3. Chapter
5-3
1. Identify the differences between service and
merchandising companies.
2. Explain the recording of purchases under a perpetual
inventory system.
3. Explain the recording of sales revenues under a perpetual
inventory system.
4. Explain the steps in the accounting cycle for a
merchandising company.
5. Distinguish between a multiple-step and a single-step
income statement.
6. Explain the computation and importance of gross profit.
Study Objectives
4. Chapter
5-4
Forms of
Financial
Statements
Accounting for Merchandising Operations
• Freight costs
• Purchase
returns and
allowances
• Purchase
discounts
• Summary of
purchasing
transactions
Merchandising
Operations
Recording
Purchases of
Merchandise
Recording
Sales of
Merchandise
Completing
the
Accounting
Cycle
• Operating
cycles
• Flow of
costs—perpet
ual and
periodic
inventory
systems
• Sales returns
and
allowances
• Sales
discounts
• Adjusting
entries
• Closing
entries
• Summary of
merchandising
entries
• Multiple-step
income
statement
• Single-step
income
statement
• Classified
balance sheet
5. Chapter
5-5
Merchandising Operations
SO 1 Identify the differences between service and merchandising companies.
Merchandising Companies
Buy and Sell Goods
Wholesaler Retailer Consumer
The primary source of revenues is referred to as
sales revenue or sales.
6. Chapter
5-6
Merchandising Operations
Income Measurement
Illustration 5-1
Cost of goods sold is the
total cost of merchandise sold
during the period.
Not used in a
Service business.
Net
Income
(Loss)
Less
Less
Equals
Equals
Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
SO 1 Identify the differences between service and merchandising companies.
7. Chapter
5-7
The operating
cycle of a
merchandising
company
ordinarily is
longer than
that of a
service
company.
Operating Cycles
Illustration 5-2
SO 1 Identify the differences between service and merchandising companies.
8. Chapter
5-8
Features:
Perpetual System
1. Purchases increase Merchandise Inventory.
2. Freight costs, Purchase Returns and Allowances and
Purchase Discounts are included in Merchandise Inventory.
3. Cost of Goods Sold is increased and Merchandise Inventory
is decreased for each sale.
4. Physical count done to verify Merchandise Inventory
balance.
The perpetual inventory system provides a continuous record
of Merchandise Inventory and Cost of Goods Sold.
Flow of Costs
SO 1 Identify the differences between service and merchandising companies.
9. Chapter
5-9
Features:
Periodic System
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:
Flow of Costs
Beginning inventory $ 100,000
Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $ 775,000
SO 1 Identify the differences between service and merchandising companies.
10. Chapter
5-10
• Made using cash or
credit (on account).
• Normally recorded
when
goods are received.
• Purchase invoice should
support each credit
purchase.
Recording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.
Illustration 5-5
11. Chapter
5-11
Under the perpetual inventory system, companies record in
the Merchandise Inventory account the purchase of goods
they intend to sell.
Illustration: From INVOICE NO. 731 (Illustration 5-5) record
the journal entry Sauk Stereo would make to record its
purchase from PW Audio Supply.
Merchandise inventory 3,800
May 4
Accounts payable 3,800
Recording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.
12. Chapter
5-12
Illustration 5-6
Seller places goods Free
On Board the carrier, and
buyer pays freight costs.
Seller places goods Free
On Board to the buyer’s
place of business, and
seller pays freight costs.
Recording Purchases of Merchandise
Freight Costs – Terms of Sale
Freight costs incurred by the seller are an operating expense.
13. Chapter
5-13
Illustration: Assume upon delivery of the goods on May 6,
Sauk Stereo pays Acme Freight Company $150 for freight
charges, the entry on Sauk Stereo’s books is:
Merchandise inventory 150
May 6
Cash 150
Recording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.
Assume the freight terms on the invoice in Illustration 5-5
had required PW Audio Supply to pay the freight charges,
the entry by PW Audio Supply would have been:
Freight-out (or Delivery Expense) 150
May 6
Cash 150
14. Chapter
5-14
Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not
meet specifications.
Purchase Returns and Allowances
Recording Purchases of Merchandise
Return goods for credit
if the sale was made on
credit, or for a cash
refund if the purchase
was for cash.
May choose to keep the
merchandise if the seller
will grant an allowance
(deduction) from the
purchase price.
Purchase Return Purchase Allowance
SO 2 Explain the recording of purchases under a perpetual inventory system.
15. Chapter
5-15
In a perpetual inventory system, a return of
defective merchandise by a purchaser is
recorded by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Merchandise Inventory
Question
Recording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.
16. Chapter
5-16
Recording Purchases of Merchandise
SO 2 Explain the recording of purchases under a perpetual inventory system.
Illustration: Assume that on May 8 Sauk Stereo returned to
PW Audio Supply goods costing $300.
Accounts payable300
May 8
Merchandise inventory 300
17. Chapter
5-17
Credit terms may permit buyer to claim a cash
discount for prompt payment.
