27 Exhibit 4: Statement of Owner s Equity 6-2 NetSolutions Statement of Owner s Equity For the Year Ended December 31, 2009 Chris Clark, capital, 1/1/09 $153,800 Net income for year $75,400 Less withdrawals 18,000 Increase in owner s equity 57,400 Chris Clark, capital, 12/31/09 $211,200 27

28 28 Exhibit 5: Report Form of Balance Sheet 6-2 NetSolutions Balance Sheet December 31, 2009 Assets Current assets: Cash $52,950 Accounts receivable 91,080 Merchandise inventory 62,150 Office supplies 480 Prepaid insurance 2,650 Total current assets $209,310 (Continued) 28

29 29 Exhibit 5: Report Form of Balance Sheet 6-2 Property, plant, and equip.: Land $20,000 Store equipment $27,100 Less accumulated depreciation 5,700 21,400 Office equipment $15,570 Less accumulated depreciation 4,720 10,850 Total property, plant, and equipment 52,250 Total assets $261,560 (Continued) 29

30 30 Exhibit 5: Report Form of Balance Sheet 6-2 Liabilities Current liabilities: Accounts payable $22,420 Note payable (current portion) 5,000 Salaries payable 1,140 Unearned rent 1,800 Total current liabilities $ 30,360 Long-term liabilities: Note payable (final pmt. due 2017) 20,000 Total liabilities $ 50,360 Owner s Equity Chris Clark, capital 211,200 Total liabilities and owner s equity $261,560 (Concluded) 30

31 Example Exercise 6-2 Based upon the following data, determine the cost of merchandise sold for May. Use the format seen in Exhibit 2. Merchandise Inventory, May 1 $121,200 Merchandise Inventory, May ,000 Purchases 985,000 Purchases Returns and Allowances 23,500 Purchases Discounts 21,000 Transportation In 11,300 31

32 Follow My Example 6-2 Merchandise Inventory, May 1 $ 121,200 Purchases $985,000 Less: Purchases returns and allowances $23,500 Purchases discounts 21,000 44,500 Net purchases $940,500 Add transportation in 11,300 Cost of merchandise purchased 951,800 Merchandise available for sale $1,073,000 Less merchandise inventory, May ,000 Cost of merchandise sold $ 931,000 For Practice: PE 6-2A, PE 6-2B 32

33 33 Objective 3 Describe and illustrate the accounting for merchandise transactions including: sale of merchandise; purchase of merchandise; transportation costs, sales taxes, trade discounts; dual nature of merchandise transactions. 33

34 34 Cash Sales On January 3, NetSolutions sold $1,800 of merchandise for cash. 34

35 35 Cash Sales (continued) Using a perpetual inventory, the $1,200 cost of the inventory must be recorded. 35

36 36 Credit Card Sales At the end of the month, $48 was sent to pay the service charge on credit card sales. 36

37 37 Sales on Account Using a Perpetual Inventory Jan. 12 Accounts Receivable Sims Co Sales Invoice No Cost of Merchandise Sold Merchandise Inventory Cost of merchandise sold on Invoice No On January 12, NetSolutions sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $

38 38 Sales Discounts The terms for when payments for merchandise are to be made, agreed on by the buyer and the seller, are called credit terms. If buyer is allowed an amount of time to pay, it is known as the credit period. 38

39 39 Credit Terms If invoice is paid within 10 days of invoice date Invoice for $1,500 Terms: 2/10, n/30 $1,470 paid ($1,500 less a 2% discount) 39

40 40 Invoice for $1,500 Terms: 2/10, n/30 If invoice is NOT paid within 10 days of invoice date Full amount ($1,500) is due within 30 days of invoice date 40

41 41 Sales Discounts Jan. 22 Cash Sales Discounts Accounts Receivable Omega Tech Collection of Invoice No , less 2% discount. On January 22, NetSolutions receives the amount due, less the 2 percent discount. 41

