accounting for merchandising activities accounting for merchandising activities c h a p t e r 5 part...
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Accounting for
Merchandising Activities
C H A P T E R 5
Part 2
Learning Objectives1. Describe merchandising and identify and
explain the important income statement and balance sheet components for a merchandising company. (LO1)
2. Describe both periodic and perpetual merchandise inventory systems. (LO2)
3. Analyze and record transactions for merchandise purchases and sales using a perpetual system. (LO3)
5-2
Learning Objectives4. Prepare adjustments for a merchandising
company. (LO4)5. Define, prepare, and use merchandising
income statements. (LO5)6. Prepare closing entries for a
merchandising company. (LO6)
5-3
Learning Objectives7. Record and compare merchandising
transactions using both periodic and perpetual inventory systems.
(Appendix 5A) (LO7)8. Explain and record Provincial Sales Tax
(PST) , Goods and Services Tax (GST) and Harmonized Sales Tax (HST).
(Appendix 5B) (LO8)
5-4
Primary ObjectiveFinancial statements are intended to provide useful information for decision-making
Accurate Clear Timely
5-5
Income Statement Formats
Typical formats are:• Single-Step• Multiple-Step• Classified, Multiple-Step
LO 5
5-6
Revenues:Sales, Net 314,700$ Rent revenue 2,800 Total revenues 317,500
Expenses:Cost of goods sold 230,400$ Selling expense 42,100 General and administrative expense 29,300 Interest expense 360 Total expenses 302,160
Net income 15,340$
Z-MartIncome Statement
For Year Ended December 31, 2011
Single- step
Format
(for external reporting)
LO 5
Single Step: Revenues minus Expenses5-7
Sales, net 314,700$ Cost of goods sold 230,400 Gross profit 84,300 Operating expenses:
Sales salaries expense 43,800$ Advertising expense 11,300 Rent expense 9,000 Depreciation expense 3,700 Supplies expense 3,000 Insurance expense 600 Total operating expense 71,400
Income from operations 12,900$ Other revenues and expenses:
Rent revenue 2,800 Interest expense (360) 2,440
Net income 15,340$
Z-MartIncome Statement
For Year Ended December 31, 2011
Multi-step Format
(for external reporting)
LO 5
5-8
Gross Profit Ratio
• Expressed as a percentage of net sales• May be tracked over time and/or compared
to similar businesses• May be calculated for whole business,
departments, products
Gross profit
Net salesGross
profit ratio = X 100%
LO 5
5-9
Sales 321,000$ Less: Sales discounts 4,300$
Sales returns and allowances 2,000 6,300 Net sales 314,700 Cost of goods sold 230,400 Gross profit 84,300 Operating expenses: Selling expenses:
Sales salaries expense 18,500$ Advertising expense 11,300 Rent expense, selling space 8,100 Depreciation expense, store equipment 3,000 Store supplies expense 1,200
Total selling expenses 42,100$ General and administrative expenses:
Office salaries expense $25,300Office supplies expense 1,800 Rent expense,office space 900 Depreciation expense, office equipment 700 Insurance expense 600 Total general and administive expenses 29,300
Total operating expenses 71,400
Income from operations 12,900$ Other revenues and expenses:
Rent revenue 2,800$ Interest expense (360) 2,440
Net income 15,340$
Z-MartIncome Statement
For Year Ended December 31, 2011
Classified Multi-step
Format
(for internal reporting)
LO 5
Practice: QS 5-13
5-10
Operating expenses are classified into two categories: selling expenses and cost of goods sold.
A) TrueB) False
5-11
Adjustments: Perpetual Inventory
• Perpetual systems keep a running total of inventory levels by recording sales and purchase transactions.
• Occasional adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory).
LO 4
5-12
Merchandising Cost Flow
Beginning Merchandise
Inventory
Merchandise available for
sale
Ending Merchandise
inventory
Cost of goodssold
Net cost ofPurchases
LO 1
5-13
Inventory per accounting records: $21,250
Inventory per physical count: $21,000
Difference (shrinkage) $250
Adjustment required:
Perpetual System–Example
Dec.31 Cost of Goods Sold 250 Merchandise Inventory 250
To record inventory shrinkage revealed by physical count.
LO 4
5-14
• Similar for merchandising and service companies
• Merchandising companies have additional temporary accounts that must be closed
These include:• Sales• Sales Returns & Allowances• Sales Discounts• Cost of Goods Sold
Closing Entries - Perpetual System
LO 6
5-15
Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold are closed to Income Summary with debits.
A) TrueB) False
5-16
Perpetual systems
Merchandise Inventory is updated after each sale or purchase.
Periodic systems
Merchandise Inventory is updated at the end of the period based on a physical count.
Appendix 5A:Periodic and Perpetual Merchandise
Inventory Systems Compared
LO 7
5-17
Purchases 1,200 Merchandise Inv. 1,200
Accounts Payable 1,200 Accounts Payable 1,200
Purchase of Merchandise
Return of Merchandise
Accounts Payable 300 Accounts Payable 300
Purchase Returns 300 Merchandise Inv. 300
Periodic System Perpetual System
Appendix 5A - Example
LO 7
5-18
Accounts Payable 900 Accounts Payable 900
Purchase Discounts 18 Merchandise Inv. 18
Cash 882 Cash 882
Purchase Discount Taken (2/10, n30)
Transportation Charges
Transportation-in 75 Merchandise Inv. 75
Accounts Payable 75 Accounts Payable 75
Periodic System Perpetual System
Appendix 5A - Example
LO 7
5-19
Merchandising Cost Flow
Beginning Merchandise
Inventory
Merchandise available for
sale
Ending Merchandise
inventory
Cost of goodssold
Net cost ofPurchases
LO 1
5-20
Cost of Goods Sold
Beginning Inventory
Plus: Purchases
Plus: Transportation and other costs
Minus: Returns, Discounts and Allowances
Equals: Goods AVAILABLE for Sale
Minus: Ending Inventory
Equals: Cost of Goods Sold
Periodic System
5-21
Practice:QS 5-20
The periodic inventory system is superior to the perpetual inventory system in preventing shrinkage.
A) TrueB) False
5-22
Accounts Receivable 2,400 Accounts Receivable 2,400
Sales 2,400 Sales 2,400
Cost of Goods Sold 1,600
Merchandise Inv. 1,600
Sale of merchandise
Periodic System Perpetual System
Appendix 5A - Example
LO 7
Us Customer
5-23
Sales Returns 800 Sales Returns 800
Accounts Receivable 800 Accounts Receivable 800
Merchandise Inv. 600
Cost of Goods Sold 600
Sales Return
Periodic System Perpetual System
Appendix 5A - Example
LO 7
Us Customer
5-24
Doug's WholesaleIncome Statement
30-Apr-11
Sales (net) $ 125,000 Cost of Goods Sold:
Beginning Inventory $ 14,000 Purchases 78,000Freight charges 6,000Returns and allowances 1,250 Goods available for sale 96,750 Ending Inventory 16,500 Cost of Goods Sold 80,250
Gross Profit 44,750 Operating Expenses 37,900 Net Income $ 6,850
Practice:QS 5-16, 5-17
5-25
Practice:QS 5-16, 5-17
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