Advantages:
• Purchaser saves money.
• Seller shortens the operating cycle.
Purchase Discounts
Recording Purchases of Merchandise
Example: Credit terms of 2/10, n/30, is read “two-ten, net
thirty.” 2% cash discount if payment is made within 10 days.
SO 2 Explain the recording of purchases under a perpetual inventory system.
18. Chapter
5-18
Purchase Discounts Terms
Recording Purchases of Merchandise
2% discount if
paid within 10
days,
otherwise net
amount due
within 30 days.
1% discount if
paid within
first 10 days
of next month.
2/10, n/30 1/10 EOM
Net amount
due within the
first 10 days
of the next
month.
n/10 EOM
SO 2 Explain the recording of purchases under a perpetual inventory system.
19. Chapter
5-19
Accounts payable3,500
May 14
Cash 3,430
Recording Purchases of Merchandise
Merchandise Inventory 70
(Discount = $3,500 x 2% = $70)
SO 2 Explain the recording of purchases under a perpetual inventory system.
Illustration: Assume Sauk Stereo pays the balance due of
$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry Sauk makes to
record its May 14 payment.
20. Chapter
5-20
Accounts payable3,500
June 3
Recording Purchases of Merchandise
Cash 3,500
SO 2 Explain the recording of purchases under a perpetual inventory system.
Illustration: If Sauk Stereo failed to take the discount, and
instead made full payment of $3,500 on June 3, the journal
entry would be:
21. Chapter
5-21
Should discounts be taken when offered?
Purchase Discounts
Recording Purchases of Merchandise
Example: 2% for 20 days = Annual rate of 36.5%
(365/20 = 18.25 twenty-day periods x 2% = 36.5%)
Passing up the discount offered equates to paying an
interest rate of 2% on the use of $3,500 for 20 days.
SO 2 Explain the recording of purchases under a perpetual inventory system.
22. Chapter
5-22
$3,500 8th
- Return
$300
Balance
4th
- Purchase
$3,580
70 14th
- Discount
Recording Purchases of Merchandise
Summary of Purchasing Transactions
150
6th
– Freight-in
Illustratio
n
SO 2 Explain the recording of purchases under a perpetual inventory system.
23. Chapter
5-23
• Made for cash or credit (on account).
• Normally recorded when
earned, usually when
goods transfer from
seller to buyer.
• Sales invoice should
support each credit
sale.
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Illustration 5-5
24. Chapter
5-24
Two Journal Entries to Record a Sale
Cash or Accounts receivable XXX
Sales XXX
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
#1
Cost of goods sold XXX
Merchandise inventory XXX
#2
Selling
Price
Cost
25. Chapter
5-25
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Accounts receivable 3,800
May 4
Sales 3,800
Illustration: Assume PW Audio Supply records its May 4
sale of $3,800 to Sauk Stereo (Illustration 5-5) as follows.
Assume the merchandise cost PW Audio Supply $2,400.
Cost of goods sold 2,400
4
Merchandise inventory 2,400
26. Chapter
5-26
• “Flipside” of purchase returns and allowances.
• Contra-revenue account (debit).
• Sales not reduced (debited) because:
would obscure importance of sales returns and
allowances as a percentage of sales.
could distort comparisons between total sales
in different accounting periods.
Sales Returns and Allowances
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
27. Chapter
5-27
Illustration: Prepare the entry PW Audio Supply would make
to record the credit for returned goods that had a $300
selling price (assume a $140 cost). Assume the goods were
not defective.
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Sales returns and allowances 300
May 8
Accounts receivable 300
Merchandise inventory 140
8
Cost of goods sold 140
28. Chapter
5-28
Illustration: Assume the returned goods were defective and
had a scrap value of $50, PW Audio would make the following
entries:
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Sales returns and allowances 300
May 8
Accounts receivable 300
Merchandise inventory 50
8
Cost of goods sold 50
29. Chapter
5-29
The cost of goods sold is determined and
recorded each time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory
system.
d. neither a periodic nor perpetual inventory
system.
Review Question
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
31. Chapter
5-31
• Offered to customers to promote prompt
payment.
• “Flipside” of purchase discount.
• Contra-revenue account (debit).
Sales Discount
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
32. Chapter
5-32
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Cash 3,430
May 14
Accounts receivable 3,500
Sales discounts 70
* [($3,800 – $300) X
2%]
*
Illustration: Assume Sauk Stereo pays the balance due of
$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry PW Audio Supply
makes to record the receipt on May 14.
33. Chapter
5-33
Q5-9 Joan Roland believes revenues from credit
sales may be earned before they are
collected in cash. Do you agree? Explain.
Discussion Question
See notes page for discussion
Recording Sales of Merchandise
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
34. Chapter
5-34
• Generally the same as a service company.
• One additional adjustment to make the records
agree with the actual inventory on hand.
