Chapter 5 Merchandising Operations Learning Objective 1 Describe merchandising operations and the two types of merchandise inventory systems
5-2 WHAT ARE MERCHANDISING OPERATIONS? A merchandiser is a business that sells merchandise, or goods, to customers. The merchandise that this type of business sells is called merchandise inventory. A wholesaler buys goods from a manufacturer and sells them to retailers.
A retailer buys merchandise from manufacturers or a wholesaler and then sells the goods to consumers. 5-3 The Operating Cycle of a Merchandising Business The operating cycle: 1. It begins when the company purchases inventory from an individual or a business, called a vendor.
2. The company then sells the inventory to a customer. 3. Finally, the company collects cash from customers. 5-4 The Operating Cycle of a Merchandising Business 5-5
The Operating Cycle of a Merchandising Business The income statement of a merchandiser reports: Sales Revenue rather than Service Revenue The cost of merchandise sold to customers, called Cost of Goods Sold (COGS) Gross profit, which is net Sales Revenue minus Cost of Goods Sold Operating expenses, which are expenses
other than Cost of Goods Sold 5-6 The Operating Cycle of a Merchandising Business 5-7 5-8 Wal-Mart
5-9 The Operating Cycle of a Merchandising Business (continued) 5-10 2018 Pearson Education, Inc.
5-11 Wal-Mart 5-12 Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems Businesses need to determine the value of merchandise inventory on
hand and the value sold. The two inventory accounting systems: A periodic inventory system requires a physical count of inventory to determine inventory on hand. A perpetual inventory system keeps a running computerized record of merchandise inventory. 5-13 Learning Objective 2
Account for the purchase of merchandise inventory using a perpetual inventory system 2018 Pearson Education, Inc. 5-14 HOW ARE PURCHASES OF MERCHANDISE INVENTORY
RECORDED IN A PERPETUAL INVENTORY SYSTEM? The cycle of a merchandiser begins with the purchase of merchandise inventory. An invoice is the sellers request for payment from the purchaser. Invoices are also called bills. Sellers have sales invoices. Purchasers have purchase invoices 5-15
5-16 Purchase of Merchandise Inventory Smart Touch Learning receives the goods from Exhibit 53 on June 3 and makes a payment on that date. 2018 Pearson Education, Inc. 5-17 Purchase of Merchandise Inventory
Now assume that on June 3, instead of paying cash, Smart Touch Learning receives the merchandise inventory on account. 5-18 Purchase Discounts A purchase discount is a discount that businesses offer to purchasers as an incentive for early payment. Credit terms are the payment terms
of purchase or sale as stated on the invoice. Most credit terms express the discount, the discount time period, and the final due date. Example: 3/15, n/30 means a 3% discount if paid within 15 day, otherwise the full amount is due in 30 days. 5-19 Purchase Discounts
Under credit terms of 3/15, NET 30 DAYS, If Smart Touch Learning pays on June 15, which is within the discount period, the cash payment entry would be: 5-20 Purchase Discounts The purchase discount is credited to the Merchandise Inventory account because the discount for early payment decreases the actual cost paid for Merchandise Inventory:
5-21 Purchase Discounts Assume instead that Smart Touch Learning pays on June 24, after the discount period ends, the cash payment entry would be: 5-22 Purchase Returns and Allowances
The invoice price for a purchaser may need to be adjusted for purchase returns or purchase allowances. Purchase returns exist when sellers allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable. Purchase allowances are amounts granted to purchasers as an incentive to keep goods that are not as ordered. 5-23
Purchase Returns and Allowances On June 4, Smart Touch Learning returns 20 tablets valued at a total of $7,000 from the June 1 purchase. 5-24 Purchase Returns and Allowances On June 10, Smart Touch Learning purchased 15 tablets on account with credit terms of 3/15, n/30 at
a cost of $5,250. Five tablets are returned on June 15 for $1,750, and payment is made on June 20. 2018 Pearson Education, Inc. 5-25 Transportation Costs Purchase agreements specify shipping terms to determine when title of the goods transfers to the purchaser and who pays the freight.
