Chapter 5 Powerpoints
Page 1
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
Page 2
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.
Page 3
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.
Page 4
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.
Page 5
Operating Cycles
Service Company Operating Cycle:
Cash → Accounts Receivable → Services → Cash.
Typically shorter than merchandising companies.
Page 6
Operating Cycles
Merchandising Company Operating Cycle:
Cash → Inventory → Accounts Receivable → Cash.
Usually longer than that of a service company.
Page 7
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.
Page 8
Perpetual Inventory System
Maintains detailed records of each inventory purchase and sale.
Continuously updated inventory records.
Determines COGS with each sale.
Page 9
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
Page 10
Advantages of the Perpetual System
Typically used for merchandise with high unit values.
Improved inventory control compared to periodic systems.
Page 11
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.
Page 12
Recording Purchases (Perpetual System)
Purchases made using cash or credit.
Recorded when goods are received.
Each credit purchase supported by a purchase invoice.
Page 13
Sales Invoice
Example Sales Invoice for recording purchases in perpetual systems.
Page 14
Journal Entry Example
Date: May 4
Inventory: $3,800
Accounts Payable: $3,800
Page 15
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.
Page 16
Freight Costs Example
Date: May 6
Inventory: $150
Cash: $150
For seller covering freight:
Date: May 4
Freight-Out: $150
Cash: $150
Page 17
Purchase Returns and Allowances
Reasons for returns:
Damage, inferior quality, unmet specifications.
Choose to keep merchandise if seller allows price reductions.
Page 18
Example of Purchase Return
Date: May 8
Accounts Payable: $300
Inventory: $300
Page 19
Recording Defective Merchandise Returns
In a perpetual inventory system, return recorded by crediting Inventory.
Page 20
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.
Page 21
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.
Page 22
Recording Payment with Discount
Date: May 14
Accounts Payable: $3,500
Cash: $3,430
Inventory: $70 (Discount)
Page 23
Recording Full Payment Without Discount
Date: June 3
Accounts Payable: $3,500
Cash: $3,500
Page 24
Advantages of Taking Discounts
Savings illustrated by analytical review.
Page 25
Summary of Purchasing Transactions
Breakdown of purchase, return, freight, and balance
Net amounts tabulated for clarity.
Page 26
DO IT! 2 Purchase Transactions Exercise
Example accounting for De La Hoya Company transactions.
Page 27
Recording Sales (Perpetual System)
Revenue recorded when performance obligation is satisfied.
Supported by sales invoice (e.g., goods transfer from seller to buyer).
Page 28
Journal Entries for Sales
Structure:
Cash or Accounts Receivable: XXX
Sales Revenue: XXX
Cost of Goods Sold: XXX
Inventory: XXX
Page 29
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
Page 30
Sales Returns and Allowances
Contra-revenue accounts to Sales Revenue.
Not for reducing sales to avoid obscuring sales returns importance.
Page 31
Return of Non-Defective Goods
Example Entry:
Sales Returns and Allowances: $300
Accounts Receivable: $300
Inventory: $140
Cost of Goods Sold: $140
Page 32
Return of Defective Goods
Adjustments for Defective Goods:
Value adjusted to scrap (e.g., $50) on return.
Page 33
COGS Recognition
Recorded under perpetual inventory system for any sale.
Page 34
Sales Discounts Overview
Used to encourage prompt payment from customers.
Page 35
Entry for Sales Receipt with Discount
Date: May 14
Cash: $3,430
Sales Discounts: $70
Accounts Receivable: $3,500
Page 36
DO IT! 3 Sales Transactions Exercise
Example accounting for De La Hoya Company sales transactions.
Page 37
Continued Sales Transactions Exercise
Further exercises for consistency in sales entries.
Page 38
Adjusting Entries
Similar to service companies but with inventory adjustments.
Page 39
Adjusting Entry Example
Example adjustment based on physical inventory count discrepancies.
Page 40
Closing Entries Overview
Process for closing balances to Income Summary on the last day of the accounting period.
Page 41
Closing Entry for Owner's Capital
Final adjustments to Owner's Capital and Drawings.
Page 42
DO IT! 4: Sales Transactions Exercise
Task for preparing closing entries based on trial balances provided.
Page 43
Completion of Closing Entries Exercise
Finalization of all entries according to summaries and balances.
Page 44
Multiple-Step Income Statement Features
Breakdown components of net income calculation and distinguishing factors.
Page 45
Example Multiple-Step Income Statement
Detailed financial statement rendition including revenues, expenses, and net income.
Page 46
Repetition of Example Income Statement
Reinforcement of financial practices through reiteration.
Page 47
Nonoperating Activities Overview
Description of revenues and expenses unrelated to primary operations.
Page 48
Key Features of Multiple-Step Income Statement
Identify features and components absent from statement structures.
Page 49
Single-Step Income Statement Overview
Explain reasons and structural features of the single-step approach.
Page 50
Example Single-Step Income Statement
Comparison of revenues versus expenses with net income result.
Page 51
Comprehensive Income Statement Example
Detailed reporting including net income and comprehensive income elements.
Page 52
Partial Balance Sheet Example
Overview of asset classifications and balances at year-end.
Page 53
DO IT! 5 Multiple-Step Income Statement Exercise
Example preparation for the Art Center financials to reinforce concepts.
Page 54
Continued Multiple-Step Statement Preparation
Detailed draft for income statement focusing on operational effectiveness.
Page 55
Comprehensive Income Statement for Art Center
Reinforcement of prior concepts through example preparation and adjustments.
Page 56
Worksheet Preparation Process
Steps for forming a worksheet for a merchandising firm prior to statement finalization.
Page 57
Example Worksheet for PW Audio Supply
Illustrative representation of all entries per financial categories.
Page 58
Cost of Goods Sold in Periodic Systems
Methods of determining COGS without continuous records.
Page 59
Example COGS Calculation
Outlining the step-by-step determination under a periodic system.
Page 60
Recording Merchandise Transactions
Details for recording inventory movements and financial adjustments in periodic systems.
Page 61
Entry for Recorded Purchase
Example of accounting purchase made under periodic system conditions.
Page 62
Example Freight Cost Entry
Illustrating transaction entries for freight costs incurred by company purchases.
Page 63
Purchase Return Recording Illustration
Entry records for handling returns under a periodic inventory system.
Page 64
Handling Purchase Discounts Illustration
Demonstrating recorded payments that take advantage of available discounts.
Page 65
Sales Recording Transactions
Example of executing sales under both periodic and perpetual methods.
Page 66
Sales Returns Entry Example
Entry technique for managing sales returns and inventory adjustments.
Page 67
Sales Discount Entry Example
Illustrative entries for recognizing received payments and adjusted discounts.
Page 68
Closing Entries Summary
Overview of accounts affected in net income determination closure.
Page 69
Additional Example Worksheet for Periodic System
Further demonstration of end-of-period worksheet procedures.
Page 70
IFRS and GAAP Similarities
Comparison highlights in accounting systems under different frameworks.
Page 71
IFRS and GAAP Key Differences
Classification approaches in income statements; functional vs. nature.
Page 72
Additional IFRS Differences Overview
Assessment of revaluation approaches and their financial implications.
Page 73
Future Directions in Accounting
Highlighting ongoing projects and implications for income statement presentation practices.
Page 74
Copyright and Usage Information
Copyright notice regarding the use and reproduction of the document.