ACG Ch 5: Accounting for Merchandising Operations

Reporting Income for a Merchandiser

Merchandising Companies:

Manufacturer -> Wholesale -> Retailer -> Consumers

Merchandising companies sell products to earn revenue. Ex: sporting goods, clothing, & auto parts stores.

Net sales - Cost of goods sold = Gross profit - Expenses = Net Income

Reporting Income for a Service Company

Service companies sell time to earn revenue. Ex: Accounting firms, law firms, & plumbing services.

Revenues - Expenses = Net Income

Inventory Systems: Flow

Beginning Inventory + Net Purchases = Merchandise Available for Sale

Merchandise Available for Sale = Ending Inventory + Cost of Goods Sold

Periodic Systems

Update accounting records for purchases & sales of inventory only at the end of a period.

Perpetual Systems

Update accounting records for each purchase & each sale of inventory.

Recording Purchases (W/o Cash Discounts)

On November 2, Z-Mart purchased $500 of merchandise inventory for cash.

Nov 2. Merchandise Inventory...........500

Cash.....................................................500

Purchased goods for cash.

Operating Cycle for a Merchandiser

Begins w/ the purchase of merchandise & ends w/ the collection of cash from the sale of merchandise.

a. Purchases -> b. Merchandise Inventory -> c. Credit Sales -> d. Accounts Receivable -> e. Cash Collection

Credit Terms

Sellers can grant a cash discount to encourage buyers to pay earlier.

Purchase Discounts

2/10, n/30

2: Discount %

10: # of days discount is available

n: Otherwise, Net (or all) is due in 30 days.

30: Credit period

Purchases w/ Cash Discounts

On November 2, Z-Mart purchased $500 of merchandise inventory on account; credit terms are 2/10, n/30.

(a) Nov. 2 Merchandise Inventory............500

Accounts Payable.............................500

Purchased goods, terms 2/10, n/30.

Payment within Discount Period

On November 12, Z-Mart paid the amount due on the purchase of November 2.

(b1) Nov. 12 Accounts Payable.............500

Merchandise Inventory..............................10

Cash*..........................490

Paid for goods within discount period. *500 x (100% - 2%)

After we post these entries, the accounts involved look like these:

Accounts payable

Nov. 12 500 | Nov. 2 500

________________________________________

| Bal. 0

Merchandise Inventory

Nov. 2 500 | Nov. 12 10

_____________________________________

Bal. 490 |

Cash

| Nov. 12 490

_________________________________

Payment after Discount Period

On December 2, Z-Mart paid the amount due on the purchase of November 2.

(b2) Dec. 2 Accounts Payable..........500

Cash..........................................500

Paid for goods outside discount period.

Purchase Return

Merchandise returned by the purchaser to the supplier.

June 1: Z-Mart purchases $250 of merchandise w/ terms 2/10, n/60.

June 3: Z-Mart returns $50 of goods before paying the invoice.

June 11: When Z-Mart pays on June 11, it takes the 2% discount only on the $200 remaining balance.

June 1 Merchandise Inventory....................................250

Accounts Payable.............................................250

Purchased goods, terms 2/10, n/60.

(c2) June 3 Accounts Payable................................................50

Merchandise Inventory.....................................50

Returned goods to seller.

June 11 Accounts Payable.............................................200

Merchandise Inventory.......................................4

Cash....................................................................................196

Paid for $200 of goods less $4 discount.

Purchase Allowance

A price reduction to the buyer of defective or unacceptable merchandise.

On November 5, Z-Mart (buyer) records a $30 allowance from Trex for defective merchandise.

(c1) Nov. 5 Accounts Payable...............................30

Merchandise Inventory.....................30

Allowance for defective goods.

Transportation Costs

Seller Shipping Point ---> Goods in Transit ---> Buyer Destinsation

Shipping Terms: FOB shipping point

Ownership Transfers at: Shipping point

Goods in Transit Owned by: Buyer

Transportation Costs Paid by:

Buyer Merchandise Inventory..........#

Cash............................................#

Shipping Terms: FOBB Destination

Ownership Transfers at: Destination

Goods in Transit Owned by: Seller

Transportation Costs Paid by:

Buyer Delivery Expense..............#

Cash..................................#

Z-Mart Purchased merchandise on terms of FOB shipping point. The transportation charge is $75.

