accounting - clutch ch. 4 - merchandising...

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ACCOUNTING - CLUTCH

CH. 4 - MERCHANDISING OPERATIONS

CONCEPT: SERVICE COMPANY VS MERCHANDISING COMPANY

● A service company provides a _____________ to the customer. There is no _________________________ transferred.

□ Examples: Tutoring, House Cleaning, Shipping, Lawyers

REMEMBER: Revenue is recognized when the company fulfills their end of the bargain, not when the cash is received. A service company earns its revenue when it ________________ the service.

Squeaky Cleaners cleaned Squirt’s shirts at a price of $20. Journal Entry:

Assets

= Liabilities + Equity

● A merchandising company provides a _______________ to the customer. Merchandising companies are ___________

□ Examples: Clothing Store, Grocery, Wal-Mart

A merchandising company earns its revenue when it _____________________ the good to the customer.

Things on Shelves (TOS) Company sells Things. Mandy walks in and buys a Thing for $15. The Thing cost TOS $5. Journal Entry for Revenue: Journal Entry for COGS:

Assets


● Cost of Goods Sold (COGS) – An __________ account that shows the amount ______________ paid for goods it sold.

□ Goods flow from Inventory into COGS

ACCOUNTING - CLUTCH


CONCEPT: NET SALES – SALES DISCOUNTS

● There is a special system used to denote discounts whether for purchases or for sales.

Typical discount notation:

“2/10 n/30” or “2/10 net 30”

2 = percentage amount of discount (2%) 10 = days allowed to receive discount 30 = total days allowed to defer

payment

EXAMPLE: ABC Company sold 100 units of Product X for $2,000 on January 14. ABC offered terms of 3/10 net 45. ABC

Company received payment on January 19. Record the sale and receipt of cash in ABC Company’s books.

Gross Method Net Method

Sale Journal Entry: Receipt Journal Entry:


EXAMPLE: ABC Company sold 100 units of Product X for $2,000 on January 14. ABC offered terms of 3/10 net 45. ABC

Company received payment on February 1. Record the sale and receipt of cash in ABC Company’s books.

Gross Method Net Method



ACCOUNTING - CLUTCH


CONCEPT: NET SALES – SALES RETURNS AND ALLOWANCES

● When the company sells good, we credit the ___________________ account.

TOS Company sold 500 units of Things on account at a price of $12 per Thing. Journal Entry:

Assets


● If the customer returns the goods to the company for a refund, the transaction is called a sales return.

The customer returned 100 units of Things to TOS using the money-back guarantee policy. Journal Entry:

Assets


● An unsatisfied customer may also keep the goods if the company lowers the price. This is a sales allowance.

TOS sold 500 Things on account at $12 per Thing. When low quality Things arrived, the customer agreed to keep each Thing at a price of $9 for this order. Journal Entry:

Assets


𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔 = 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑆𝑎𝑙𝑒𝑠 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑠 − 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑡𝑢𝑟𝑛𝑠 𝑎𝑛𝑑 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒𝑠

ACCOUNTING - CLUTCH


CONCEPT: COST OF GOODS SOLD – PERPETUAL INVENTORY VS PERIODIC INVENTORY

● A perpetual inventory system updates the inventory account after ___________________

□ Barcodes have made perpetual inventory systems the industry norm

□ The perpetual inventory system makes _______ entries when a sale is made

Things on Shelves Company sells things on shelves. Mandy walks in and buys a thing for $15. The thing cost Things on Shelves $5. Journal Entry:

Assets


● A periodic inventory system updates the inventory account at _______________ of the accounting period.

□ The periodic inventory system makes _______ entries when a sale is made

Things on Shelves Company sells things on shelves. Mandy walks in and buys a thing for $15. The thing cost Things on Shelves $5. Journal Entry:

Assets


𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑠 − 𝑆𝑢𝑏𝑡𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑠 = 𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 Inventory Beginning Balance + _____________ - ______________ = Inventory Ending Balance

𝐶𝑂𝐺𝑆 =

ACCOUNTING - CLUTCH


CONCEPT: PERPETUAL INVENTORY – PURCHASES

● A merchandising company generally buys goods in _________ and then sells them to customers __________________

□ Companies “purchase” many things:

- Goods acquired for resale __________________

- Pens, paper, staplers __________________

- Copy machine __________________

● When the company purchases goods, we debit the ___________________ account.

TOS Company purchased 500 units of Things on account at a price of $5 per Thing. Journal Entry:

Assets


● If the company returns the goods to the supplier for a refund, the transaction is called a purchase return.

TOS Company returned 100 units of Things to its supplier. Journal Entry:

Assets


● An unsatisfied company may also keep the goods if the supplier lowers the price. This is a purchase allowance.

TOS ordered 500 Things on account at $5 per Thing. When low quality Things arrived, the supplier agreed to lower the price of each Thing to $2 per thing for this order. Journal Entry:

Assets


ACCOUNTING - CLUTCH


CONCEPT: PERPETUAL INVENTORY – FREIGHT COSTS

● Someone has to pay the shipping costs: the buyer or the seller.

