Merchandising Activities
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Merchandising Activities
- 1. McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Merchandising ActivitiesMerchandising Activities otaleem.blogspot.comotaleem.blogspot.com for more presentation(follow me)for more presentation(follow me) Chapter 6
- 2. 6-2 Income Statement of aIncome Statement of a Merchandising CompanyMerchandising Company Computer City Condensed Income Statement For the Year Ended December 31, 2009 Revenue from sales 900,000$ Less: Cost of goods sold 540,000 Gross profit 360,000$ Less: Expenses 270,000 Net income 90,000$ Cost of goods sold represents the expense of goods that are sold to customers. Gross profit is a useful means of measuring the profitability of sales transactions.
- 3. 6-3 In order to ensure the accuracy of their perpetual records, most businesses take a complete physical count of the merchandise on hand at least once a year. Taking a Physical InventoryTaking a Physical Inventory On December 31, Worley Co. counts its inventory. An inventory shortage of $2,000 is discovered. Reasonable amounts of inventory shrinkage are viewed as a normal cost of doing business. Examples include breakage, spoilage and theft.
- 4. 6-4 Computing Cost of Goods SoldComputing Cost of Goods Sold The accounting records of Party Supply show the following: Inventory, Jan. 1 $ 14,000 Purchases (during year) 130,000 Inventory, Dec. 31 12,000 The accounting records of Party Supply show the following: Inventory, Jan. 1 $ 14,000 Purchases (during year) 130,000 Inventory, Dec. 31 12,000 Inventory (beginning of the year) 14,000$ Add: Purchases 130,000 Cost of goods available for sale 144,000 Less: Inventory (end of year) 12,000 Cost of goods sold 132,000$
- 5. 6-5 CreditTerms and Cash DiscountsCreditTerms and Cash Discounts 2/10, n/30Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due Read as: “Two ten, net thirty” When manufacturers and wholesalers sell their products on account, the credit terms are stated in the invoice.
- 6. 6-6 Recording Purchases at Net CostRecording Purchases at Net Cost $4,000 × 98% =$4,000 × 98% = On July 6, Jack & Jill, Inc. purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Jack & Jill, Inc.
- 7. 6-7 On July 15, Jack & Jill, Inc. pays the full amount due to Kid’s Clothes. Prepare the journal entry for Jack & Jill, Inc. Recording Purchases at Net CostRecording Purchases at Net Cost
- 8. 6-8 Now, assume that Jack & Jill, Inc. waited until July 20 to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Jack & Jill, Inc. Recording Purchases at Net CostRecording Purchases at Net Cost Nonoperating ExpenseNonoperating Expense
- 9. 6-9 Computer City Partial Income Statement For the Year Ended December 31, 2009 Revenue Sales 912,000$ Less: Sales returns and allowances 8,000$ Sales discounts 4,000 12,000 Net sales 900,000$ Credit terms and merchandise returns affect the amount of revenue earned by the seller. Transactions Related to SalesTransactions Related to Sales
- 10. 6-10 On August 2, Kid’s Clothes sold $2,000 of merchandise to Jack & Jill, Inc. on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. SalesSales
- 11. 6-11 Contra-revenueContra-revenue On August 5, Jack & Jill, Inc. returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Sales Returns and AllowancesSales Returns and Allowances
- 12. 6-12 On July 6, Kid’s Clothes sold $4,000 of merchandise to Jack & Jill, Inc. on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2,000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Sales DiscountsSales Discounts
- 13. 6-13 $4,000 × 98% = $3,920 $4,000 × 98% = $3,920 Contra-revenueContra-revenue On July 15, Kid’s Clothes receives the full amount due from Jack & Jill, Inc. fro the July 6 sale. Prepare the journal entry for Kid’s Clothes. Sales DiscountsSales Discounts
- 14. 6-14 Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Jack & Jill, Inc. from the July 6 sale. Prepare the journal entry for Kid’s Clothes. Sales DiscountsSales Discounts
