Transcript Document

Chapter 5
Accounting for
Merchandising Businesses
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
1
Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
Distinguish the activities of a service business from those
of a merchandising business.
Describe and illustrate the financial statements of a
merchandising business.
Describe the accounting for the sale of merchandise.
Describe the accounting for the purchase of merchandise.
Describe the accounting for transportation costs, sales
taxes, and trade discounts.
Illustrate the dual nature of merchandising transactions.
Prepare a chart of accounts for a merchandising business.
Describe the accounting cycle for a merchandising
business.
Compute the ratio of net sales to assets as a measure of
how effectively a business is using its assets.
2
Nature of Businesses
Service Business
Fees earned
$XXX
Operating expenses
–XXX
Net income
$XXX
Merchandising Business
Sales
Cost of Merchandise Sold
Gross Profit
Operating Expenses
Net Income
$XXX
–XXX
$XXX
–XXX
$XXX
3
Collection
Activity
Purchasing
Activity
Cash
Accounts
Receivable
Raw Materials
Products
Sales
Activity
Production
Activity
4
Multiple-Step Income Statement
NetSolutions
Income Statement For the Year Ended
December 31, 2007
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
5
Operating expenses:
Selling expenses:
Sales salaries expense
$56,230
Advertising expense
10,860
Depr. Expense–store equipment 3,100
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
Income from operations
$ 77,240
Other income and expenses:
Rent revenue
$ 600
Interest expense
(2,440)
(1,840)
Net income
$75,400
Continued
6
Periodic vs. Perpetual Methods of Accounting
Periodic Method
• A method of determining the cost of merchandise sold and the
amount of merchandise on hand
• Under this method, the inventory records do not show the
amount available for sale or the amount sold during the period
Perpetual Method
• Under this method, each purchase and sale of merchandise is
recorded in the inventory and the cost of merchandise sold
accounts.
• The amount of merchandise available for sale and the amount
sold are continuously disclosed in the inventory records.
7
Cost of Merchandise Purchased
Purchases
Less: Purchase returns and
allowances
$9,100
Purchase discounts
2,525
Net purchases
Add transportation-in
Cost of merchandise purchased
$521,980
11,625
$510,355
17,400
$527,755
8
Cost of Merchandise Sold
Merchandise inventory, 1/1/07
$ 59,700
Purchases
$521,980
Less: Purchase returns and
allowances
$9,100
Purchase discounts
2,525
11,625
Net purchases
$510,355
Add transportation-in
17,400
Cost of merchandise purchased
527,755
Merchandise available for sale
$587,455
Less merchandise inventory, 12/31/07
62,150
Cost of merchandise sold
$525,305
9
Single-Step Income Statement for a
Merchandising Business
NetSolutions
Income Statement
For the Year Ended December 31, 2007
Revenues:
Net sales
Rent revenue
Total revenues
Expenses:
Cost of merchandise sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
Net income
$708,255
600
$708,855
$525,305
70,820
34,890
2,440
633,455
$ 75,400
10
Retained Earnings Statement
NetSolutions
Retained Earnings Statement
For the Year Ended December 31, 2007
Retained earnings, 1/1/07
Net income for year
Less dividends
Increase in owner’s equity
Retained earnings, 12/31/07
$128800
$75,400
18,000
57,400
$186,200
11
NetSolutions - Balance Sheet- December 31, 2007
Assets
Current assets:
Cash
Accounts receivable
Merchandise inventory
Office supplies
Prepaid insurance
Total current assets
Property, plant, and equipment:
Land
Store equipment
Less accumulated
depreciation
Office equipment
Less accumulated
depreciation
Total property, plant, and
equipment
Total assets
$52,950
91,080
62,150
480
2,650
$209,310
$20,000
$27,100
5,700
$15,570
21,400
4,720
10,850
52,250
$261,560 12
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 (due 2017)
20,000
Total liabilities
$ 50,360
Stockholders’ Equity
Capital stock
$ 25,000
Retained earnings
186,200 211,200
Total liab. and stockholders’ equity
$261,560
13
Sales Transactions
14
Cash Sales
JOURNAL
Description
Date
2007
1 Jan. 3 Cash
2
3
4
PAGE 26
Post.
