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Chapter 5 Powerpoints
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Title: Accounting Principles Thirteenth Edition
Authors: Weygandt, Kimmel, Kieso
Chapter 5: Accounting for Merchandising Operations
Prepared By: Coby Harmon
Affiliations: University of California, Santa Barbara; Westmont College
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Chapter Outline
Learning Objectives:
LO 1: Describe merchandising operations and inventory systems.
LO 2: Record purchases under a perpetual inventory system.
LO 3: Record sales under a perpetual inventory system.
LO 4: Apply steps in the accounting cycle to a merchandising company.
LO 5: Prepare a multiple-step income statement and a comprehensive income statement.
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Merchandising Operations and Inventory Systems
Merchandising Companies:
Buy and sell goods.
Types of Merchants:
Wholesaler: Sells to retailers.
Retailer: Sells to consumers.
Revenue Source: Sales revenue or sales.
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Income Measurement
Cost of Goods Sold (COGS):
Total cost of merchandise sold during the period.
Not applicable to service businesses.
Income Equation:
Net Income = Sales Revenue - Cost of Goods Sold - Operating Expenses
Gross Profit = Sales Revenue - Cost of Goods Sold.
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Operating Cycles
Service Company Operating Cycle:
Cash → Accounts Receivable → Services → Cash.
Typically shorter than merchandising companies.
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Operating Cycles
Merchandising Company Operating Cycle:
Cash → Inventory → Accounts Receivable → Cash.
Usually longer than that of a service company.
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Flow of Costs
Cost Flow:
Reflects the movement from:
Beginning Inventory
Plus: Cost of Goods Purchased
Equals: Cost of Goods Available for Sale
Minus: Ending Inventory
Equals: Cost of Goods Sold
Inventory systems: perpetual or periodic.
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Perpetual Inventory System
Maintains detailed records of each inventory purchase and sale.
Continuously updated inventory records.
Determines COGS with each sale.
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Periodic Inventory System
No detailed records kept during the accounting period.
COGS determined at the end of the accounting period.
Calculation Example:
Beginning Inventory: $100,000
Purchases: $800,000
Ending Inventory: $125,000
COGS Calculation: $775,000
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Advantages of the Perpetual System
Typically used for merchandise with high unit values.
Improved inventory control compared to periodic systems.
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True or False Statements
False: Merchandising companies generate revenue from service performance.
True: Service company operating cycles are generally shorter than merchandising cycles.
True: Gross profit equals sales revenue minus COGS.
False: Ending Inventory plus COGS purchased does not equal COGS available for sale.
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Recording Purchases (Perpetual System)
Purchases made using cash or credit.
Recorded when goods are received.
Each credit purchase supported by a purchase invoice.
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Sales Invoice
Example Sales Invoice for recording purchases in perpetual systems.
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Journal Entry Example
Date: May 4
Inventory: $3,800
Accounts Payable: $3,800
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Freight Costs
Shipping terms determine ownership transfer:
Passes when the carrier accepts goods from the seller (buyer).
Remains with the seller until delivery (seller).
Freight costs by the seller are operating expenses.
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Freight Costs Example
Date: May 6
Inventory: $150
Cash: $150
For seller covering freight:
Date: May 4
Freight-Out: $150
Cash: $150
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Purchase Returns and Allowances
Reasons for returns:
Damage, inferior quality, unmet specifications.
Choose to keep merchandise if seller allows price reductions.
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Example of Purchase Return
Date: May 8
Accounts Payable: $300
Inventory: $300
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Recording Defective Merchandise Returns
In a perpetual inventory system, return recorded by crediting Inventory.
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Purchase Discounts
Terms may offer cash discounts for prompt payment (e.g., 2/10, n/30).
Benefits:
Saves money for buyers.
Accelerates seller's cash flow.
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Example Credit Terms
2/10, n/30:
2% discount if paid within 10 days; otherwise, net due in 30 days.
1/10 EOM:
1% discount if paid in the first 10 days of the following month.
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Recording Payment with Discount
Date: May 14
Accounts Payable: $3,500
Cash: $3,430
Inventory: $70 (Discount)
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Recording Full Payment Without Discount
Date: June 3
Accounts Payable: $3,500
Cash: $3,500
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Advantages of Taking Discounts
Savings illustrated by analytical review.
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Summary of Purchasing Transactions
Breakdown of purchase, return, freight, and balance
Net amounts tabulated for clarity.
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DO IT! 2 Purchase Transactions Exercise
Example accounting for De La Hoya Company transactions.
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Recording Sales (Perpetual System)
Revenue recorded when performance obligation is satisfied.
Supported by sales invoice (e.g., goods transfer from seller to buyer).