- 15. 6-15 Perpetual Inventory systemPerpetual Inventory system What are the possible recording entries of given transaction. a) On August 2, Kid’s Clothes sold $2,000 of merchandise to Jack & Jill, Inc. on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the merchandise. b) On August 5, Jack & Jill, Inc. returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. c) On July 6, Kid’s Clothes sold $4,000 of merchandise to Jack & Jill, Inc. on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2,000. d) On July 15, Kid’s Clothes receives the full amount due from Jack & Jill, Inc. fro the July 6 sale. e) Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Jack & Jill, Inc. from the July 6 sale
- 16. 6-16 Quiz 03Quiz 03 10 marks10 marks Ranns Supply uses a perpetual inventory system. on the January 1, its account had a beginning balance of $6450,000.Ranns engaged in the following transaction during the year. Purchase merchandising inventory for $9500,000. Generated net sales of $26000,000. Recorded inventory shrinkage of $10,000 after taking a physical inventory at year-end. Reported Gross-profit for the year of 15000,000 in its income statement. a) At what amount was cost of goods sold reported in the company’s year-end income statement? b) At what amount was merchandise Inventory reported in the company’s year-end balance sheet? c) Immediately prior to recording inventory shrinkage at the end of year, what was the balance of the cost of goods sold account?What was the balance of the merchandising inventory account.
- 17. 6-17 Self-testing QuestionSelf-testing Question Solve the Demonstration problem Brief Exercise 6.1, 6.3, 6.4 Exercise 6.1, 6.7, 6.10
Editor's Notes
- Chapter 6: Merchandising Activities
- The income statements of merchandising companies have an additional expense item called Cost of Goods Sold. The Cost of Goods Sold account represents the cost of merchandise sold during the period to help earn revenue. Cost of Goods Sold is presented as a separate expense item on the income statement. Net Sales minus Cost of Goods Sold equals Gross Profit. Gross Profit is the amount left, after subtracting the cost of the inventory sold, to cover all other expenses and a profit.
- Part I Most companies take a physical count of inventory at least once a year. Theoretically, the physical count should match the number of items in the inventory records. In reality, this is not the case. The physical count does not match the records due to spoilage, breakage, damage, obsolescence, and theft. The physical count helps get the records up to date to reflect what is actually on hand. Part II When a physical count identifies inventory shrinkage, an entry is made to debit Cost of Goods Sold and credit Inventory. This entry increases Cost of Goods Sold, an expense account, and decreases the Inventory account.
- Part I Because the periodic system does not maintain a cost of goods sold account, cost of goods sold must be calculated at the end of the period. Here is some information for Party Supply. On January 1st, they have beginning inventory of $14,000. They have purchases during the year totaling $130,000. On December 31st, the physical inventory count was $12,000. Now, let’s see how to calculate the cost of goods sold for Party Supply. Part II To calculate the cost of goods sold for Party Supply, start with the beginning inventory and add the purchases during the year. This provides the cost of goods available for sale during the period. From this, subtract the ending inventory and arrive at the cost of goods sold during the period.
- Part I Cash discounts are provided to customers as an incentive for them to pay early. The credit period is the normal period of time a company allows for customers to extend their account receivable, typically 30 or 60 days. The discount period is a much shorter period of time, typically 10 or 15 days. If payment is received during the discount period, a discount may be taken. If payment is made after the discount period expires, then the full payment is due on or before the end of the credit period. Part II Cash discount terms are typically written as this slide shows. This particular discount term would be read as “two ten, net thirty.” The first number represents the discount percentage. The second number represents the discount period. The letter “n” stands for the word net. The last number represents the entire credit period. In this case, if the customer pays within 10 days, then a 2% discount may be taken. If not, then the full amount is due within 30 days.