□ Freight Costs – the delivery expense

□ FOB Shipping Point – _________________ of the goods changes hands at the shipping point.

- The _____________ pays the shipping costs

- If you have to pay freight costs to receive your inventory, the delivery cost is included in ______________

TOS ordered 500 Things at $5 per Thing. The terms of the order are FOB Shipping Point. UPS charged $35 for the delivery of these Things. Journal Entry:

Assets


□ FOB Destination – _________________ of the goods changes hands at the destination.


- If you have to pay freight costs to sell your inventory, the delivery cost is included in _________________

TOS ordered 500 Things at $5 per Thing. The terms of the order are FOB Destination. UPS charged $35 for the delivery of these Things. Journal Entry:

Assets


ACCOUNTING - CLUTCH


CONCEPT: PERPETUAL INVENTORY – PURCHASE DISCOUNTS



“2/10 n/30” or “2/10 net 30”


payment

EXAMPLE: ABC Company purchased 300 units of Product X for $1,800 on January 14. The supplier offered terms of 3/10

net 45. ABC Company paid the supplier on January 19. Record the purchase and payment in ABC Company’s books.

Purchase Journal Entry: Payment Journal Entry:

Assets


PRACTICE: On April 12, a company purchased goods worth $14,000 on account with terms of 2/15 net 30. The company

paid its supplier on April 25. In a perpetual system, the journal entry to record the payment on April 25 would include:

a) A credit to Cash for $14,000

b) A credit to Inventory for $280

c) A credit to Accounts Payable for $14,000

d) A debit to Cash for $13,720

ACCOUNTING - CLUTCH


CONCEPT: PERPETUAL INVENTORY – PURCHASES SUMMARY

● Throughout the period, we make purchases and sell product.

□ At the end of the period, we must calculate the ending balance in _____________

□ We use the standard BASE equation on the Inventory account.

- Beginning Balance – Inventory’s beginning balance

- Additions – Purchases during the period

- Subtractions – Purchase discounts, purchase returns and allowances, and _______________

- Ending Balance – Inventory’s ending balance (Generally solving for Ending Balance)

EXAMPLE: A company has the following inventory records from the past month’s activity:

Inventory, July 1 $55,000

COGS $40,000

Purchases during July $25,000

Purchase discounts $650

Purchase returns and allowances $1,500

Accounts Payable, July 1 $16,000


Calculate the Inventory balance on July 31.

ACCOUNTING - CLUTCH


CONCEPT: PERIODIC INVENTORY – PURCHASES

● A merchandising company generally buys goods in _______ and then sells them to customers ___________________

□ Companies “purchase” many things:

- Goods acquired for resale __________________

- Pens, paper, staplers __________________

- Copy machine __________________

□ In a periodic system, we use _________________ accounts to account for Inventory purchase transactions:

1. Purchases – the value of all goods ________________ during the period (not straight to Inventory!)

2. Purchase Returns and Allowances – value of purchases ____________ or _____________ because of a quality issue

3. Purchase Discounts – value of discounts received for _______________________

● When the company purchases good, we debit the ___________________ account.

TOS Company purchased 500 units of Things on account at a price of $5 per Thing. Journal Entry:

Assets


● If the company returns the goods to the supplier for a refund, the transaction is called a purchase return.

TOS Company returned 100 units of Things to its supplier. Journal Entry:

Assets


ACCOUNTING - CLUTCH


● An unsatisfied company may also keep the goods if the supplier lowers the price. This is a purchase allowance.

TOS ordered 500 Things on account at $5 per Thing. When low quality Things arrived, the supplier agreed to lower the price of each Thing to $2 per thing for this order. Journal Entry:

Assets


PRACTICE: Never Satisfied Incorporated (NSI) purchased 400 units of High Quality Goods for $300,000 on account. After

inspecting the goods, they decided that 300 units did not meet their standards and NSI received a refund for these goods. If

NSI uses a periodic inventory system, the entry to record the return of goods would include:

a) A credit to Inventory for $225,000

b) A debit to Accounts Payable for $225,000

c) A credit to Purchase Discounts for $225,000

d) A credit to Purchases for $225,000

ACCOUNTING - CLUTCH


CONCEPT: PERIODIC INVENTORY – FREIGHT COSTS

● Someone has to pay the shipping costs: the buyer or the seller.

□ Freight Costs – the delivery expense

- In a periodic system, we use Freight In to hold the value of all shipping costs paid during the period.

□ FOB Shipping Point – ____________________ of the goods changes hands at the shipping point.


- If you have to pay freight costs to receive your inventory, the delivery cost is included in ______________

TOS ordered 500 Things at $5 per Thing. The terms of the order are FOB Shipping Point. UPS charged $35 for the delivery of these Things. Journal Entry:

Assets


□ FOB Destination – _________________ of the goods changes hands at the destination.


