Transcript Merchandise Transactions Chapter 4

Chapter 4 
Merchandise Transactions
Business Categories
Service: provides services to customers
• Merchandising:
– Retail:Buy ready made goods and sell to
customers
– Wholesale:Buy from manufacturers and sell to
retailers
• Manufacturing:Produces goods and sells
them to wholesalers
Chapter 4
Mugan-Akman 2005
2-45
Current Assets-Inventories
Service
Merchandising
Wholesale
Retails
Manufacturing
Supplies
Supplies
Merchandise
Supplies
Merchandise
Raw Material
Work-in Process
Finished Goods
Chapter 4
Mugan-Akman 2005
3-45
Operating Cycle
Cash
Purchase
Merchandise
Inventory
Sell
Merchandise
if a company has cash sales only, then
the cycle is cash-inventories-sales-cash
Chapter 4
Mugan-Akman 2005
4-45
How do we determine the Acquisition
Cost of Purchased Inventory?
–Determine purchase
price :
•ordering goods +
•receiving +
•inspecting +
•recording the
purchase +
•Recorded when title
passes to the firm.
–Adjust purchase price for:
–transportation ( add)
–handling (add)
–customs and duties (add)
–cash discounts (deduction)
–returns (deduction)
–to determine the
acquisition cost
Cost of inventory should include all costs incurred to acquire
goods and prepare them for sale.
Chapter 4
Mugan-Akman 2005
5-45
How do we record the adjustments to
purchase price?
Depends on the recording system: Perpetual or Periodic
Perpetual Inventory System:
•A running record of purchases
are kept through “merchandise
inventory” account
•Purchases entries and
Adjustments are made to the
merchandise inventory account
•The amount of inventories at a
point in time can be determined
•Cost of Goods sold is known
during the period
Chapter 4
Periodic Inventory System:
•Purchases of inventory are
recorded in “Purchases” account
•Adjustments are made to
separate accounts“
•Amount of inventories at a point
can not be determined unless a
physical count is made
•Cost of goods sold can be
determined after physical count at
the end of the period
Mugan-Akman 2005
6-45
How do we determine the cost of
goods that are sold -COGS?
Perpetual
•Accumulated in cost of
goods sold account as
sales are made
•Known during the period
•Physical count made at
the end – helps to
determine inventory
shrinkage
Chapter 4
Periodic
•Cost of goods sold can
be determined after the
physical count
•Beginning Inventory
(from previous period) +
•Purchases (net) –
•Ending Inventory
(physical count) =
•Cost of goods sold
•Cannot determine
inventory shrinkage
Mugan-Akman 2005
7-45
Merchandising Terms and
Concepts
• F.O.B. shipping point (free-on-board-shipping
point): the ownership of the goods is transferred
to the buyer when the goods are loaded for
shipment
• F.O.B. destination (free-on-board
destination): in this case the ownership of
goods is transferred to the buyer when the
goods reach their final destination
• bulk discounts or trade discounts,
• cash discounts
– For example, the terms of sales could state 2/10, n/30
Chapter 4
Mugan-Akman 2005
8-45
Accounting for Cash Discounts
Gross Method
Buyer (seller) assumes that they will not
pay within the cash discount period
Net Method
Buyer (seller) assumes that they will pay
within the discount period
Chapter 4
Mugan-Akman 2005
9-45
Accounting for Purchases-Perpetual Inventory
System
Recording of purchases for cash or credit:
Date
Account Title and Description
Debit
1-Dec-04 Merchandise Inventory
Accounts Payable or Cash
Purchase of merchandise
Credit
950
950
If the company pays within the discount period:
