Accounting principles 9e willey kieso chapter 05

Forms of Financial StatementsForms of Financial Statements Accounting for Merchandising Operations Accounting for Merchandising Operations Freight costs Purchase returns and allowances P

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Chapter 5

Accounting for Merchandising

Operations

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1. Identify the differences between service and

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Forms of Financial Statements

Accounting for Merchandising Operations

Freight costs Purchase returns and allowances Purchase discounts Summary of purchasing transactions

Recording Purchases of Merchandise

Recording Sales of Merchandise

Completing the Accounting Cycle

allowances Sales

discounts

Adjusting entries Closing entries Summary of merchandising entries

Multiple-step income

statement Single-step income statement Classified balance sheet

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Merchandising Operations

Merchandising Companies

Buy and Sell Goods

The primary source of revenues is referred to as

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Merchandising Operations

Income Measurement

Illustration 5-1

Cost of goods sold is the total

cost of merchandise sold

during the period.

Not used in a Service business.

Net Income (Loss)

Operating Expenses

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Perpetual System

1 Purchases increase Merchandise Inventory.

2 Freight costs, Purchase Returns and Allowances and

Purchase Discounts are included in Merchandise Inventory.

3 Cost of Goods Sold is increased and Merchandise Inventory

is decreased for each sale.

4 Physical count done to verify Merchandise Inventory

balance.

The perpetual inventory system provides a continuous record

Flow of Costs

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Chapter

5-9

Features:

Periodic System

Flow of Costs

Beginning inventory

$ 100,000Add: Purchases, net

800,000Goods available for sale

900,000Less: Ending inventory

125,000Cost of goods sold

SO 1 Identify the differences between service and merchandising companies.

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Made using cash or credit (on account).

Normally recorded when

goods are received

Purchase invoice should

support each credit

purchase

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Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they

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Seller places goods Free

On Board the carrier, and buyer pays freight costs

Seller places goods Free

On Board to the buyer’s place of business, and seller pays freight costs

Freight Costs – Terms of Sale

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Illustration: Assume upon delivery of the goods on May 6,

Sauk Stereo pays Acme Freight Company $150 for freight

charges, the entry on Sauk Stereo’s books is:

May 6

Assume the freight terms on the invoice in Illustration 5-5

had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would have been:

May 6

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Purchaser may be dissatisfied because goods are

damaged or defective, of inferior quality, or do not

meet specifications.

Purchase Returns and Allowances

Return goods for credit if

the sale was made on

credit, or for a cash refund if the purchase

was for cash

May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price

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In a perpetual inventory system, a return of

defective merchandise by a purchaser is

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Illustration: Assume that on May 8 Sauk Stereo returned to

PW Audio Supply goods costing $300

May 8

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Credit terms may permit buyer to claim a cash

discount for prompt payment.

Advantages:

Purchaser saves money.

Seller shortens the operating cycle.

Purchase Discounts

Example: Credit terms of 2/10, n/30, is read “two-ten, net

thirty.” 2% cash discount if payment is made within 10 days

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Purchase Discounts Terms

Net amount due within the first

10 days of the next month.

n/10 EOM

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Accounts payable 3,500

May 14

(Discount = $3,500 x 2% = $70)

Illustration: Assume Sauk Stereo pays the balance due of

$3,500 (gross invoice price of $3,800 less purchase returns

and allowances of $300) on May 14, the last day of the

discount period Prepare the journal entry Sauk makes to

record its May 14 payment

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Accounts payable 3,500

June 3

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Should discounts be taken when offered?

Purchase Discounts

Example: 2% for 20 days = Annual rate of 36.5%

(365/20 = 18.25 twenty-day periods x 2% = 36.5%)

Passing up the discount offered equates to paying an

interest rate of 2% on the use of $3,500 for 20 days.

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Summary of Purchasing Transactions

150

6th – Freight-in

Illustration

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Made for cash or credit (on account).

Normally recorded when earned, usually when goods transfer from seller to buyer.

Sales invoice should support each credit sale.

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Two Journal Entries to Record a Sale

Cash or Accounts receivable XXX

Cost

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4

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“Flipside” of purchase returns and allowances.