FOB shipping point means the buyer takes ownership (title) to the goods after the goods leave the sellers place of business (shipping point). The buyer (owner of the goods while in transit) usually pays the freight. FOB destination means the buyer takes ownership (title) to the goods at the delivery destination point. The seller (owner of the goods while in transit) usually
pays the freight. 2018 Pearson Education, Inc. 5-26 Transportation Costs When merchandisers are required to pay for shipping costs: Freight in is the transportation cost to ship goods into the purchasers warehouse; thus, it is freight on purchased goods.
Freight out is the transportation cost to ship goods out of the sellers warehouse and to the customer; thus, it is freight on goods sold to a customer. 2018 Pearson Education, Inc. 5-27 Transportation Costs 5-28
Transportation Costs Freight In Assume Smart Touch Learning pays a $60 freight charge on June 3 for a purchase with FOB shipping point: 5-29 Transportation Costs Freight In Within Discount Period
Under FOB shipping point, the seller sometimes prepays the transportation cost as a convenience and lists this cost on the invoice. Assume, Smart Touch Learning purchases $5,000 of goods, with freight charge of $400, on June 20 on account with terms of 3/5, n/30. The terms of shipment are FOB shipping point. 5-30 Transportation Costs
Freight In Within Discount Period If Smart Touch Learning pays within the discount period, the discount will be computed only on the $5,000 merchandise cost, resulting in a $150 discount: 5-31 Cost of Inventory Purchased Knowing the net cost of inventory allows a business to determine the
actual cost of the merchandise purchased. Net cost of inventory is calculated as follows: 2018 Pearson Education, Inc. 5-32 Cost of Inventory Purchased During the year, Smart Touch Learning buys
$281,750 of inventory, returns $61,250 of the goods, and takes a $4,410 early payment discount. The company also pays $14,700 of freight in. Net costs are calculated as: 2018 Pearson Education, Inc. 5-33 Learning Objective 3
Account for the sale of merchandise inventory using a perpetual inventory system 5-34 HOW ARE SALES OF MERCHANDISE INVENTORY RECORDED IN A PERPETUAL INVENTORY SYSTEM?
The amount a business earns from selling merchandise inventory is called Sales Revenue. Two entries are required to record sale transactions: The first entry records Sales Revenue and Cash or Accounts Receivable. The second entry records Cost of Goods Sold and Merchandise Inventory. 5-35
Cash and Credit Card Sales Smart Touch Learning sold the two tablets for $1,000 cash. The cost of the tablets was $700. 5-36 Sales on Account Smart Touch Learning sold 5 tablets for $500 each, making a $2,500 sale on account on
June 15. The goods cost $1,750. 5-37 Sales Discounts Many sellers offer customers a discount for early payment. Sales discounts are a reduction in the amount of revenue earned on sales for early payment. The new revenue recognition
standards require sales to be recorded at the net amount or the amount of the sale less any sales discounts. 2018 Pearson Education, Inc. 5-38 Sales Discounts On June 21, Smart Touch Learning sold 10 tablets for $500 each on account with terms
of 2/10, n/30. The goods cost $3,500. 2018 Pearson Education, Inc. 5-39 Sales Discounts When the customer makes payment within the discount period, Smart Touch Learning will record the receipt of cash and decrease the Accounts Receivable for $4,900 as
follows: 2018 Pearson Education, Inc. 5-40 Sales Discounts If the customer does not pay within the discount period, the customer must pay the full $5,000 amount. Smart Touch Learning would record the discount lost as follows:
5-41 Sales Returns and Allowances The return of goods by a customer or the granting of an allowance is called Sales Returns and Allowances. Estimating Sales Returns Under the new revenue recognition standard, companies should only record sales revenue in the amount they expect
to eventually realize. Companies must decrease sales revenue by an estimated amount of sales returns. Historical data can be used for this estimate. 5-42 Sales Returns and Allowances Estimating Sales Returns Smart Touch Learning had sales of $1,000,000 and cost of goods sold of
$600,000 for the period. Smart Touch Learning estimates that approximately 4% of the merchandise sold will be returned. 2018 Pearson Education, Inc. 5-43 Sales Returns and Allowances Actual Return of Inventory On January 20, 2020, a customer returned
merchandise purchased with cash with a sales price of $2,000. The cost of the goods was $800. 2018 Pearson Education, Inc. 5-44 Sales Returns and Allowances Sales Allowance On January 28, 2020, Smart Touch Learning
grants a $100 sales allowance for goods damaged in transit. The goods were sold on account and remain unpaid. 2018 Pearson Education, Inc. 5-45 Transportation CostsFreight Out Smart Touch Learning paid $30 to ship goods to a customer on June 21.
