ACO 201 Chapter 6, Spring 2013

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Merchandising Activities Merchandising Activities Chapter 6 6-2 Operating Cycle of a Operating Cycle of a Merchandising Company Merchandising Company 1. Purchase of merchandise 3. Collection of the receivables 2. Sale of merchandise on account Cash Inventory Accounts Receivable 6-3 Comparing Merchandising Comparing Merchandising Activities with Manufacturing Activities with Manufacturing Activities Activities Merchandising Company Purchase inventory in ready-to-sell condition. Manufacturing Company Manufacture inventory and have a longer and more complex operating cycle. 6-4 Retailers and Wholesalers Retailers and Wholesalers Retailers sell merchandise directly to the public. Wholesalers buy merchandise from several different manufacturers and then sell this merchandise to several retailers. 6-5 Income Statement of a Income Statement of a Merchandising Company Merchandising 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. 6-6 Accounting System Accounting System Requirements for Requirements for Merchandising Companies Merchandising Companies General Ledger Accounts Receivable Date Debit Credit Balance 2009 June 1 10,000 10,000 15 3,000 7,000 Control Account Subsidiary Ledger Heather Jacobs Company Date Debit Credit Balance 2009 June 1 7,000 7,000 15 2,000 5,000 Subsidiary Ledger Sparks, Inc. Date Debit Credit Balance 2009 June 1 3,000 3,000 15 1,000 2,000 Subsidiary Ledgers 6-7 On September 5, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account. Perpetual Inventory Systems Perpetual Inventory Systems 6-8 On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios. 10  $30 = $300 10  $30 = $300 Cost Retail Perpetual Inventory Systems Perpetual Inventory Systems 6-9 On September 15, Worley Co. paid Electronic City $3,000 for the September 5 purchase. Perpetual Inventory Systems Perpetual Inventory Systems 6-10 On September 22, Worley Co. received $500 from ABC Radios as payment in full for their purchase on September 10. Perpetual Inventory Systems Perpetual Inventory Systems 6-11 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 Inventory Taking 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. 6-12 Closing Entries in a Perpetual Closing Entries in a Perpetual Inventory System Inventory System  Close Revenue accounts (including Sales) to Income Summary.  Close Expense accounts (including Cost of Goods Sold) to Income Summary.  Close Income Summary account to Retained Earnings.  Close Dividends to Retained Earnings. The closing entries are the same! 6-13 On September 5, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account. Notice that no entry is made to Inventory. Notice that no entry is made to Inventory. Periodic Inventory System Periodic Inventory System 6-14 On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios. Retail Periodic Inventory System Periodic Inventory System 6-15 On September 15, Worley Co. paid Electronic City $3,000 for the September 5 purchase. Periodic Inventory System Periodic Inventory System 6-16 On September 22, Worley Co. received $500 from ABC Radios as payment in full for their purchase on September 10. Periodic Inventory System Periodic Inventory System 6-17 Computing Cost of Goods Computing Cost of Goods Sold 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 6-18 Creating a Cost of Goods Sold Creating a Cost of Goods Sold Account Account Party Supply must create the Cost of Goods Sold account. Party Supply must record the ending inventory amount. 6-19 Selecting an Inventory Selecting an Inventory System System Factors Suggesting a Perpetual Inventory System Factors Suggesting a Periodic Inventory System Large company with professional management. Small company, run by owner. Management and employees wanting information about items in inventory and the quantities of specific products that are selling. Accounting records of inventories and specific product sales not needed in daily operations; such information developed primarily for use in annual income tax returns. Items in inventory with a high per-unit cost. Inventory with many different kinds of low-cost items. Low volume of sales transactions or a computerized accounting system. High volume of sales transactions and a manual accounting system. Merchandise stored at multiple locations or in warehouses separate from sales sites. All merchandise stored at the sales site (for example, in the store). 6-20 Credit Terms and Cash Discounts Credit Terms and Cash Discounts 2/10, n/30 Percentage 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. 6-21 Recording Purchases at Net Recording Purchases at Net Cost Cost $4,000  98% = $3 920 $4,000  98% = $3 920 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. 6-22 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 Recording Purchases at Net Cost Cost 6-23 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 Recording Purchases at Net Cost Cost Nonoperating Expense Nonoperating Expense 6-24 Recording Purchases at Gross Recording Purchases at Gross Invoice Price Invoice Price 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. 6-25 Reduces Cost of Goods Sold Reduces Cost of Goods Sold $4,000  98% = $3,920 $4,000  98% = $3,920 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 Gross Recording Purchases at Gross Invoice Price Invoice Price 6-26 Now, assume that Jack & Jill, Inc. waited until July 20 to pay the full amount due to Kid’s Clothes. Prepare the journal entry for Jack & Jill, Inc. Recording Purchases at Gross Recording Purchases at Gross Invoice Price Invoice Price 6-27 $500  98% = $490 $500  98% = $490 On August 5, Jack & Jill, Inc. returned $500 of unsatisfactory merchandise purchased from Kid’s Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at net cost. Prepare the entry for Jack & Jill, Inc. Returns of Unsatisfactory Returns of Unsatisfactory Merchandise Merchandise 6-28 Transportation costs related to the acquisition of assets are part of the cost of the asset being acquired. Transportation costs related to the acquisition of assets are part of the cost of the asset being acquired. Transportation Costs on Transportation Costs on Purchases Purchases 6-29 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 Sales Transactions Related to Sales 6-30 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. Sales Sales 6-31 Contra-revenue Contra-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 Allowances Sales Returns and Allowances 6-32 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 Discounts Sales Discounts 6-33 $4,000  98% = $3,920 $4,000  98% = $3,920 Contra-revenue Contra-revenue On July 15, Kid’s Clothes receives the full amount due from Jack & Jill, Inc. from the July 6 sale. Prepare the journal entry for Kid’s Clothes. Sales Discounts Sales Discounts 6-34 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 Discounts Sales Discounts 6-35 Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense. Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense. Delivery Expenses Delivery Expenses 6-36 Businesses collect sales tax at the point of sale. Then, they remit the tax to the appropriate governmental agency at times specified by law. $1,000 sale  7% tax = $70 sales tax $1,000 sale  7% tax = $70 sales tax Accounting for Sales Taxes Accounting for Sales Taxes 6-37 Modifying an Accounting Modifying an Accounting System System Most businesses use special journals rather than a general journal to record routine transactions that occur frequently. 6-38 Financial Analysis Financial Analysis Net Sales Gross Profit Margins • Trends over time • Comparable store sales • Sales per square foot of selling space • Trends over time • Comparable store sales • Sales per square foot of selling space • Gross profit  Net sales • Overall gross profit margin • Gross profit margins by department and products • Gross profit  Net sales • Overall gross profit margin • Gross profit margins by department and products 6-39 Ethics, Fraud, and Ethics, Fraud, and Corporate Governance Corporate Governance Sales discounts and allowances are contra- revenue accounts. Sales discounts and allowances reduce gross sales. As such, net income will be incorrect if discounts and allowances are not properly recorded. The pressure brought to bear on subordinates to implement fraudulent schemes developed by top management can often be intense. Top management can threaten employees with termination if they fail to participate in the fraud. Unfortunately, employees who acquiesce to such pressure face tremendous legal risks. 6-40 End of Chapter 6 End of Chapter 6