42 42 Jan. 13 Sales Returns and Allowances Accounts Receivable Krier Co Credit Memo No Merchandise Inventory Cost of Goods Sold Cost of merchandise returned. Credit Memo No. 32. On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $

43 Example Exercise Journalize the following merchandise transactions: a. Sold merchandise on account, $7,500 with terms of 2/10, n/30. The cost of the merchandise sold was $5,625. b. Received payment less the discount. 43

44 44 Follow My Example a. Accounts Receivable 7,500 Sales 7,500 Cost of Merchandise Sold 5,625 Merchandise Inventory 5,625 b. Cash 7,350 Sales Discounts 150 Accounts Receivable 7,500 For Practice: PE A, PE B 44

45 45 Purchase Transactions (Perpetual Inventory) Date 2009 Description JOURNAL Post. Ref. Jan. 3 Merchandise Inventory Dr Cr. PAGE 24 Cash Purchased inventory from Bowen Co. On January 3, NetSolutions purchased merchandise for cash from Alden Company, $2,

46 46 Jan. 4 Merchandise Inventory Accounts Payable Thomas Corp Purchased inventory on account. On January 4, NetSolutions purchased merchandise on account from Thomas Corporation, $9,

47 47 Purchases Discounts Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. 47

48 48 NetSolutions borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay the invoice within the discount period? YES Discount of 2% on $3,000 $60.00 Interest for 20 days at the rate of 6% on $2, Savings from borrowing $

49 49 Purchase Transactions (Perpetual Inventory) Mar. 12 Merchandise Inventory Accounts Payable Alpha Tech Purchased inventory on account. On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,

50 50 Mar. 22 Accounts Payable Alpha Technol Cash Merchandise Inventory Paid Alpha Technologies for March 12 purchase. If payment is made by March 22, NetSolutions records the discount as a reduction in cost. Notice that Merchandise Inventory is credited because NetSolutions maintains a perpetual inventory. 50

51 51 Apr. 11 Accounts Payable Alpha Technol Cash Paid Alpha Technologies for March 12 purchase. If NetSolutions does not pay the invoice until April 11, it would pay the full amount. 51

52 52 Purchases Return A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. 52

53 53 Purchases Allowance When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance. 53

54 54 NetSolutions receives the delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 (also called a debit memo) is issued to Maxim Systems. 54

55 55 Mar. 7 Accounts Payable Maxim Systems Merchandise Inventory Debit Memo No. 18 On March 7, NetSolutions records the return of the merchandise indicated in Debit Memorandum No

56 56 On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30. May 2 Merchandise Inventory Accounts Payable Delta Data Purchased merchandise. 56

57 57 On May 4, NetSolutions returns $3,000 of the merchandise. 4 Accounts Payable Delta Data Link Merchandise Inventory Returned portion of the merchandise purchased. 57

58 58 On May 12, NetSolutions pays the amount due, $1,960 [$2,000 ($5,000 $3,000) x 2%)]. 12 Accounts Payable Delta Data Links Cash Merchandise Inventory Paid invoice [($5,000 $3,000) x 2% = $40; $2,000 $40 = $1,960] 58

59 59 Example Exercise 6-4 Rofles Company purchased merchandise on account from a supplier for $11,500, terms 2/10, n/30. Rofles Company returned $3,000 of the merchandise and received full credit. a. If Rofles Company pays the invoice within the discount period, what is the amount of cash required for the payment? b. Under a perpetual inventory system, what account is credited by Rofles Company to record the return? 59

60 60 Follow My Example 6-4 a. $8,330. Purchase of $11,500 less the return of $3,000 less the discount of $170 [($11,500 $3,000) x 2%]. b. Merchandise Inventory. For Practice: PE 6-4A, PE 6-4B 60

61 61 Transportation Costs If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, it is said to be FOB (free on board) shipping point. 61

62 62 June 10 Merchandise Inventory Accounts Payable Magna Data Purchased merchandise, terms FOB shipping point. 10 Merchandise Inventory Cash Paid shipping cost. On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50. 62

