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Chapter 5
Accounting for
Merchandising Operations
Prepared by:
Debbie Musil
Kwantlen Polytechnic University
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Accounting for Merchandising
Operations
•
•
•
•
•
•
Merchandising operations
Recording purchases of merchandise
Recording sales of merchandise
Completing the accounting cycle
Merchandising financial statements
Using the information in the financial
statements
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Merchandising Operations
•
Purchasing products to resell to customers
• Main source of revenue is sale of merchandise
• Called Sales Revenue, or simply Sales
•
Two categories of expenses:
• Cost of Goods Sold: cost of merchandise sold
• Operating expenses: incurred in the process of earning
sales revenue
•
Gross profit: difference between Sales Revenue
and Cost of Goods Sold
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Income Measurement Process for
a Merchandising Company
Sales
Revenue
Less
Cost of
Goods Sold
Equals
Gross
Profit
Less
Operating
Expenses
Equals
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Profit
(Loss)
Perpetual Inventory System
•
•
•
Maintains detailed records of inventory
purchases and sales
Continuously (perpetually) shows quantity
and cost of inventory that should be on
hand for each item
Cost of Goods Sold is calculated and
recorded at the time of each sale
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Periodic Inventory System
•
•
Detailed inventory records are not kept
throughout the period
Cost of Goods Sold is calculated at the
end of the accounting period (periodically)
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Calculating Cost of Goods Sold
Beginning
Inventory
+
Cost of
Goods
Purchased
=
Goods
Available
For Sale
-
Ending
Inventory
•
=
Cost of
Goods Sold
The equation for calculating Cost of Goods Sold
is the same for perpetual and periodic inventory
systems
• The difference is when Cost of Goods Sold is
calculated
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Perpetual Inventory System
Recording Merchandise Purchases
•
When merchandise is purchased for
resale:
Dr. Merchandise inventory (for cost of goods)
Cr. Accounts payable (purchases on credit)
or Cash (cash purchases)
•
The purchase is normally recorded when
the merchandise is received
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Freight Costs
•
Purchase invoice indicates when ownership of the
goods is transferred from buyer to seller
• FOB Shipping Point:
• Buyer accepts ownership at place of shipping and pays
for shipping costs
• Buyer debits Merchandise Inventory for cost of shipping
•
FOB Destination:
• Buyer accepts ownership when goods are delivered to
buyer’s place of business and seller pays freight costs
• Seller debits Freight Out for cost of shipping
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Purchase Returns & Allowances
•
•
•
Goods purchased may be damaged,
defective, of inferior quality, or they may
not meet purchaser’s specifications
Goods may be returned or purchase price
may be reduced (an allowance)
Entry to record:
Dr. Cash or Accounts payable
Cr. Merchandise Inventory (for amount of
return or adjustment)
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Quantity and Purchase Discounts
•
•
•
Quantity discount: reduction in price due to
the quantity being purchased
Purchase discount: reduction in price due
to early payment of amount due
If pay early and get a purchase discount:
Dr. Accounts payable
Cr. Merchandise Inventory (for amount of
discount)
Cr. Cash (for net amount owed)
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Recording Sales of Merchandise
•
•
Revenues are reported when goods are
transferred from seller to buyer
Two entries needed to record the sale:
• To record sales revenue:
Dr. Cash or Accounts payable
Cr. Sales
• To record cost of goods sold:
Dr. Cost of Goods Sold
Cr. Merchandise Inventory
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Sales Taxes
•
•
•
Collected by merchandising companies on
the goods that they sell
Periodically remitted to government
Sales taxes collected are not revenue
• Treated as a liability until paid (as they are
due to the government)
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Sales Returns & Allowances
•
Sales returns: when customers return
merchandise to seller for credit or refund
• Sales allowances: when seller grants customers a
price reduction
• Contra account used to provide information
• Seller’s entry required:
Dr. Sales returns and allowances
Cr. Accounts receivable or cash
•
Also, if merchandise returned, and is saleable:
Dr. Merchandise inventory
Cr. Cost of goods sold
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Quantity and Sales Discounts
•
Quantity discount:
• Reduction in selling price due to the volume of
goods purchased
• Sale is recorded at reduced price
•
Sales discount:
• Discount offered for early payment of bill
• Discount amount taken is credited to Sales
Discounts (a contra revenue account)
• Original amount in Sales is not changed
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Completing the Accounting Cycle
•
Same types of adjusting entries as a service
company
• One additional adjustment for inventory
• To ensure the recorded inventory amount agrees with
the actual quantity on hand
•
A physical count is an important control feature
• A perpetual system indicates what should exist
• An inventory count will determine what does exist
•
Additional accounts to be closed: Sales, Sales
Returns and Allowances, Sales Discounts, Cost
of Goods Sold, Freight Out
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Merchandising Income Statement
•
Single step: classified as revenues and expenses
only
• Multiple step: five main steps
1 Net Sales = Sales less returns, allowances, discounts