Ref.
Dr
Cr.
1 800 00
Sales
1 800 00
To record cash sales.
5
On January 3, a firm sold $1,800
of merchandise for cash.
15
Cash Sales
6
3 Cost of Merchandise Sold
7
Merchandise Inventory
8
9
1 200 00
1 200 00
To record the cost of
merchandise sold.
10
Using a perpetual inventory, the inventory
cost of $1,200 must be recorded.
16
Cash Sales
JOURNAL
Description
Date
2007
1 Jan. 31 Credit Card Expense
2
3
4
5
PAGE 28
Post.
Ref.
Dr
Cr.
48 00
Cash
48 00
To record service charges
on credit card sales for the
month.
At
Credit
the end
cardofsales
the month,
(MasterCard
$48 was
or
sent
Visa)toare
cover
recorded
this service
as cashcharge.
sales.
17
Sales on Account
Jan. 12 Accounts Receivable—Sims Co.
510 00
Sales
510 00
Invoice No. 7172.
12 Cost of Merchandise Sold
Merchandise Inventory
280 00
280 00
Cost of merchandise sold
on Invoice No. 7172.
On January 12, a firm sold Sims Company
merchandise on account, $510. The cost of
the merchandise to the seller was $280.
18
Sales Discounts
The terms for when payments for
merchandise are to be made are
called credit terms.
If buyer is allowed an
amount of time to pay, it is
known as the credit period.
19
Sales Discounts
Credit Terms
If invoice is
paid within
10 days of
invoice date
$1,470 paid (less
2% as a cash
discount)
Invoice for
$1,500
Terms:
2/10, n/30
If invoice is
NOT paid
within 10
days of
invoice date
$1,500 PAID
20
Sales Discounts
Jan. 22 Cash
1 470 00
Sales Discounts
Accounts Receivable—Sims Co.
30 00
1 500 00
Collection of Invoice
No. 7172, less discount.
On January 22, the firm receives $1,470
from Sims Co. which is the amount due of
$1,500 less a 2 percent discount.
21
Sales Returns and Allowances
Merchandise that is returned to the
vendor is referred to as a sales return.
If there is a defect in the product or the
wrong item was shipped, the seller
may reduce the initial price at which
the goods were sold. This is known as
a sales allowance.
22
Sales Returns and Allowances
Jan. 13 Sales Returns and Allowances
225 00
Accounts Receivable—Krier Co.
225 00
Credit Memo No. 32.
13 Merchandise Inventory
Cost of Merchandise Sold
Cost of merchandise
returned—Credit Memo 32.
140 00
140 00
On January 13, issued Credit Memo 32 to Krier
Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.
23
Purchase
Transactions
24
Purchase Transactions
Description
Date
2007
1 Jan. 3 Merchandise Inventory
2
3
4
Post.
Ref.
Dr
Cr.
2 510 00
Cash
2 510 00
Purchased inventory from
Bowen Co.
5
On January 13, Purchased merchandise
for cash from Alden Company, $2,510.
25
Purchase Discounts
What’s the last
day the invoice
can be paid?
Alpha Technologies
issues an invoice for
$3,000 to
NetSolutions dated
March 12, with terms
2/10, n/30.
26
Purchase Discounts
The full amount is
due on April 11.
Let’s do a simple
calculation.
Invoice period
Days in March 31
Date of invoice 12
Remaining days
April
30
19
11
27
Purchase Discounts
We can borrow at an annual interest rate of
6%. Should we borrow the to pay the
invoice within the discount period?
$60 discount
(2% x
$3,000)?
28
Purchase Discounts
Let’s see… Interest on the
amount due of $3,000 less
the 2 percent…
Discount
$60.00
Interest for 20 days
at the rate of 6%
on $2,940
–9.80
Savings from
borrowing
$50.20
29
Purchase Discounts
Looks like we should take
advantage of the discount even if we
have to borrow the money.
Discount
$60.00
Interest for 20 days
at the rate of 6%
on $2,940
–9.80
Savings from
borrowing
$50.20
30
Purchase Discounts
JOURNAL
Date
Description
2007
1 Mar. 12 Merchandise Inventory
2
3
4
PAGE 27
Post.