• Involves adjusting Merchandise Inventory and
Cost of Goods Sold.
Adjusting Entries
Completing the Accounting Cycle
SO 4 Explain the steps in the accounting cycle for a merchandising company.
35. Chapter
5-35
Completing the Accounting Cycle
SO 4 Explain the steps in the accounting cycle for a merchandising company.
Illustration: Suppose that PW Audio Supply has an
unadjusted balance of $40,500 in Merchandise Inventory.
Through a physical count, PW Audio determines that its
actual merchandise inventory at year-end is $40,000. The
company would make an adjusting entry as follows.
Cost of goods sold 500
Merchandise inventory 500
37. Chapter
5-37
• Shows several steps in determining net income.
• Two steps relate to principal operating
activities.
• Distinguishes between operating and non-
operating activities.
Multiple-Step Income Statement
Forms of Financial Statements
SO 5 Distinguish between a multiple-step and a single-step income statement.
38. Chapter
5-38 SO 6 Explain the computation and importance of gross profit.
Illustration 5-13
Key Items:
• Net sales
• Gross profit
• Gross profit
rate
Illustration 5-10
Calculation of Gross Profit
40. Chapter
5-40
Forms of
Financial
Statements
Key Items:
• Net sales
• Gross profit
• Operating
expenses
• Nonoperating
activities
• Net income
SO 5 Distinguish between a multiple-step and a single-step income statement.
Illustration 5-13
41. Chapter
5-41
The multiple-step income statement for a
merchandiser shows each of the following
features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.
Review Question
Forms of Financial Statements
SO 5 Distinguish between a multiple-step and a single-step income statement.
42. Chapter
5-42
• Subtract total expenses from total revenues
• Two reasons for using the single-step format:
1) Company does not realize any type of profit
until total revenues exceed total expenses.
2) Format is simpler and easier to read.
Single-Step Income Statement
Forms of Financial Statements
SO 5 Distinguish between a multiple-step and a single-step income statement.
44. Chapter
5-44
Forms of Financial Statements
Illustration 5-15
Classified Balance Sheet
SO 5 Distinguish between a multiple-step and a single-step income statement.
45. Chapter
5-45
Periodic System
• Separate accounts used to record purchases,
freight costs, returns, and discounts.
• Company does not maintain a running account
of changes in inventory.
• Ending inventory determined by physical count.
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Periodic Inventory System
46. Chapter
5-46
Calculation of Cost of Goods Sold
$316,000
Illustration 5A-1
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Periodic Inventory System
47. Chapter
5-47
Recording Purchases under Periodic System
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Illustration: On the basis of the sales invoice (Illustration 5-5)
and receipt of the merchandise ordered from PW Audio
Supply, Sauk Stereo records the $3,800 purchase as follows.
Purchases 3,800
May 4
Accounts payable 3,800
48. Chapter
5-48
Recording Purchases under Periodic System
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Illustration: If Sauk pays Haul-It Freight Company $150
for freight charges on its purchase from PW Audio Supply on
May 6, the entry on Sauk’s books is:
Freight-in (Transportation-in) 150
May 6
Cash 150
Freight Costs
49. Chapter
5-49
Recording Purchases under Periodic System
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Illustration: Sauk Stereo returns $300 of goods to PW Audio
Supply and prepares the following entry to recognize the
return.
Accounts payable300
May 8
Purchase returns and allowances 300
Purchase Returns and Allowances
50. Chapter
5-50
Recording Purchases under Periodic System
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Illustration: On May 14 Sauk Stereo pays the balance due on
account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio for payment within 10 days. Sauk
Stereo records the payment and discount as follows.
Accounts payable3,500
May 14
Purchase discounts 70
Purchase Discounts
Cash 3,430
51. Chapter
5-51
No entry is recorded for cost of goods sold at the time
of the sale under a periodic system.
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Recording Sales under Periodic System
Illustration: PW Audio Supply, records the sale of $3,800 of
merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-5) as follows.
Accounts receivable 3,800
May 4
Sales 3,800
52. Chapter
5-52
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Illustration: To record the returned goods received from
Sauk Stereo on May 8, PW Audio Supply records the $300
sales return as follows.
Sales returns and allowances 300
May 4
Accounts receivable 300
Sales Returns and Allowances
Recording Sales under Periodic System
53. Chapter
5-53
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Illustration: On May 14, PW Audio Supply receives payment
of $3,430 on account from Sauk Stereo. PW Audio honors the
2% cash discount and records the payment of Sauk’s account
receivable in full as follows.
Sales Discounts
Recording Sales under Periodic System
Cash 3,430
May 14
Accounts receivable 3,500
Sales discounts 70
54. Chapter
5-54
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Comparison of Entries—Perpetual Vs. Periodic
Illustration 5A-2
55. Chapter
5-55
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory
Comparison of Entries—Perpetual Vs. Periodic
Illustration 5A-2