Contra-revenue account (debit).

Sales not reduced (debited) because:

 would obscure importance of sales returns and

allowances as a percentage of sales

 could distort comparisons between total sales

in different accounting periods.

Sales Returns and Allowances

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Illustration: Prepare the entry PW Audio Supply would make

to record the credit for returned goods that had a $300

selling price (assume a $140 cost) Assume the goods were not defective

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Illustration: Assume the returned goods were defective and had a scrap value of $50, PW Audio would make the following entries:

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The cost of goods sold is determined and

recorded each time a sale occurs in:

a periodic inventory system only

b a perpetual inventory system only

c both a periodic and perpetual inventory

system

d neither a periodic nor perpetual inventory

system.

Review Question

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Offered to customers to promote prompt payment.

“Flipside” of purchase discount.

Contra-revenue account (debit).

Sales Discount

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May 14

Illustration: Assume Sauk Stereo pays the balance due of

$3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the

discount period Prepare the journal entry PW Audio Supply makes to record the receipt on May 14

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Q5-9 Joan Roland believes revenues from credit

sales may be earned before they are collected in cash Do you agree? Explain.

Discussion Question

See notes page for discussion

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Generally the same as a service company

One additional adjustment to make the records agree with the actual inventory on hand.

Involves adjusting Merchandise Inventory and Cost of Goods Sold.

Adjusting Entries

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Illustration: Suppose that PW Audio Supply has an

unadjusted balance of $40,500 in Merchandise Inventory

Through a physical count, PW Audio determines that its actual merchandise inventory at year-end is $40,000 The company would make an adjusting entry as follows

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Closing

Entries

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Shows several steps in determining net income.

Two steps relate to principal operating activities

Distinguishes between operating and

non-operating activities.

Multiple-Step Income Statement

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Calculation of Gross Profit

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The multiple-step income statement for a

merchandiser shows each of the following

features except:

a gross profit

b cost of goods sold

c a sales revenue section.

d investing activities section.

Review Question

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Subtract total expenses from total revenues Two reasons for using the single-step format:

1) Company does not realize any type of profit

until total revenues exceed total expenses

2) Format is simpler and easier to read.

Single-Step Income Statement

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Single-Step

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Classified Balance Sheet

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Periodic System

Separate accounts used to record purchases,

freight costs, returns, and discounts.

Company does not maintain a running account

of changes in inventory.

Ending inventory determined by physical count.

Periodic Inventory System

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Calculation of Cost of Goods Sold

$316,000

Illustration 5A-1

Periodic Inventory System

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Recording Purchases under Periodic System

Illustration: On the basis of the sales invoice (Illustration 5-5)

and receipt of the merchandise ordered from PW Audio

Supply, Sauk Stereo records the $3,800 purchase as follows

May 4

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Illustration: If Sauk pays Haul-It Freight Company $150

for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauk’s books is:

May 6

Freight Costs

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Illustration: Sauk Stereo returns $300 of goods to PW Audio Supply and prepares the following entry to recognize the

return

May 8

Purchase returns and allowances 300

Purchase Returns and Allowances

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Illustration: On May 14 Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2% cash discount

allowed by PW Audio for payment within 10 days Sauk

Stereo records the payment and discount as follows

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No entry is recorded for cost of goods sold at the time

of the sale under a periodic system.

Recording Sales under Periodic System

Illustration: PW Audio Supply, records the sale of $3,800 of merchandise to Sauk Stereo on May 4 (sales invoice No 731, Illustration 5-5) as follows

May 4

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Illustration: To record the returned goods received from

Sauk Stereo on May 8, PW Audio Supply records the $300

sales return as follows

May 4

Sales Returns and Allowances

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Illustration: On May 14, PW Audio Supply receives payment of

$3,430 on account from Sauk Stereo PW Audio honors the 2% cash discount and records the payment of Sauk’s account

receivable in full as follows

Sales Discounts

May 14

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Comparison of Entries—Perpetual Vs Periodic

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Comparison of Entries—Perpetual Vs Periodic

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Worksheet for a Merchandising Company

Illustration 5B-1

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