Merchandising FirmsMerchandising Firms Two types of merchandising firms

Retailers sell products to the final consumer Wholesalers sell products to retailers or other

wholesalers Cost of Goods Sold (CoGS)

Cost of merchandise sold during the period Gross profit (also called gross margin)

Sales Revenue – CoGS Operating cycle for merchandising firm

Purchase inventory Sell inventory, creating accounts receivable (AR) Collect cash from customers, reducing AR

Acquiring Merchandise For Acquiring Merchandise For SaleSale

What is merchandise inventory?Where on the balance sheet is it?

Acquisition process for inventoryPeriodic & perpetual inventoryRecording purchases: perpetual

Freight costsPurchase Returns and AllowancesPurchase DiscountsGoods available for sale

Acquisition Process for Inventory

Inventory manager sends purchase requisition to purchase agent

Purchase agent sends purchase order (PO) to chosen vendor Copies to accounts payable (AP) and receiving

departments No quantity on receiving dept’s copy

Objectives of purchase process Quality

Purchase from reliable vendors Timeliness

Vendors must have an adequate supply of merchandise to avoid stock-outs

Accuracy Receive only items ordered

Acquisition Process for Inventory

Receiving dept notifies AP dept when goods arrive

AP pays for goods when it receives invoice from vendor Invoice matched with purchase order

Periodic and Perpetual Inventory

Perpetual inventory systemEvery purchase of inventory is recorded

directly to inventory accountPeriodic inventory system

Inventory account only updated at the end of the accounting period

Freight Costs FOB (free on board) shipping point

Shipping is free until it leaves the seller’s loading dock

Buying firm pays freight Recorded as freight-in Included in cost of inventory

Who owns the goods while they are in transit? Where does title pass?

FOB destination Shipping is free until it arrives at the buyer’s place of

business Selling firm pays the freight

No freight-in charge Not included in cost of inventory

Who owns the goods while they are in transit? Where does title pass?

Purchase Returns and Allowances

Amounts that reduce $$ of inventory purchases due to returned or damaged inventoryAlso reduce accounts payable for inventory

purchased on accountWhich account is affected if the inventory was

purchased for cash?

Purchase Discounts

Annual rate of return if taking advantage of discount

Discount# of days paid early

Annual rate of return

÷ x 360 =

Calculate the annual rate of return if you pay early with terms 3/10, n/45

Purchase Discounts

GPS pays the balance due within the discount period with terms 3/10, n/45Discount calculated on balance due

Inventory Accts. Payable

Dr. Cr. Dr. Cr. Dr. Cr.3,000

1003,000450

250450250

Goods Available for Sale

Beginning inventory+ Net purchases (total purchases less returns and allowances and discounts)

+ Shipping costs (freight in) _

Goods available for sale

Sale of MerchandiseSale of MerchandiseSales are the mirror image of purchases

What the vendor records when you make an inventory purchase

Sales process for merchandise inventoryRecording sales

Sales Returns and AllowancesSales DiscountsNet salesCredit card sales and sales taxes

Recording Sales

GPS sells 11 skateboards on account for $250 each

Increase Sales $2,750 Increase AR $2,750

Dr. Cr. Dr. Cr.

Recording Sales How much did GPS pay for the 17

(20 – 3 returned) skateboards assuming they paid w/in the discount period?

$3,000 purchase price+ 100 freight-in- 450 purchase return- 200 purchase allowance

$2,400 for 17 skateboards How much did each skateboard

cost?

Recording Sales

GPS sells 11 skateboards on account for $250 each 1/15, n/30

Increase or decrease merchandise inventory?

Increase CoGS $2,750 On which fin. stmt. will you find CoGS?

Dr. Cr. Dr. Cr.

Sales Returns and Allowances

Contra-revenue accountUsed to reduces a firm’s revenue

Net revenueRevenue less contra-revenue

Sales Returns and AllowancesDecrease revenue because you reduce

a customer’s AR account or give a cash refund (if the customer paid cash)

Sales Returns and Allowances

Customer returned one skateboard because it was defectiveFirst, undo the revenue side of the

transactionWhat was the sale price of the

merchandise?Second, undo the expense side of the

transactionHow much did the merchandise sold

cost?

Sales Returns and Allowances

The sales price was $250Increase Sales Returns and

AllowancesIf revenues increase with credits, how

would you increase a contra-revenue?Decrease AR

Dr. Cr. Dr. Cr.

Sales Returns and Allowances

Cost of the merchandise sold was $150Reduce CoGS by $150What happens to the inventory

account?

Dr. Cr. Dr. Cr.

Sales DiscountsSales discount

Reduction in sales price offered for prompt payment

Contra-revenueReduces net sales

Based on customer’s outstanding balance from salesSales price less SR&A

Sales DiscountsAmount to be received if payment

is received w/in discount periodCash collected

($2,750 – $250) x (1 – 1%)Sales discount – increases contra

revenue($2,750 – $250) x 1%

Accounts receivable decreases by full amount owedCustomers balance completely satisfied

for 99% of the amount due

Sales Discounts

Make the journal entry if payment received w/in discount periodIncrease CashIncrease Sales DiscountsDecrease AR

Accts. Rec.

Dr. Cr. Dr. Cr. Dr. Cr.2502,750

Net SalesSales

- Allowances given- Sales Discounts _

Net sales Bank cards

Cash sale Credit card company pays seller full amount less a service fee

(2% - 4%) Service fee is an expense

E.g, Visa, MasterCard, American Express

Sales tax Seller collects sales tax from customer and remits to

state/local government Liability

Sales tax payable

Credit Card Sales and Sales Taxes

Sell $100 of merchandise to customerSales tax rate is 5%Customer pays with bank card with a

3% service feeCash collected

$100 – (3% x $100) + (5% x $100)Service Revenue = $100

Credit Card Sales and Sales Taxes

Journal entryIncrease CashIncrease Service Fee (expense)Increase SalesIncrease Sales Tax Payable

Dr. Cr. Dr. Cr.

Recording InventoryRecording InventoryPerpetual inventory system

Inventory records updated every time a purchase, sale, or return is made

Periodic inventory systemInventory records only updated at end of

accounting periodBoth systems require an actual inventory

count at end of periodPerpetual inventory system can detect

shrinkageShrinkage = Inventory account balance less

actual inventory $$ amount based on physical count of merchandise

Multistep Income Multistep Income StatementStatement

Single-step income statementAll revenues presented firstAll expense subtracted to arrive at net

incomeMultiple-step income statement

Gross profitSales – CoGS

Operating incomeGross profit – operating expenses

Other revenues and expenses not directly related to firm’s day-to-day operations

Financial Statement Financial Statement AnalysisAnalysis

Gross profit ratioGross Profit ÷ SalesPortion of each sales $ a company has left

after paying for goods it soldAmount left over to cover operating and

non-operating expenses and generate a profit

Profit margin ratioNet Income ÷ SalesMeasures % of each sales $ that results in

net incomeA measure of how well a company is

controlling its operating expenses

Business Risk, Control, and Business Risk, Control, and EthicsEthics

Segregation of dutiesPerson with physical control over

merchandise should NOT also do the record-keeping on the merchandise under her control

However, this control can be defeated if both people get together to commit fraudSee In the News—Risks and Controls

Assign #9: pg. 256-257, E5-1A, E5-4A, E5-7AAssign #10: P5-2A, P5-3A