63 63 Transportation Costs If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination. 63

64 64 FOB Destination On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $

65 65 June 15 Accounts Receivable Kranz Co Sales Sold merchandise, terms FOB destination. 15 Cost of Merchandise Sold Merchandise Inventory Record cost of merchandise sold to Kranz Company. 65

66 66 June 15 Delivery Expense Cash Paid shipping cost on merchandise sold. On June 15, NetSolutions pays the transportation cost of $40. 66

67 67 FOB Shipping Point On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. The cost of the merchandise sold is $

68 68 June 20 Accounts Receivable Planter Co Sales Sold merchandise, terms FOB shipping point. 20 Cost of Merchandise Sold Merchandise Inventory Record cost of merchandise sold to Planter Company. 68

69 69 June 20 Accounts Receivable Planter Co Cash Prepaid shipping cost on merchandise sold. NetSolutions pays the transportation cost of $45 and adds it to the invoice. 69

70 70 Example Exercise 6-5 Determine the amount to be paid in full settlement of each of invoices (a) and (b), assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. Transportation Returns and Merchandise Paid by Seller Transportation Terms Allowances a. $4,500 $200 FOB shipping point, $800 1/10, n/30 b. $5,000 $60 FOB destination, $2,500 2/10, n/30 70

71 71 Follow My Example 6-5 a. $3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 $800) x 1%] plus $200 of shipping. b. $2,450. Purchase of $5,000 less return of $2,500 less the discount of $50 [($5,000 $2,500) x 2%]. For Practice: PE 6-5A, PE 6-5B 71

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73 73 Sales Taxes Aug. 12 Accounts Receivable Lemon Co Sales Sales Taxes Payable 6 00 Invoice No. 339 On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax

74 74 Sept. 15 Sales Tax Payable Cash Payment for sales taxes collected during August. On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected

75 75 Trade Discounts When wholesalers offer special discounts to certain classes of buyers that order large quantities, these discounts are called trade discounts. 75

76 76 Dual Nature of Merchandise Transactions Each merchandising transaction affects a buyer and a seller. In the following illustrations, we show how the same transactions would be recorded by both the seller and the buyer. July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,

77 77 Scully Company (Seller) Accounts Receivable Burton Co. 7,500 Sales 7,500 Cost of Merchandise Sold 4,500 Merchandise Inventory 4,500 Burton Company (Buyer) Merchandise Inventory. 7,500 Accounts Payable Scully Co. 7,

78 78 July 2 Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company. 78

79 79 No entry. Scully Company (Seller) Burton Company (Buyer) Merchandise Inventory 150 Cash

80 80 July 5 Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,

81 81 Scully Company (Seller) Accounts Receivable Burton Co. 5,000 Sales 5,000 Cost of Merchandise Sold 3,500 Merchandise Inventory 3,500 Burton Company (Buyer) Merchandise Inventory. 5,000 Accounts Payable Scully Co. 5,

82 82 July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5. 82

83 83 Scully Company (Seller) Delivery Expense 250 Cash 250 No entry. Burton Company (Buyer) 18 83

84 84 July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $

85 85 Scully Company (Seller) Sales Returns and Allowances 1,000 Accounts Receivable Burton Co. 1,000 Merchandise Inventory 700 Cost of Merchandise Sold 700 Burton Company (Buyer) Accounts Payable Scully Co. 1,000 Merchandise Inventory 1,

86 86 July 15. Scully Company received payment from Burton Company for purchase of July 5. 86

87 87 Scully Company (Seller) Cash 4,000 Accounts Receivable Burton Co. 4,000 Burton Company (Buyer) Accounts Payable Scully Co. 4,000 Cash 4,

88 88 July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,

89 89 Scully Company (Seller) Accounts Receivable Burton Co. 12,000 Sales 12,000 Accounts Receivable Burton Co. 500 Cash 500 Cost of Merchandise Sold 7,200 Merchandise Inventory 7,200 Burton Company (Buyer) Merchandise Inventory 12,500 Accounts Payable Scully Co. 12,