Remember: Freight out is a delivery expense to the seller. 2018 Pearson Education, Inc. 5-46 Learning Objective 4 Adjust and close the accounts of a
merchandising business 2018 Pearson Education, Inc. 5-47 WHAT ARE THE ADJUSTING AND CLOSING ENTRIES FOR A MERCHANDISER? Actual inventory on hand may differ from what the books show.
Inventory shrinkage is loss of inventory occurring from theft, damage, and errors. Businesses take a physical count of inventory at least once a year. Merchandise Inventory is adjusted based on the physical count. 2018 Pearson Education, Inc. 5-48
Adjusting Merchandise Inventory Based on a Physical Count Smart Touch Learnings Merchandise Inventory account shows an unadjusted balance of $31,530, but a physical count comes to only $30,000. 2018 Pearson Education, Inc. 5-49
Closing the Accounts of a Merchandiser The four-step closing process for a merchandising company follows: Step 1: Make the revenue accounts equal zero via the Income Summary account. Step 2: Make expense accounts equal zero via the Income Summary account. Step 3: Make the Income Summary account equal zero via the Retained Earnings account. This closing entry transfers net income (or net
loss) to Retained Earnings. Step 4: Make the Dividends account equal zero via the Retained Earnings account. 5-50 Closing the Accounts of a Merchandiser Exhibit 5-6 presents Smart Touch Learnings adjusted trial balance and closing entries for
the year (new accounts are highlighted in blue). Closing means to zero out all temporary accounts. 2018 Pearson Education, Inc. 5-51
Closing the Accounts of a Merchandiser 2018 Pearson Education, Inc. 5-52 Learning Objective 5 Prepare a merchandisers financial statements
2018 Pearson Education, Inc. 5-53 HOW ARE A MERCHANDISERS FINANCIAL STATEMENTS PREPARED? The formats for income statements are: The single-step income statement groups all revenues together and then lists and deducts all expenses together without
calculating any subtotals. The multi-step income statement contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income. 2018 Pearson Education, Inc. 5-54 2018 Pearson Education, Inc.
5-55 Multi-Step Income Statement Operating expenses are reported in two categories: Selling expenses are related to marketing and selling the companys goods and services. Administrative expenses include expenses not related to marketing the companys goods and services.