- If you have to pay freight costs to sell your inventory, the delivery cost is included in _________________

TOS ordered 500 Things at $5 per Thing. The terms of the order are FOB Destination. UPS charged $35 for the delivery of these Things. Journal Entry:

Assets


ACCOUNTING - CLUTCH


CONCEPT: PERIODIC INVENTORY – PURCHASE DISCOUNTS



“2/10 n/30” or “2/10 net 30”


payment

● In a periodic system, the account Purchase Discounts holds the value of all discounts received from quick payment.

EXAMPLE: ABC Company purchased 300 units of Product X for $1,800 on January 14. The supplier offered terms of 3/10

net 45. ABC Company paid the supplier on January 19. Record the purchase and payment in ABC Company’s books.

Purchase Journal Entry: Payment Journal Entry:

Assets


PRACTICE: On April 12, a company purchased goods worth $14,000 on account with terms of 2/15 net 30. The company

paid its supplier on April 25. In a periodic system, the journal entry to record the payment on April 25 would include:

a) A credit to Cash for $14,000

b) A credit to Purchase Discounts for $280

c) A credit to Accounts Payable for $14,000

d) A debit to Cash for $13,720

ACCOUNTING - CLUTCH


CONCEPT: PERIODIC INVENTORY – PURCHASES SUMMARY

● Throughout the period, balances will build up in all the inventory related accounts.

□ At the end of the period, we must calculate _____________

□ We use the standard BASE equation on the Inventory account.

- Beginning Balance – Inventory’s beginning balance

- Additions – Purchases during the period

- Subtractions – Purchase discounts, purchase returns and allowances, and _______________

- Ending Balance – Inventory’s ending balance

> Note: The Ending Balance comes from a physical inventory count and must be ____________

EXAMPLE: A company has the following inventory records from the past month’s activity:



Purchases during July $25,000

Purchase discounts $650

Purchase returns and allowances $1,500



Calculate COGS for the month of July.

ACCOUNTING - CLUTCH


CONCEPT: SINGLE-STEP INCOME STATEMENT

● A single-step income statement first shows all ______________, then all ______________ to calculate ____________

□ It is straight forward 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

EXAMPLE: Create a single-step income statement using the following information from the month of November:

Sales Revenue $300,000

Accounts Payable, November 30 $45,000

Wage Expense $35,000

Interest Expense $6,000

Dividends $15,000

Service Revenue $18,000

Cash Collected from Customers on Account $140,000

Cost of Goods Sold $180,000

Income Tax Expense $12,000

Other General and Administrative Expenses $48,000

ABC COMPANY, INC.

Income Statement For the month ended November 30, 20XX

Revenues Expenses Net Income

ACCOUNTING - CLUTCH


CONCEPT: MULTI-STEP INCOME STATEMENT

● A multi-step income statement shows a few _________________ before arriving at ________________.

□ Gross Profit = __________________ – __________________

- Gross profit is sometimes called the gross margin

□ Operating Expenses – expenses necessary in the regular course of business

- This includes payroll expenses, selling, general and administrative expenses, rent expense, etc.

□ Income from Operations = __________________ – __________________

□ Non-operating Activities – revenues/gains and expenses/losses that are not in the ordinary course of business

- Interest Revenue – earned from notes receivable or investments

- Dividend Revenue – earned from investments in other company’s stock

- Rent Revenue – subletting part of your space

- Gain/Loss – when we sell something at a profit/loss, but the sale is not in our ordinary course of business

> Selling old equipment, selling investments, selling land

- Interest Expense – paid on notes payable

- Other Losses can arise from employee strikes, abandoned property, accidents

□ Income before Income Taxes = __________________ – __________________

- Income Tax Expense is always the last expense shown before net income.

□ Net Income = _________________________ – ___________________________

ACCOUNTING - CLUTCH


EXAMPLE: Use the following information for Cool Corp. for the year ended December 31, 2018.

Gain on Sale of Land $9,000 Sales Revenue $443,000

Interest Expense $4,000 Rent Expense $36,000

Cost of Goods Sold $136,000 Sales Discounts $23,000

Payroll-related Expenses $75,000 General, and Administrative Expense $58,000

The company has a tax rate of 40%. Prepare a multi-step income statement.

Cool Corp.

Income Statement For the year ended December 31, 2018

Sales COGS

Gross Profit Operating Expenses Other Revenues and Gains Other Expenses and Losses Income before Income Taxes Income Tax Expense Net Income

ACCOUNTING - CLUTCH


CONCEPT: COMPREHENSIVE INCOME

● The details of comprehensive income are beyond the scope of this class

□ Comprehensive Income = Net Income + _____________

- Unrealized gains and losses on available-for-sale securities

- Foreign-currency translation adjustments

- Other more complicated issues

□ Items of other comprehensive income do not affect net income. They are not included in EPS calculation.

ACCOUNTING - CLUTCH


accounting - clutch ch. 4 - merchandising...

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