Date
Account Title and Description
9-Dec-04 Accounts Payable
Merchandise Inventory
Cash
Payment of Accounts Payable; discount taken
Debit
Credit
950
19
931
If the company pays after the discount period:
Date
Account Title and Description
30-Dec-04 Accounts Payable
Cash
Payment of Accounts Payable; discount not
taken
Chapter 4
Mugan-Akman 2005
Debit
Credit
950
950
10-45
Purchase Returns and
Allowances
Date
Account Title and Description
Debit
8-Dec-04 Accounts Payable or Cash
Merchandise Inventory
Return of merchandise
Date
Account Title and Description
9-Dec-04 Accounts Payable or Cash
Merchandise Inventory
Received Purchase allowance
Chapter 4
Mugan-Akman 2005
Credit
50
50
Debit
Credit
5
5
11-45
Freight Cost - under the
perpetual inventory system
Date
Account Title and Description
Debit
Credit
01.Ara.04 Merchandise Inventory
50
Accounts Payable
50
Purchase of merchandise on credit-freight cost
paid by the buyer –FOB shipping point
Date
Account Title and Description
2-Dec-04 Account payable
Cash
Payment of freight charges
Chapter 4
Mugan-Akman 2005
Debit
Credit
50
50
12-45
Total Cost of Merchandise
Purchases
Less: Purchase Returns and Allowances
Less: Purchase Discounts
Net Purchases
Plus: Freight-in
Total Cost of Merchandise
Purchase
Freight in
Balance
Chapter 4
TL950
55
19
876
50
TL 926
Merchandise Inventory
950
19 Cash discount
50
50 Return
5 Allowance
926
Mugan-Akman 2005
13-45
Selling Merchandise and
Recording Cost of Goods Sold
•
•
•
•
Sales or Sales Revenue
cash or credit
Sales Returns and Allowances
Sales Discounts
Chapter 4
Mugan-Akman 2005
14-45
Accounting for Sale of MerchandisePerpetual Inventory System
TWO ENTRIES ARE NECESSARY TO
RECORD A SALE UNDER PERPETUAL
INVENTORY SYSTEM
1. To record the sale transaction
2. To reflect the cost of the sales (cost of goods
sold) made and deduct the cost of sales from
the inventory
Chapter 4
Mugan-Akman 2005
15-45
Recording Sales-Perpetual
Giysi Giyim A.S. sold five sweaters for TL 125 on credit. The cost
of each sweater is TL 10.
1) Record sale
Date
Account Title and Description
12-Dec-04 Accounts Receivable
Sales
Sale of merchandise on credit
Debit
Credit
125
125
2) show the decrease in inventory and the corresponding increase in
COGS
Date
Account Title and Description
12-Dec-04 COGS
Merchandise Inventory
To record cost of goods sold
Chapter 4
Mugan-Akman 2005
Debit
Credit
50
50
16-45
Accounting for Sales ReturnsPerpetual System
When the customer returns one of the sweaters
Date
Account Title and Description
Debit
15-Dec-04 Sales Returns and Allowances
Cash or Accounts Receivable
Merchandise returned
Date
Account Title and Description
15-Dec-04 Merchandise Inventory
Cost of Goods Sold
Returned goods to inventory
Chapter 4
Mugan-Akman 2005
Credit
25
25
Debit
Credit
10
10
17-45
Sales Returns and Allowances
When allowance is provided
Date
Account Title and Description
15.Ara.04 Sales Returns and Allowances
Cash or Accounts Receivable
Merchandise returned
Chapter 4
Mugan-Akman 2005
Debit
Credit
15
15
18-45
Accounting for Cash Discounts –
Giysi Giyim A.S. sold TL 500 worth of merchandise to
Okan Boutique with the terms 2/10, n/30.
Date
Account Title and Description
Debit
15-Dec-04 Accounts Receivable
Sales
Sale of merchandise on credit 2/10, n/30
Date
Account Title and Description
24-Dec-04 Cash
Sales Discount
Accounts Receivable
Collection on account; discount taken
Credit
500
500
Debit
Credit
490
10
500
How much will be collected after the discount period?