Ref.
Dr
Cr.
3 000 00
Accounts Payable—Alpha
Technologies
3 000 00
5
On March 12, NetSolutions purchased
merchandise on account from Alpha
Technologies, $3,000.
31
Purchase Discounts
JOURNAL
Description
Date
2007
1 Mar. 22 Accounts Payable—Alpha Technol.
2
Cash
3
4
Merchandise Inventory
PAGE 27
Post.
Ref.
Dr
Cr.
3 000 00
2 940 00
60 00
5
If payment is made by March 22 NetSolutions
records the discount as a reduction in cost.
32
Purchase Discounts
JOURNAL
Description
Date
2007
1 Apr. 11 Accounts Payable—Alpha Technol.
2
Cash
PAGE 27
Post.
Ref.
Dr
Cr.
3 000 00
3 000 00
3
4
5
If NetSolutions does not pay the invoice until
April 11, it would pay the full amount.
33
Purchases Returns and Allowances
A purchases return involves actually
returning merchandise that is
damaged or does not meet the
specifications of the order.
When the defective or incorrect
merchandise is kept by the buyer and
the vendor makes a price adjustment,
this is a purchases allowance.
34
Purchases Returns and Allowances
You sent me the wrong interface cards.
We’ll send a debit memorandum with the
returned items.
NetSolutions received the
delivery from Maxim
Systems and determined that
$900 of the items were not
the merchandise ordered.
Debit memorandum #18 is
issued to Maxim Systems.
35
Purchases Returns and Allowances
Mar. 7 Accounts Payable—Maxim Systems
Merchandise Inventory
900 00
900 00
Debit Memo No. 18
36
Purchases Returns and Allowances
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
5 000 00
5 000 00
Purchased merchandise.
37
Purchases Returns and Allowances
On May 4, NetSolutions returns
$3,000 of the merchandise.
May 4 Accounts Payable—Delta Data Links
Merchandise Inventory
3 000 00
3 000 00
Returned portion of
merchandise purchased.
38
Purchases Returns and Allowances
On May 12, NetSolutions pays the amount due.
May 12 Accounts Payable—Delta Data Links
Cash
Merchandise Inventory
Paid invoice.
2 000 00
($5,000 –
$3,000) x
2%
1 960 00
40 00
39
Transportation Costs
FOB Shipping Point
Buyer pays freight costs and debits
Merchandise Inventory
Fruit Express
Title passes to buyer as
shipment leaves
shipping point.
40
FOB Shipping Point
June 10 Merchandise Inventory
Accounts Payable—Magna Data
Purchased merchandise, terms
FOB shipping point.
900 00
10 Merchandise Inventory
Cash
Paid shipping cost on
merchandise purchased.
50 00
900 00
On June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50.
50 00
41
FOB Destination
Seller pays freight costs and debits
Transportation Out
Fruit Express
Title passes to buyer
upon arrival at
destination.
42
FOB Destination
June 15 Accounts Receivable—Kranz Co.
Sales
Sold merchandise, terms FOB
destination.
15 Cost of Merchandise Sold
Merchandise Inventory
700 00
700 00
480 00
480 00
Cost of sale of Kranz Co .
On June 15, NetSolutions sells merchandise to Kranz
Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480.
NetSolutions pays the transportation cost of $40. 43
FOB Destination
June 15 Transportation Out
Cash
Paid shipping cost on
merchandise sold.
40 00
40 00
On June 15, NetSolutions sells merchandise to Kranz
Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480.
NetSolutions pays the transportation cost of $40. 44
Sales Taxes
Aug. 12 Accounts Receivable—Lemon Co.
106 00
Sales
Sales Taxes Payable
Invoice No. 339
100 00
6 00
On August 12, merchandise is sold on
account to Lemon Company, $100. The
state has a 6% sales tax.
45
Sales Taxes
Sept.15 Sales Tax Payable
Cash
Payment for sales taxes
collected during August.
2 900 00
2 900 00
On September 15, the seller sends in a
payment of $2,900 to the taxing unit for
the August taxes collected.
46
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co.
