Merchandising Operations and Perpetual Inventory System

Chapter 5 Learning Objectives

• C1: Describe merchandise activities and identify income components for a merchandising company.
• C2: Identify and explain the inventory asset and cost flows of a merchandising company.
• A1: Compute the acid-test ratio and explain its use to assess liquidity.
• A2: Compute the gross margin ratio and explain its use to assess profitability.
• P1: Analyze and record transactions for merchandise purchases using a perpetual system.
• P2: Analyze and record transactions for merchandise sales using a perpetual system.
• P3: Prepare adjustments and close accounts for a merchandising company.
• P4: Define and prepare financial statements for a merchandising company.
• P5: Appendix 5A – Record and compare merchandising transactions using both periodic and perpetual inventory system.
• P6: Appendix 5B – Prepare adjustments for discounts, returns and allowances per revenue recognition rules.
• P7: Appendix 5C – Record and compare merchandising transactions using the gross method and net method.

Learning Objective P2: Merchandise Sales

• Analyze and record transactions for merchandise sales using a perpetual system.

Accounting for Merchandise Sales

• Each sales transaction involves two parts:
  • Revenue received (and asset increased) from the customer.
  • Cost of goods sold incurred (and asset decreased) to the customer.

Sales without Cash Discounts

• Example: Z-Mart sold 1,000 of merchandise on credit with a cost basis of 300. Journal entries required for both the revenue and cost aspects of the transaction.
  • Revenue side journal entry.
  • Cost side journal entry.

Sales with Cash Discounts

• Z-Mart completes a 1,000 credit sale with terms of 2/10, n/45.
  • Buyer pays within discount period. (Sales discounts)
  • Buyer pays after discount period.

Sales Returns and Allowances

• Sales returns and allowances usually involve dissatisfied customers and 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.

Sales with Returns and Allowances

• Customer returns merchandise which sold for 15 and cost 9.
  • Returned Goods - Not Defective.
  • Returned Goods - Are Defective.

Buyer Granted Allowances

• 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.

Learning Objective P3: Adjustments and Closing

• Prepare adjustments and close accounts for a merchandising company.

Merchandising Cost Flow in the Accounting Cycle

• Overview of the merchandising cost flow within the accounting cycle.

Closing Entries for Merchandisers

• Explanation and examples of closing entries specific to merchandising companies.

Learning Objective P4: Financial Statements

• Define and prepare financial statements for a merchandising company.

Income Statement

• Format and components of the income statement for a merchandising company.

Classified Balance Sheet

• Presentation of assets and liabilities in a classified balance sheet, distinguishing between highly liquid and less liquid assets.

Perpetual vs Periodic Inventory Systems

• Inventory Updates:
  • Perpetual System: Inventory is updated in real time after every sale.
  • Periodic System: Inventory is updated periodically, typically at the end of the period.
• COGS (Cost of Goods Sold):
  • Perpetual System: Calculated immediately at each sale, leads to more accurate net profit.
  • Periodic System: Calculated at the end of the period using a formula; may be less precise due to lack of real-time data.
• System Detail:
  • Perpetual System: More detailed and accurate record of inventory.
  • Periodic System: Simpler, but less accurate and timely.
• Real-Time Profit Tracking:
  • Perpetual System: Allows for real-time tracking of gross profit and net profit.
  • Periodic System: Profit is only known at the end of the period.