Gross profit minus operating expenses equals operating income. 2018 Pearson Education, Inc. 5-56 Multi-Step Income Statement Other income and expenses reports revenues or expenses that are outside the
normal, day-to-day operations of a business, such as a gain or loss on the sale of plant assets or interest expense. Income tax expense reports the federal and state income taxes that are incurred by the corporation. 2018 Pearson Education, Inc. 5-57
2018 Pearson Education, Inc. 5-58 Statement of Retained Earnings and the Balance Sheet The statements of retained earnings for merchandisers and service businesses are similar. The balance sheet for a merchandiser is very similar, except for two new assets
accounts: Merchandise Inventory Estimated Returns Inventory 2018 Pearson Education, Inc. 5-59 Learning Objective 6 Use the gross profit
percentage to evaluate business performance 2018 Pearson Education, Inc. 5-60 HOW DO WE USE THE GROSS PROFIT PERCENTAGE TO EVALUATE BUSINESS PERFORMANCE? The gross profit percentage measures the
profitability of each sales dollar above the cost of goods sold. A high gross profit percentage is desired. 2018 Pearson Education, Inc. 5-61 5-62 HOW DO WE USE THE GROSS PROFIT
PERCENTAGE TO EVALUATE BUSINESS PERFORMANCE? Kohls Corporation reported the following: Gross profit percentage for year ending Jan. 2015: Gross profit percentage for year ending Jan. 2016: 5-63 Gross Profit PercentageExample
CISCO 60.6% = $29,440 $48,607
5-64 Learning Objective 8 Account for the purchase and sale of merchandise inventory using a periodic inventory system (Appendix 5B)
2018 Pearson Education, Inc. 5-65 HOW ARE MERCHANDISE INVENTORY TRANSACTIONS RECORDED IN A PERIODIC INVENTORY SYSTEM? Perpetual inventory systems are too expensive for smaller businesses. Periodic inventory systems require
physical counts of inventory to determine quantities on hand. Merchandise Inventory is updated at the end of the period, during the closing process. 5-66 Purchases of Merchandise Inventory Referring back to Exhibit 5-3, the entry to record the receipt of goods on account on June 3 and payment on June 15 using the
periodic inventory system is as follows: 5-67 Purchases of Merchandise Inventory Recording Purchase Returns and Allowances Prior to payment, on June 4, Smart Touch Learning returned 20 tablets to the vendor costing $7,000.
2018 Pearson Education, Inc. 5-68 Purchases of Merchandise Inventory Recording Purchase Returns and Allowances During the period, the business records the cost of all inventory bought in the Purchases account. The balance of Purchases is a gross amount because it does not include subtractions for
discounts, returns, or allowances. Net purchases is the remainder after subtracting the contra accounts from Purchases: 2018 Pearson Education, Inc. 5-69 Purchases of Merchandise Inventory Recording Transportation Costs Smart Touch Learning pays a $60 freight
charge on June 3. 2018 Pearson Education, Inc. 5-70 Sale of Merchandise Inventory No running record of merchandise inventory is maintained. There is no need to record an entry to Merchandise Inventory and Cost of
Goods Sold. Accounting for sales discount and sales return and allowances is the same as under the perpetual inventory system. 5-71 Sale of Merchandise Inventory On June 21, Smart Touch Learning sold 10 tablets for a total sale of $5,000 on account with terms of 2/10, n/30.
5-72 Preparing Financial Statements The periodic inventory system requires an additional calculation the cost of goods sold. At the end of each period, the company combines a number of accounts to compute cost of goods sold for the period, and this
calculation is shown on the income statement. 2018 Pearson Education, Inc. 5-73 Preparing Financial Statements Cost of goods sold is calculated as follows for Smart Touch Learning: 5-74
Adjusting and Closing Entries No adjustment is required for inventory shrinkage. Temporary accounts are closed via the Income Summary: Purchase Returns and Allowances Purchase Discounts Purchases Freight In 5-75
Adjusting and Closing Entries Adjusting and Closing Entries 2018 Pearson Education, Inc. Adjusting and Closing Entries The four-step closing process under
the periodic inventory system: Step 1: Using the periodic inventory system, Sales Revenue and Sales Discounts Forfeited are closed with a debit via the Income Summary account. All other temporary accounts with credit balances are also closed. The ending Merchandise Inventory and Estimated Returns Inventory are recorded as debits.
2018 Pearson Education, Inc. 5-78 Adjusting and Closing Entries The four-step closing process under the periodic inventory system: Step 2: Expense accounts and other temporary accounts with debit balances are closed via the Income Summary account.
The beginning Merchandise Inventory, Purchases, and Freight In are also closed via the Income Summary account. 5-79 Adjusting and Closing Entries The four-step closing process under the periodic inventory system: Step 3 and Step 4: These steps, closing the Income Summary and Dividends
accounts, are the same under both the perpetual and periodic methods. 5-80
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