Accounting for Merchandising Operations - Lecture Slides | ACC 101, Exams of Financial Accounting

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ACC101 – CHAPTER 4

Accounting for Merchandising Operations

Key Terms and Concepts to Know

Income Statements: Single-step income statement Multiple-step income statement Gross Margin = Gross Profit = Net Sales – Cost of Goods Sold Gross Margin ratio = Gross Margin / Net Sales

Operating Cycle: Purchase merchandise from vendors for inventory on account or for cash Sell inventory to customers on account Collect cash from customers Pay cash to vendors Repeat again and again Note that these steps overlap so that the cash collections from customers may occur after the cash payments to vendors.

Merchandise Inventory: Merchandise Inventory (Inventory or MI) refers to the goods the company has purchased and intends to sell to others. Inventory is a current asset since the company intends to sell it within one year.

Cost of Goods Sold: Inventory that has been sold becomes an expense, Cost of Goods Sold, in the period of sale.

Inventory Systems: Perpetual Inventory System records all inventory transactions as they occur in the Merchandise Inventory account. Perpetual Inventory System records all purchase-related inventory transactions as they occur in separate accounts and records the cost of goods sold only at the end of the period. Shrinkage is the cost of inventory not on hand and not sold. It is part of cost of goods sold under either inventory system.

Purchasing Transactions: Inventory account is increased for the cost of the merchandise purchased plus the freight cost necessary to transport the inventory to the buyer’s place of business (FOB shipping point). Inventory account is decreased for the cost of the merchandise returned to the seller, allowances received from the seller and any cash discounts taken. Inventory is always recorded at the final cost to the buyer.

Purchase Transactions

Example: Inventory is purchased for cash or on account. If the purchaser is required to pay shipping charges they are added on to the dollar amount. ($700 purchase + $ shipping charge)

FOB Shipping Point FOB Destination

Mdse Inventory 800 Mdse Inventory 700 A/P (Cash) 800 A/P (Cash) 700

2. $200 of mdse is returned: A/P (Cash) 200 Mdse Inventory 200
3. When paid within the discount period assuming credit terms of 2/10, n/30: $700 purchase - $200 return = $500 mdse * 2% = $10 discount $600 owed ($500 + $100 shipping) - $10 discount = $590 paid

FOB Shipping Point FOB Destination

A/P 600 (amt owed) A/P 500

Cash 590 (amt paid) Cash 490

Mdse Inventory 10 (discount) Mdse Inventory 10

Practice Problem # Journalize the following purchase related transactions:

a. Jingle Co. purchased $4,000 worth of merchandise on account, terms 2/10, n/30, FOB shipping point. Prepaid transportation charges of $200 were added to the invoice. b. Returned $500 of merchandise purchased in (a). c. Paid on account for purchases in (a), less return (b) and discount.

Sales Transactions

1. Sales can be on account or for cash and require two entries. One entry records the revenue from the sale at the selling price; the second entry decreases the inventory account and records the expense of the sale at cost. ($2,000 sale, cost of merchandise is $1,200, shipping charges of $100)

FOB Shipping Point FOB Destination

Accounts Receivable (Cash) 2,100 Accounts Receivable 2, Sales 2,000 Sales 2, Cash 100 Transportation Out 100 Cash 100

Cost of Mdse Sold 1,200 Cost of Mdse Sold 1, Mdse Inventory 1,200 Mdse Inventory 1,

2. Nonbank credit card sales, such as American Express, are considered sales on account. Bank credit card sales are considered cash sales.
3. When merchandise is returned by the customer 2 entries are required. One entry records the reduction in revenue at the sales price; the second entry increases the inventory account and reduces the expense of the sale at cost. ($800 return, cost of merchandise is $480)

Sales Returns & Allowances 800 A/R (Cash) 800 Mdse Inventory 480 Cost of Mdse Sold 480

4. When the customer pays within the discount period, assuming credit terms of 2/10, n/30: $2,000 sale - $800 return = 1,200 balance due * 2% = $24 discount ($1,200 due + $100 shipping) - $24 discount = $1,276 cash to be received

FOB Shipping Point FOB Destination

Cash 1,276 (amount received) Cash 1,

Sales Disc. 24 (discount)^ Sales Disc.^24

A/R 1,300 (amount due) A/R 1,

Inventory Shrinkage

The balance in the Merchandise Inventory account in the general ledger was $300, before adjustment. A Physical Inventory was taken and the value of the merchandise on hand was $294,000.