90 90 July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000). 90

91 91 Scully Company (Seller) Cash 12,260 Sales Discounts 240 Accounts Receivable Burton Co. 12,500 Burton Company (Buyer) Accounts Payable Scully Co. 12,500 Merchandise Inventory 240 Cash 12,

92 Example Exercise 6-6 Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms 2/15, n/30. The cost of the merchandise sold is $6,900. Sievert Co. issued a credit memorandum for $900 for merchandise returned and later received the amount due within the discount period. The cost of the merchandise returned was $540. Journalize Sievert Co. s and Bray Co. s entries for the receipt of the check for the amount due from Bray Co. 92

93 93 Follow My Example 6-6 Sievert Company Journal Entries: Cash ($11,500 $900 $212) 10,388 Sales Discounts [($11,500 $900) x 2%] 212 Accounts Receivable Bray Co. ($11,500 $900) 10,600 Bray Company Journal Entries: Accounts Payable Sievert Co. ($11,500 $900) 10,600 Merchandise Inventory [($11,500 $900) x 2%] 212 Cash ($11,500 $900 $212) 10,388 For Practice: PE 6-6A, PE 6-6B 93

94 Objective 4 Describe the adjusting and closing process for a merchandising business. 94

95 95 Inventory Shrinkage 6-4 Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory. If the balance of the Merchandise Inventory account is larger than the total amount of merchandise count, the difference is often called inventory shrinkage or inventory shortage. 95

96 NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, The physical count reveals that only $62,150 is actually available. 96

97 Adjusting Entry Dec. 31 Cost of Merchandise Sold Merchandise Inventory Inventory shrinkage (63,950 $62,150). Inventory records $63,950 Inventory count 62,150 Inventory shortage $ 1,

98 98 Step 1: Closing Entries 6-4 Close the temporary accounts with credit balances to Income Summary. Date Item PR Debit Credit 2009 Closing Entries Dec. 31 Sales Rent Revenue Income Summary

99 99 Step 2: Closing Entries 6-4 Close the temporary accounts with debit balances to Income Summary. 99

100 100 Step 2: Closing Entries Income Summary Sales Returns and Allow Sales Discounts Cost of Merchandise Sold Sales Salaries Expense Advertising Expense Depr. Exp. Store Equip Delivery Expense Misc. Selling Expense Office Salaries Expense Rent Expense Depr. Exp. Office Equip Insurance Expense Office Supplies Expense Misc. Administrative Exp Interest Expense

101 101 Step 3: Closing Entries 6-4 Close Income Summary (the balance represents a $75,400 profit for NetSolutions in 2009) to Chris Clark, Capital. 31 Income Summary Chris Clark, Capital

102 102 Step 4: Closing Entries 6-4 Close Chris Clark, Drawing to Chris Clark, Capital. 31 Chris Clark, Capital Chris Clark, Drawing

103 103 Example Exercise 6-7 Pulmonary Company s perpetual inventory records indicate that $382,800 of merchandise should be on hand on March 31, The physical inventory indicates that $371,250 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Pulmonary Company for the year ended March 31, Follow My Example 6-7 Mar. 31 Cost of Merchandise Sold ($382,800 ($371,250) 11,550 Merchandise Inventory 11,550 For Practice: PE 6-7A, PE 6-7B

104 104 Financial Analysis 6-4 The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. Ratio of Net Sales to Assets = Net sales Average total assets 104

105 Ratio of Net Sales to Assets Sears J. C. Penney Total revenue (net sales) $19,701* $18,424* Total assets: Beginning of year $6,074 $18,300 End of year $8,651 $14,127 Average $7,362.5 $16,213.5 Ratio of net sales to assets 2.68 to to 1 *in millions 105

106 106 Interpretation 6-4 Based on these ratios, Sears appears better than J. C. Penney in utilizing its assets to generate sales. 106