Chapter 4
Mugan-Akman 2005
19-45
Partial Income Statement
Sales
TL 625
Less;Sales Returns and Allowances
40
Less:Sales Discounts
10
Net Sales
TL 575
Chapter 4
Mugan-Akman 2005
20-45
Transaction
Perpetual Inventory System
Purchases Related
- Purchase of Merchandise
Merchandise Inventory
- Receive Cash Discount
Merchandise Inventory
- Return of merchandise and /or receipt Merchandise Inventory
of price allowance
- Transportation Costs-if born by the Merchandise Inventory
buyer
Sales Related
-Sale of Merchandise
Sales ; COGS and Merchandise
Inventory
Sales Discounts
- Grant Cash Discount
- Return of merchandise by the
Sales Returns and Allowances / COGS
customer
and Merchandise Inventory
- Price allowance given to the customer Sales Returns and Allowances
- Transportation Costs-if born by the
Chapter 4
Freight-out (Delivery Expense)
Mugan-Akman 2005
21-45
Gross Profit
GROSS PROFIT =
NET SALES – COST OF GOODS SOLD
COST OF GOODS SOLD=
BEG INV + PURCHASES –END INV
GROSS PROFIT PERCENTAGE=
GROSS PROFIT/NET SALES
Chapter 4
Mugan-Akman 2005
22-45
Computation of COGS
Inventory at the beginning of the year
Purchases during the year
Purchase returns and allowances
Purchase discounts
Inventory at the end of the year
6.700
14.800
400
300
4.800
Determined by a
physical inventory
count
Chapter 4
Mugan-Akman 2005
23-45
COGS – Periodic Computation
Beginning Inventory:
TL 6.700
Plus: Purchases
14.800
Less: Pur.Disc
(300)
Pur.R&A
(400)
Net Purchases
14.100
Plus: Freight-in
500
Total Cost of Purh.
14.600
Cost of Goods Available for Sale
21.300
Less: Ending Inventory
4.800
TL
Cost of Goods Sold
Chapter 4
Mugan-Akman 2005
16.500
24-45
Single Step Income Statement
• Deduct all expenses from the total of
revenues without a distinction among the
different sources of revenues or the
causes of expenses
Chapter 4
Mugan-Akman 2005
25-45
Giysi Giyim A.S.
Income Statement
For the Year Ended 31 December 2004
Revenues
Net Sales
Interest Revenue
Gain on Sale of Equipment
Total Revenues
Expenses
Cost of Goods Sold
Operating Expenses
Interest Expense
Income Before Tax
Chapter 4
Mugan-Akman 2005
TL 30.000
400
200
30.600
TL 16.500
12.600
600
29.700
TL 900
26-45
Multiple Step Income Statement
• Discloses numerous parts or steps to
determine net income, showing income
from operating and non-operating activities
Chapter 4
Mugan-Akman 2005
27-45
Giysi Giyim A.Ş.
Income Statement
For the Year Ended 31 December 2004
Chapter
Sales
Less: Sales Discounts
Sales Returns and Allowances
Net Sales
Cost of Goods Sold:
Merchandise Inventory, 1 January
Purchases
TL 14.800
Less: Purchase Returns and
TL 300
Allowances
Purchase Discounts
400
700
Net Purchases
14.100
Add: Freight-in
500
Cost of Goods Purchased
Cost of Goods Available for Sale
Less: Inventory, 31 December
Cost of Goods Sold
Gross Profit
Operating Expenses:
Selling Expenses
Salaries Expense
6.100
Advertising Expense
1.300
Delivery Expense
700
Total Selling Expenses
Administrative Expenses
Rent Expense
1.500
Utilities Expense
1.100
Depreciation Expense
1.000
Insurance Expense
900
Total Administrative Expenses
Total Operating Expenses
Operating Income
Other Revenues and Gains
Interest Revenue
400
Gain on Sale of Equipment
200
4 Other Expenses and Losses
Mugan-Akman 2005
Interest Expense
Income Before Tax
TL 500
200
TL 30.700
700
30.000
6.700
14.600
21.300
4.800
16.500
TL 13.500
8.100
4.500
TL 12.600
TL 900
600
(600)
28-45
0
TL 900
Are we done with Inventories? NO….. Wait ‘till next chapter….
Chapter 4
Mugan-Akman 2005
29-45