- Many companies plan to take advantage of cash discounts offered, so they record their purchases net of the discount. Since they typically take the discount, this process simplifies future entries. If a cash discount is not taken in the future, then a purchase discounts lost account is used. On July 6th, Jack & Jill, Inc. purchased $4,000 of merchandise on account from Kid’s Clothes with terms two ten net thirty. Jack & Jill, Inc. debits Inventory and credits Accounts Payable for $3,920, which is net of the two percent cash discount.
- On July 15th, Jack & Jill, Inc. pays the full amount due to Kid’s Clothes. In this entry, Jack & Jill, Inc. debits Accounts Payable and credits Cash for $3,920. Since Accounts Payable was originally recorded for the net amount, this entry completely takes care of the balance in the Accounts Payable account.
- Now, assume that Jack & Jill, Inc. waited until July 20th to pay Kid’s Clothes. This is outside the discount period. Jack & Jill, Inc. will have to pay the full amount of $4,000 since they did not pay within the discount period. This is recorded as a credit to Cash. The debit to Accounts Payable can only be for the originally recorded amount of $3,920. The difference is a debit to Purchase Discounts Lost, a nonoperating expense account, for $80.
- Just as inventory returns and cash discounts impact a buyer’s entries, they also impact a seller’s entries. Sellers use the Sales Returns and Allowances account to record inventory returned to the seller, or adjustments in prices sellers allow due to customer dissatisfaction. Sellers use the Sales Discounts account to record cash discounts taken by customers who pay within the discount period. Net sales equals Sales minus Sales Returns and Allowances and Sales Discounts. Let’s see how these accounts are treated in journal entries.
- Kid’s Clothes sold $2,000 of merchandise to Jack & Jill, Inc. on credit terms of two ten net thirty. Kid’s Clothes originally paid $1,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, two entries are required to record this sale. One entry is a debit to Accounts Receivable and a credit to Sales for the retail amount of the sale, which in this case is $2,000. Another required entry is a debit to Cost of Goods Sold and a credit to Inventory for the cost of the inventory sold, which in this case is $1,000.
- On August 5th, Jack & Jill, Inc. returned $500 of merchandise to Kid’s Clothes. The cost of this inventory to Kid’s Clothes is $250. Because Kid’s Clothes uses a perpetual inventory system, two entries are required to record this return. One entry is a debit to Sales Returns and Allowances and a credit to Accounts Receivable for the retail amount of the sale, which in this case is $500. Another required entry is a debit to Inventory and a credit to Cost of Goods Sold for the cost of the inventory returned, which in this case is $250. Sales Returns and Allowances is a contra-revenue account that is subtracted from Sales to arrive at Net Sales for the period.
- We have explained that sellers frequently offer cash discounts, such as 2/10,n/30, to encourage customers to make early payments for purchases on account. To the seller, the cost associated with cash discounts is the discounts taken by customers who do pay within the discount period. Therefore, sellers design their accounting systems to measure the sales discounts taken by their customers. To achieve this goal, sellers record the sale and the related account receivable at the gross (full) invoice price. To illustrate, assume that on July 6th, Kid’s Clothes sold $4,000 of merchandise to Jack & Jill, Inc. on credit terms of two ten net thirty. Kid’s Clothes originally paid $2,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, two entries are required to record this sale. One entry is a debit to Accounts Receivable and a credit to Sales for the retail amount of the sale, which in this case is $4,000. Another required entry is a debit to Cost of Goods Sold and a credit to Inventory for the cost of the inventory sold, which in this case is $2,000.
- On July 15th, Kid’s Clothes receives the full payment due from Jack & Jill, Inc. Kid’s Clothes debits Cash for $3,920, which is the net amount due since payment was made within the discount period. Accounts Receivable is credited for the entire original amount of $4,000. The difference is debited to Sales Discounts, a contra-revenue account, for $80.
- Now assume that payment was not received until July 20th, which is outside the discount period. Kid’s Clothes would debit Cash and credit Accounts Receivable for the full amount of $4,000.