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Journal Entries for Sales
Structure:
Cash or Accounts Receivable: XXX
Sales Revenue: XXX
Cost of Goods Sold: XXX
Inventory: XXX
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Example Sale
Date: May 4 from PW Audio Supply to Sauk Stereo
Accounts Receivable: $3,800
Sales Revenue: $3,800
Cost of Goods Sold: $2,400
Inventory: $2,400
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Sales Returns and Allowances
Contra-revenue accounts to Sales Revenue.
Not for reducing sales to avoid obscuring sales returns importance.
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Return of Non-Defective Goods
Example Entry:
Sales Returns and Allowances: $300
Accounts Receivable: $300
Inventory: $140
Cost of Goods Sold: $140
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Return of Defective Goods
Adjustments for Defective Goods:
Value adjusted to scrap (e.g., $50) on return.
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COGS Recognition
Recorded under perpetual inventory system for any sale.
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Sales Discounts Overview
Used to encourage prompt payment from customers.
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Entry for Sales Receipt with Discount
Date: May 14
Cash: $3,430
Sales Discounts: $70
Accounts Receivable: $3,500
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DO IT! 3 Sales Transactions Exercise
Example accounting for De La Hoya Company sales transactions.
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Continued Sales Transactions Exercise
Further exercises for consistency in sales entries.
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Adjusting Entries
Similar to service companies but with inventory adjustments.
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Adjusting Entry Example
Example adjustment based on physical inventory count discrepancies.
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Closing Entries Overview
Process for closing balances to Income Summary on the last day of the accounting period.
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Closing Entry for Owner's Capital
Final adjustments to Owner's Capital and Drawings.
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DO IT! 4: Sales Transactions Exercise
Task for preparing closing entries based on trial balances provided.
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Completion of Closing Entries Exercise
Finalization of all entries according to summaries and balances.
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Multiple-Step Income Statement Features
Breakdown components of net income calculation and distinguishing factors.
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Example Multiple-Step Income Statement
Detailed financial statement rendition including revenues, expenses, and net income.
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Repetition of Example Income Statement
Reinforcement of financial practices through reiteration.
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Nonoperating Activities Overview
Description of revenues and expenses unrelated to primary operations.
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Key Features of Multiple-Step Income Statement
Identify features and components absent from statement structures.
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Single-Step Income Statement Overview
Explain reasons and structural features of the single-step approach.
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Example Single-Step Income Statement
Comparison of revenues versus expenses with net income result.
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Comprehensive Income Statement Example
Detailed reporting including net income and comprehensive income elements.
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Partial Balance Sheet Example
Overview of asset classifications and balances at year-end.
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DO IT! 5 Multiple-Step Income Statement Exercise
Example preparation for the Art Center financials to reinforce concepts.
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Continued Multiple-Step Statement Preparation
Detailed draft for income statement focusing on operational effectiveness.
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Comprehensive Income Statement for Art Center
Reinforcement of prior concepts through example preparation and adjustments.
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Worksheet Preparation Process
Steps for forming a worksheet for a merchandising firm prior to statement finalization.
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Example Worksheet for PW Audio Supply
Illustrative representation of all entries per financial categories.
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Cost of Goods Sold in Periodic Systems
Methods of determining COGS without continuous records.
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Example COGS Calculation
Outlining the step-by-step determination under a periodic system.
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Recording Merchandise Transactions
Details for recording inventory movements and financial adjustments in periodic systems.
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Entry for Recorded Purchase
Example of accounting purchase made under periodic system conditions.
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Example Freight Cost Entry
Illustrating transaction entries for freight costs incurred by company purchases.
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Purchase Return Recording Illustration
Entry records for handling returns under a periodic inventory system.
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Handling Purchase Discounts Illustration
Demonstrating recorded payments that take advantage of available discounts.
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Sales Recording Transactions
Example of executing sales under both periodic and perpetual methods.
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Sales Returns Entry Example
Entry technique for managing sales returns and inventory adjustments.
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Sales Discount Entry Example
Illustrative entries for recognizing received payments and adjusted discounts.
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Closing Entries Summary
Overview of accounts affected in net income determination closure.
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Additional Example Worksheet for Periodic System
Further demonstration of end-of-period worksheet procedures.
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IFRS and GAAP Similarities
Comparison highlights in accounting systems under different frameworks.
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IFRS and GAAP Key Differences
Classification approaches in income statements; functional vs. nature.
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Additional IFRS Differences Overview
Assessment of revaluation approaches and their financial implications.
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Future Directions in Accounting
Highlighting ongoing projects and implications for income statement presentation practices.
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Copyright and Usage Information
Copyright notice regarding the use and reproduction of the document.
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