Chapter 4 Powerpoint

Chapter Overview

• Focus on accounting for merchandising operations.

• Key areas include cost flows, transaction analysis, and financial statement preparation.

Learning Objectives

Conceptual Understandings

• C1: Describe merchandising activities and cost flows.

Analytical Skills

• A1: Compute and analyze the acid-test ratio and gross margin ratio.

Procedural Skills

• P1: Analyze and record transactions for merchandise purchases and sales using a perpetual system.

• P2: Prepare adjustments and close accounts for a merchandising company.

• P3: Define and prepare multiple-step and single-step income statements.

• Appendices: Various supplemental calculations and transaction analysis methods.

Merchandising Activities and Cost Flows

Service Companies vs. Merchandisers

• Service Companies: Sell time, such as accounting and plumbing services.

• Merchandising Companies: Sell products, e.g., clothing and sporting goods.

• Income reporting differs between service and merchandising entities.

Operating Cycle for a Merchandiser

• Definition: Starts with the purchase of merchandise and ends with cash collection from sales.

Inventory Systems

Types of Inventory Systems

Perpetual System

• Continuous tracking of inventory and cost of goods sold (COGS) at the time of sale.

Periodic System

• Updates COGS and inventory at the end of the accounting period.

Purchasing Merchandise

Transactions Without Cash Discounts

• Example: Z-Mart purchases $500 of merchandise inventory for cash on November 2.

Credit Terms

• Sellers may offer cash discounts to encourage quicker payment.

Purchase Discounts

• Terms Example: 2/10, n/30 specifies a 2% discount if paid within 10 days; otherwise, the net total is due in 30 days.

Returns and Allowances

• Purchase Return: Returning defective goods to the supplier.

• Purchase Allowance: Price reduction for defective merchandise retained by the purchaser.

Transportation Costs

• Costs may include shipping charges, which are affected by the terms of sale, e.g., FOB shipping point.

Merchandising Sales

Recording Sales Transactions

• Involves the recording of revenue and the associated cost of goods sold.

• Example: Z-Mart sells $1,000 of merchandise on credit, cost basis of $300.

Sales Discounts and Returns

• Sales discounts encourage early payment; returns involve customer dissatisfaction.

Adjustments and Closing for Merchandisers

Adjusting Entries

• Necessary for shrinkage and expected sales discounts, returns, and allowances.

Closing Entries

• Adjust for temporary accounts such as revenues and expenses at the period's end.

Income Statements

Multiple-Step Income Statement

• Breaks down revenues and expenses to show detailed income calculations.

Single-Step Income Statement

• Consolidated format focusing on total revenues and expenses.

Key Ratios for Merchandisers

Acid-Test Ratio

• Provides insight into liquidity, calculated as:

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

Gross Margin Ratio

• Measures the percentage remaining after COGS and is calculated as:

  • Gross Margin Ratio = (Net Sales - COGS) / Net Sales.

Periodic vs. Perpetual Inventory Systems

Periodic Inventory System

• Updates inventory records and COGS at the end of the accounting period.

Adjustments for Discounts, Returns, Allowances

Expected Sales Discounts and Returns

• Adjusting entries to align actual figures with expectations for sales discounts and returns.

Conclusion

• Comprehensive understanding of merchandising operations enhances the ability to analyze financial transactions and statements effectively.

Net sales are calculated by subtracting sales returns, allowances, and discounts from gross sales. The formula is:

**Net Sales = Gross Sales - Sales Returns - Sales Allowances - Sales Discounts**

This calculation provides a more accurate picture of the revenue a company retains after accounting for these reductions.