Sales
7,500
Cost of Merchandise Sold
Merchandise Inventory
4,500
7,500
4,500
Burton Company (Buyer)
Merchandise Inventory.
Accounts Payable—Scully Co.
7,500
7,500
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 $4,500.
47
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
No entry.
Burton Company (Buyer)
Merchandise Inventory
Cash
150
150
July 2. Burton Company paid transportation charges of
$150 on July 1 purchase from Scully Company.
48
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Accounts Receivable—Burton Co.
Sales
5,000
Cost of Merchandise Sold
Merchandise Inventory
3,500
5,000
3,500
Burton Company (Buyer)
Merchandise Inventory.
Accounts Payable—Scully Co.
5,000
5,000
July 5. Scully Company sold merchandise on account
to Burton Co., $5,000, terms FOB shipping point,
n/30. The cost of the merchandise sold was $3,500. 49
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Transportation Out
Cash
250
250
Burton Company (Buyer)
No entry.
July 7. Scully Company paid transportation costs
of $250 for delivery of merchandise sold to
Burton Company on July 5.
50
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Sales Returns and Allowances
Accounts Receivable—Burton Co.
Merchandise Inventory
Cost of Merchandise Sold
1,000
1,000
700
700
Burton Company (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
1,000
1,000
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 $700.
51
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Cash
Accounts Receivable—Burton Co.
4,000
4,000
Burton Company (Buyer)
Accounts Payable—Scully Co.
Cash
4,000
4,000
July 15. Scully Company received payment
from Burton Company for purchase of July 5.
52
Illustration of Accounting for
Merchandise Transactions
Continued (Seller)
Cost of Merchandise Sold
Merchandise Inventory
7,200
7,200
Burton Company (Buyer)
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 $7,200.
53
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Cost of Merchandise Sold
Merchandise Inventory
7,200
7,200
Burton Company (Buyer)
Merchandise Inventory
Accounts Payable—Scully Co.
12,500
12,500
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 $7,200.
54
Illustration of Accounting for
Merchandise Transactions
Scully Company (Seller)
Cash
Sales Discounts
Accounts Receivable—Burton Co.
12,260
240
12,500
Burton Company (Buyer)
Accounts Payable—Scully Co.
Merchandise Inventory
Cash
12,500
July 28. Scully Company received payment
from Burton Company for purchase of July
18, less discount (2% x $12,000).
240
12,260
55
NetSolutions
Chart of Accounts
Balance Sheet Accounts
110
112
115
116
117
120
123
124
125
126
100 Assets
Cash
Accounts Receivable
Merchandise Inventory
Office Supplies
Prepaid Insurance
Land
Store Equipment
Accumulated Depreciation—
Store Equipment
Office Equipment
Accumulated Depreciation—
Office Equipment
210
211
212
215
200 Liabilities
Accounts Payable
Salaries Payable
Unearned Rent
Notes Payable
300
310
311
312
313
Stockholders’ Equity
Capital Stock
Retained Earnings
Dividends
Income Summary
56
NetSolutions
Chart of Accounts
Income Statement Accounts
400 Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
600 Other Income
610 Rent Revenue
700 Other Expense
710 Interest Expense
500 Costs and Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense—
Store Equipment
523 Transportation Out
529 Miscellaneous Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Admin. Expense
57
Merchandise Inventory
Shrinkage
NetSolutions inventory
records indicate that
$63,950 of merchandise
should be available for sale
on December 31, 2007.
The physical count reveals
that only $62,150 is
actually available.
58
Merchandise Inventory
Shrinkage
Adjusting Entry
Dec. 31 Cost of Merchandise Sold
1 800 00
Merchandise Inventory
1 800 00
Inventory records $63,950
Inventory count
62,150
Inventory shortage $ 1,800
59
Profitability Measures -- Effective Use of Assets
Ratio of Net Sales to Assets
Net sales
Total assets:
Beginning of year
End of year
Average
Ratio of net sales to assets
Sears
Penney
$41,366,000 $31,846,000
$50,409,000 $19,742,000
$44,317,000 $20,908,000
$47,363,000 $20,325,000
.87 to 1
1.57 to 1
Ratio Use: To assess the effectiveness in the
use of assets to generate sales.
60