2 Gross Profit = Net Sales less Cost of Goods Sold
3 Profit from Operations = Gross Profit less Operating
Expenses
4 Non-Operating Activities: activities not related to
operations
5 Profit = Profit from Operations + Non-operating Activities
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Single-Step Income Statement
HIGHPOINT AUDIO & TV SUPPLY
Income Statement
Year Ended May 31, 2011
Revenues
Net sales
Interest revenue
Rent revenue
Total revenues
Expenses
Cost of goods sold
Operating expenses
Interest expense
Total expenses
Profit
$459,000
1,000
2,400
462,400
$315,000
114,000
1,800
430,800
$ 31,600
All data are classified as either
(1) revenues or (2) expenses
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Multiple-Step Income Statement
H IGH POIN T AU D IO & T V SU PPLY
Inc o me Sta te me nt
Ye a r End e d Ma y 31, 2011
Calculation of net sales and
gross profit
Calculation of profit from
operations
Calculation of non-operating
activities and profit
Sales revenue
Sales
Less: Sales returns and allowances
Sales discounts
Net sales
Cost of goods sold
Gross profit
Operating expenses
Salaries expense
Rent expense
Utilities expense
Advertising expense
Depreciation expense
Freight out
Insurance expense
Total operating expenses
Profit from operations
Other revenues
Interest revenue
Rent revenue
Total non-operating revenue and gain
Other expenses
Interest expense
Net non-operating revenues
Profit
$ 480,000
$
$
16,700
4,300
21,000
459,000
315,000
144,000
45,000
19,000
17,000
16,000
8,000
7,000
2,000
114,000
30,000
$
1,000
2,400
3,400
$
1,800
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
$
1,600
31,600
Impact of IFRS on the
Income Statement
•
•
•
•
•
Profit used instead of net income
Income is equivalent to revenue and gains
Net income may still be used
Operating and other expenses should be
classified based on their nature or function
Relevant line items, headings and
subtotals are required
• Prevents important information from being
concealed
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Classified Balance Sheet
H IGH P OIN T A U D IO & T V S U P P LY
B a la nc e S he e t (p a rtia l)
Ma y 31, 2011
Assets
Current assets
Cash
Notes receivable
Accounts receivable
Merchandise inventory
Prepaid insurance
Total current assets
Property, plant, and equipment
Store equipment
Less: Accumulated depreciation
Total assets
$
$
$ 80,000
24,000
9,500
10,000
6,100
40,000
1,800
67,400
Merchandise
Inventory
reported as a
current asset
following
Accounts
Receivable
56,000
$ 123,400
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Using the Information in the
Financial Statements
•
•
Profitability ratios: measure profit or
operating success for a specific time period
Gross profit margin:
• Gross profit expressed as a percentage
• Measures the effectiveness of a company’s
purchasing and pricing policies
= Gross Profit ÷ Net Sales
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Using the Information in the
Financial Statements 2
•
Profit margin:
• The percentage of sales that results in profit
• Measures the ability of a company to cover all
expenses and provide a return to owners
= Profit ÷ Net Sales
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Appendix 5A: Periodic Inventory
System
•
Calculation of Cost of Goods Sold is only
performed at end of period
• When physical inventory count is done
•
Causes accounting entries to be different
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Recording Purchases of
Merchandise
•
Merchandise Inventory account is not
used; separate accounts are used instead:
• Merchandise purchases are debited to
Purchases account
• Freight costs are debited to Freight In account
• Returns and allowances are credited to
Purchase Returns and Allowances account
• Discounts are credited to Purchase Discounts
account
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Periodic Inventory System:
Sales
•
At time of sale, only Sales Revenue is
recorded
Dr. Accounts receivable or Cash
Cr. Sales
• No entry is made to recognize cost of sales
•
Freight costs, sales returns, allowances
and discounts are treated the same as
under a perpetual inventory system
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Periodic Inventory System:
Calculating Cost of Goods Sold
•
Cost of Goods Purchased
• Add Purchases and Freight In
• Subtract Purchase Returns and Allowances and
Purchase Discounts
•
Cost of Goods on Hand
• Based on physical count of inventory
= Number of units counted x unit cost
•
Cost of Goods Sold
= Cost of Goods on Hand at beginning of period + Cost
of Goods Purchased – Cost of Goods on Hand at end
of period
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
Periodic Inventory System:
Calculating Cost of Goods Sold 2
= Inventory at start of period + Cost of Goods
Purchased - Inventory at end of period
Cost of goods sold
Inventory, June 1, 2010
Purchases
Less: Purchase returns and allowances
and discounts
Net purchases
Add: Freight in
Cost of goods purchased
Cost of goods available for sale
Inventory, May 31, 2011
Cost of goods sold
$
$
325,000
$
17,200
307,800
12,200
$
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
35,000
320,000
355,000
40,000
315,000
Periodic Inventory System:
Completing the Accounting Cycle
•
Regular closing entries for all purchase and
sales discounts, allowances, freight
• Additional entry is required to close beginning
merchandise inventory
Dr. Income summary
Cr. Merchandise Inventory
•
Another entry is required to establish ending
merchandise inventory
Dr. Merchandise Inventory
Cr. Income summary
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.
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from the use of the information contained herein.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition
© 2010 John Wiley & Sons Canada, Ltd.