Acct 4a: Chapter 5 notes

Chapter 5: Merchandising Operations

Introduction

• Overview of Financial & Managerial Accounting (Horngren’s Eighth Edition)

• Focus on merchandising operations and inventory accounting.

Learning Objectives (1 of 2)

• 5.1: Describe merchandising operations and the two types of merchandise inventory systems.

• 5.2: Account for the purchase of merchandise inventory using a perpetual inventory system.

• 5.3: Account for the sale of merchandise inventory using a perpetual inventory system.

• 5.4: Adjust and close the accounts of a merchandising business.

Learning Objectives (2 of 2)

• 5.5: Prepare a merchandiser’s financial statements.

• 5.6: Use the gross profit percentage to evaluate business performance.

5.1: Merchandising Operations

Definitions

• Merchandiser: A business that sells goods to customers.

  • The goods are referred to as merchandise inventory.

  • Wholesaler: Buys from manufacturers and sells to retailers.

  • Retailer: Buys from wholesalers/manufacturers and sells to consumers.

The Operating Cycle of a Merchandising Business

Stages of the Operating Cycle

• 1. Purchase inventory from a vendor.

• 2. Sell the inventory to customers.

• 3. Collect cash from customers.

Income Statement Components

• Sales Revenue instead of Service Revenue.

• Cost of Goods Sold (COGS): The cost of the merchandise sold to customers.

• Gross Profit: Calculated as Net Sales Revenue minus COGS.

• Operating Expenses: Expenses other than COGS.

Merchandise Inventory Systems

Types of Inventory Systems

• Periodic Inventory System: Requires physical counts to determine inventory on hand.

• Perpetual Inventory System: Maintains a running record of inventory on a computerized system.

5.2: Accounting for Merchandise Inventory Purchases

Recording Purchases in Perpetual Inventory System

• Purchases begin with an invoice (seller’s request for payment).

  • Invoices are called bills (seller has sales invoices; purchaser has purchase invoices).

Purchase Returns and Allowances

Adjusting for Invoices

• Purchase Returns: Occur when defective or unsuitable merchandise is returned.

• Purchase Allowances: Discounts offered to keep goods that are not as ordered.

Purchase Discounts

Definition and Example

• Purchase Discount: Incentive for early payment.

• Discusses credit terms (e.g., 3/15, NET 30) to understand payment structure.

Transportation Costs

Shipping Terms Explained

• FOB Shipping Point: Title transfers when goods leave the seller; buyer usually pays freight.

• FOB Destination: Title transfers at delivery; seller usually pays freight.

Types of Freight Costs

• Freight In: Cost to ship goods into the buyer’s warehouse.

• Freight Out: Cost to ship goods out to customers (delivery expense).

Net Cost of Inventory Purchased

Calculation Importance

• Knowing the net cost is essential for determining actual merchandise purchases:

  • Total purchases minus returns and discounts plus freight charges.

5.3: Accounting for Merchandise Sales

Sales Recorded in Perpetual Inventory System

• Two entries: one for Sales Revenue and one for COGS (reduction of Merchandise Inventory).

Cash and Credit Card Sales

• Amounts earned from transactions are recorded as Sales Revenue.

• Retailers account for credit card sales as cash sales (payment received electronically).

Sales on Account

Credit Terms

• Many sales are made on account; invoice documentation captures the details.

• Smart Touch Learning example with sales computation on account.

Sales Returns and Allowances

Impact on Revenue Recording

• Return of goods must decrease sales revenue based on estimates of upcoming returns (based on historical data).

Sales Discounts

Accounting for Early Payments

• Discounts are recorded at the net amount, with implications for receivables.

5.4: Adjustments and Closing Accounts

Adjusting for Inventory

• Inventory shrinkage from theft, damage or errors necessitates regular physical counts.

5.5: Preparing Financial Statements for Merchandiser

Key Components

• A merchandiser's financial statements follow similar structures, with the addition of net sales revenue considerations.

• Income statements show net sales revenue, gross profit, and total expenses.

Types of Income Statements

• Single-Step: Groups all revenues and expenses.

• Multi-Step: Highlights subtotals like gross profit and operating income.

5.6: Evaluating Business Performance

Gross Profit Percentage

• Measures profitability per sales dollar above COGS.

• Desired to maintain a high gross profit percentage for positive business evaluation.