(d) Nov. 24 Merchandise Inventory................75

Cash.....................................................75

Paid freight costs on goods.

Itemized Costs of Purchases

Itemized Costs of Merchandise Purchases

______________________________________________________________________________

Invoice cost of merchandise purchases............ $ 235,800

Less: Purchase discounts received.............................. (4,200)

Purchases returns & allowances............................(1,500)

Add. Costs of transportation-in.......................................2,300

_______

Total net cost of merchandise purchases.......... $232,400

Sales of Merchandise

Each sales transaction for a seller of merchandise involves two part:

Revenue earned from sale to customer.

Cost of goods sold incurred when sold to customer.

Sales w/o Cash Discounts

Z-Mart sold $1,000 of merchandise on credit. The merchandise has a cost basis to Z-Mart of $300.

Revenue side journal entry:

Nov. 12 Accounts Receivable..................1,000

Sales.....................................................1,000

Sold goods on credit.

Cost side journal entry:

Nov. 12 Costs of Goods Sold................................300

Merchandise Inventory.........................300

Record cost of Nov. 12 sale.

Sales Discounts

Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash & reducing future collection efforts.

Sales w/ Cash Discounts

Z-Mart completes a $1,000 credit sale w/ terms of 2/10, n/45.

Nov. 12 Accounts Receivable....................................1,000

Sales.........................................................................1,000

Sold goods, terms 2/10, n/45.

Nov. 12 Cost of Goods Sold...........................................300

Merchandise Inventory.......................................300

Record cost of Nov.12 sale.

Buyer pays within discount period:

Nov. 22 Cash......................................................980

Sales Discounts..................................20

Accounts Receivable.........................1,000

Receivable payment on Nov. 12 sale less discount. $1,000 - ($1,000 2%)

Buyer pays after discount period:

Dec. 27 Cash............................................................1,000

Accounts Receivable..................................1,000

Received payment on Nov 12. sale after discount period.

Sales Returns & Allowances

Usually involve dissatisfied customers & the possibility of lost future sales.

Sales Returns

Merchandise that customers return to the seller after a sale.

Sales Allowances

Reductions in the selling price of merchandise sold to customers.

Assume that $40 of the merchandise Z-Mart sold on November 12 is defective but the buyer decides to keep it because Z-Mart offers a $10 price reduction.

(f) Nov. 24 Sales Returns & Allowances.................10

Cash.................................................................10

Sales allowance granted.

Sales w/ Returns & Allowances

Customer returns merchandise which sold for $15 and cost $9.

(e1) Dec. 29 Sales Returns & Allowances................15

Cash....................................................................15

Goods returned from Nov. 12 sale.

Returned Goods - Not Defective

(e2) Dec. 29 Merchandise Inventory.....................9

Cost of Goods Sold............................9

Returned goods are added back to inventory.

Gross Profit Computation

Computation of Gross Profit

______________________________________________________________________________

Net sales (net of discounts, returns, & allowances)...$ 314,700

Cost of goods sold..................................................................... 230,400

___________

Gross profit.................................................................................... $ 84,300

Loss of Inventory

Shrinkage: adjustment to reflect loss of merchandise

Dec. 31 Cost of Goods Sold.......................................250

Merchandise Inventory................................250

Adjust for $250 shrinkage.

Acid-Test Ratio

Acid-test ratio = Quick assets / Current liabilities

Acid-test ratio = (Cash + Short-term investments + Receivables) / Current liabilities

A common rule of thumb is the acid-test ratio should have a value of at least 1.0.

If a company has a ratio of at least 1.0, they are unlikely to face liquidity problems in the near future.

Gross Margin Ratio

Percentage of dollar sales available to cover expenses and provide a profit.

Gross margin ratio = (Net sales - Cost of goods sold) / Net sales