Adjusting entry required:

Cost of Mdse Sold 6, Mdse Inventory 6,

Practice Problem # Using the format for the multi-step income statement, compute the following: a. Calculate Net Sales and Gross Profit if, Sales are $375,000, Sales Returns and Allowances are $32,000, Sales Discounts are $12,000 and Cost of Merchandise Sold is $255,000. b. Calculate Sales Returns and Allowances and Cost of Merchandise Sold if, Sales are $750,000, Sales Discounts are $9,000, Net Sales are $736,000 and Gross Profit is $310,000. c. Calculate Sales and Net Sales if, Sales Returns and Allowances are $25,000, Sales Discounts are $15,000, Cost of Merchandise Sold is $620,000 and Gross Profit is $185,000.

Practice Problem # Journalize the following related transactions. a. Purchased mdse on account from Blitzen Co., list price $20,000, trade discount 25%, terms FOB shipping point, 2/10, n/30, with prepaid transportation costs of $650 added to the invoice. b. Purchased merchandise on account from Cupid Co., $8,000, terms FOB destination, 1/10, n/30. c. Sold merchandise on account to Donner Co., $9,800, terms 2/10, n/30. The cost of the merchandise sold was $5,800. d. Returned $2,000 of merchandise purchased from Cupid Co. (b) e. Paid Blitzen Co. on account for purchase in (a) less discount. f. Received merchandise returned by Donner Co. from sale in (c), $1,800. The cost of the merchandise returned was $1,080. g. Paid Cupid Co. on account for purchase in (b) less return (d) and discount. h. Received cash on account from Donner Co. for sale in (c) less return (f) and discount. i. Perpetual inventory records indicate that $85,000 of merchandise should be on hand. The physical inventory indicates that $81,350 of merchandise is on hand.

SAMPLE MULTIPLE CHOICE QUESTIONS

1. The difference between net sales and cost of merchandise sold for a merchandising business is: a. Sales b. Net Sales c. Gross Profit d. Gross Sales
2. When purchases of merchandise are made on account, the transaction would be recorded with the following entry: a. Debit Accounts Payable, credit Merchandise Inventory b. Debit Merchandise Inventory, credit Accounts Payable c. Debit Merchandise Inventory, credit Cash d. Debit Cash, credit Merchandise Inventory
3. When a corporation sells merchandise and the terms are FOB shipping point and pays the shipping costs, the seller would record the transportation costs with the following entry: a. Debit Cash, credit Accounts Receivable b. Debit Accounts Receivable, credit Sales c. Debit Accounts Receivable, credit Cash d. Debit Merchandise Inventory, credit Accounts Payable
4. Multiple-step income statements: a. Show gross profit but not income from operations b. Show both gross profit and income from operations c. Show neither gross profit nor income from operations d. Show income from operations but not gross profit
5. Which of the following would be reported on the retained earnings statement for the current year? a. Dividends for the current year b. Sales c. Cost of merchandise sold d. Merchandise inventory

12. Ownership of the merchandise passes to the buyer when the merchandise is delivered to the shipper under F.O.B. Destination. a. True b. False
13. When credit terms of 1/10, n/30 are offered, the discount period is: a. 1 day b. 10 days c. 20 days d. 30 days
14. Freight costs incurred by the seller are recorded in the a. Sales account b. Cost of merchandise sold account c. Transportation In account d. Transportation Out account
15. Which of the following would be classified in an income statement as Other Income or Other Expense? a. Advertising Expense b. Interest Expense c. Transportation Out d. Cost of merchandise sold
16. The sales discount is based on a. Invoice price plus transportation costs b. Invoice price less discount c. Invoice price plus transportation costs less returns and allowances d. Invoice price less returns and allowances
17. Myers and Company sold $1,800 of merchandise on account to Oscar, Inc. on March 1 with credit terms of 2/10, n/30. Oscar returned $500 of the merchandise due to poor quality on March 3. If Oscar pays for the purchase on March 11, what entry does Myers make to record receipt of the payment? a. Debit Cash, $1,764; credit A/R, $1, b. Debit Cash, $1,800; credit Sales Returns and allowances, $500; credit A/R, $1, c. Debit Cash, $1,274; debit Sales Discounts $26; credit A/R, $1, d. Debit Cash, $1,800; credit Sales Discounts $36; credit A/R, $1,

