Chapter 6 Slides

Chapter 6: Merchandising Operations and the Multistep Income StatementAuthor: Brandy Mackintosh, CPA, CA.

INVENTORY JOURNAL ENTRIES

Inventory journal entries document all transactions related to inventory management, including:

• Purchases: When inventory is acquired, it is recorded in the inventory account and increases accounts payable if purchased on credit.

• Sales: Upon selling inventory, two entries are recorded: one to recognize sales revenue and another to reflect the expense of goods sold (Cost of Goods Sold - CGS).

• Returns and Allowances: Returns lead to a decrease in inventory and a corresponding reduction in accounts receivable or accounts payable, depending on whether the sale was on credit or for cash.

• Transportation Costs: Costs incurred for shipping inventory are added to the inventory account to reflect the total cost associated with obtaining the goods.

DISCOUNT TERMS

Discount terms in merchandising operations refer to conditions under which discounts can be applied to sales or purchases.

• Sales Discounts: Encouraging early payment, they might follow terms like 2/30 (2% off if paid within 30 days) or n/60 (full amount due in 60 days).

• Purchase Discounts: Similar terms apply for purchases, recorded at the time the purchase is made using either the Net Method (accounting for discounts immediately) or the Gross Method (accounting for discounts when payment is made).

CGS EQUATION

The Cost of Goods Sold (CGS) equation is crucial for calculating gross profit in merchandising:

• CGS Equation:CGS = Beginning Inventory + Purchases - Ending InventoryThis formula helps to determine the expense associated with the inventory that has been sold during the accounting period.

• Gross Profit: It is derived from the sales revenue minus cost of goods sold:Gross Profit = Sales Revenue - Cost of Goods SoldThis calculation is essential for understanding the profitability of the merchandise sold.

MULTI STEP INCOME STATEMENT

The multistep income statement provides a detailed overview of a company's financial performance, breaking down revenues and expenses into distinct categories.

• Structure:

  1. Gross Profit: Represents the difference between sales revenue and cost of goods sold.

  2. Operating Income: Calculated by subtracting operating expenses from gross profit.

  3. Net Income: Final profit calculated after subtracting non-operating expenses from operating income.

• Gross Profit Percentage: This metric helps assess profitability and is calculated as:Gross Profit % = (Gross Profit / Net Sales) × 100This percentage indicates how efficiently a company turns sales into profits, allowing for performance comparisons over time or against industry standards.

CHAPTER TOTAL 6

Chapter 6 comprehensively covers merchandising operations, including inventory management systems (periodic vs. perpetual), operating cycles, and the formulation and implications of the multistep income statement. The chapter includes various solved exercises that enhance practical understanding and application of the concepts discussed.