18. In a perpetual inventory system, what accounts are credited when a customer returns merchandise to the seller? a. Sales Returns and Allowances and Accounts Receivable b. Accounts Receivable and Cost of Merchandise Sold c. Merchandise Inventory and Cost of Merchandise Sold d. Sales Returns and Allowances and Merchandise Inventory
19. Assume that sales are $450,000, sales discounts are $10,000, net income is $35,000, and cost of merchandise sold is $320,000. Gross profit and operating expenses are, respectively a. $130,000 and $95, b. $120,000 and $95, c. $130,000 and $85, d. $120,000 and $85,
20. Which of the following accounts is credited when merchandise purchases are paid for within the discount period? a. Merchandise Inventory b. Accounts Payable c. Accounts Receivable d. Sales Discounts

• Sales Returns & Allowances (32,000)

c. Sales x x – 25,000 – 15,000 = y

• Practice Problem #
• a. Merchandise Inventory 4, - A/P 4,
• b. A/P - Merchandise Inventory
• c. A/P 3, - Cash 3, - Merchandise Inventory
• Practice Problem #
• a. Accounts Receivable/Jangle 5, - Sales 5, - Cash
  • Cost of Merchandise Sold 3,
    • Merchandise Inventory 3,
• b. Accounts Receivable/Comet 10, - Sales 10,
  • Cost of Merchandise Sold 6,
    • Merchandise Inventory 6,
• c. Transportation Out - Cash
• d. Sales Returns & Allowances 2, - Accounts Receivable/Comet 2,
  • Merchandise Inventory 1,
    • Cost of Merchandise Sold 1,
  • Cash 5, $5,200 owed ($5,000 + $200 shipping) - $100 discount = $5,100 received
  • Sales Discounts
    • Accounts Receivable/Jangle 5,
  • Cash 7, $8,000 owed - $80 discount = $7,920 received
  • Sales Discounts
    • Accounts Receivable/Comet 8,
• Practice Problem #
• a. Sales $375, - Net Sales 331, - Sales Discounts (12,000) - Gross Profit $76, -Cost of Merchandise Sold (255,000)
• b. Sales $750,000 750,000 – x – 9,000 = 736,
  • • Sales Returns & Allowances x 741,000 – x = 736,
  • • Sales Discounts (9,000) x = 5,
  • Net Sales 736,000 736,000 – y = 310,
  • • Cost of Merchandise Sold y y = 426,
  • Gross Profit $310,
  • • Sales Discounts (15,000) y – 620,000 = 185, - Sales Returns & Allowances (25,000)
  • Net Sales y y = 805,
  • • Cost of Merchandise Sold (620,000) x = 845,
  • Gross Profit 185,
• Practice Problem #
• a. Merchandise Inventory 15, - Accounts Payable/Blitzen 15, (20,000 * 25%) = $5,000 discount
• b. Merchandise Inventory 8, (20,000 – 5,000 + 650 shipping) - Accounts Payable/Cupid 8,
• c. Accounts Receivable/Donner 9, - Sales 9,
  • Cost of Merchandise Sold 5,
    • Merchandise Inventory 5,
• d. Accounts Payable/Cupid 2, - Merchandise Inventory 2,
• e. Accounts Payable/Blitzen 15, - Cash 15, - Merchandise Inventory

f. Sales Returns & Allowances 1, A/R – Donner 1, Merchandise Inventory 1, Cost of Merchandise Sold 1,

g. Accounts Payable/Cupid 6, (8,000 – 2,000 return = 6,000 bal.) Cash 5, Merchandise Inventory 60 (6,000 * 1% = $60 discount)

h. Cash 7, Sales Discount 160 (8,000 * 2% = $160 discount) A/R – Donner 8, (9,800 – 1,800 return = 8,000 bal.)

i. Cost of Merchandise Sold 3, (85,000 – 81,350 = 3,650) Merchandise Inventory 3,