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TRANSCRIPT
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Accounting for Merchandising Businesses
Chapter 5 Student Version These slides should be viewed
using the presentation mode (left
click your mouse on the icon).
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 1
Distinguish between the
activities and financial
statements of service and
merchandise businesses.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Nature of Merchandising Businesses
Most services businesses, such as plumbing
repair and accounting services, have no
merchandise.
Merchandising businesses, such as a
department store or sandwich shop,
generate revenue by selling a product.
Merchandise on hand (not sold) at the end
of an accounting period is called
merchandise inventory.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 2
Describe and illustrate
the financial
statements of a
merchandising
business.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Multiple-Step Income Statement
The multiple-step income statement
contains several sections, subsections, and
subtotals.
Below is the revenue section for
NetSolutions.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Revenue from Sales
Sales is the total amount charged
customers for merchandise sold, including
cash sales and sales on account.
Sales returns and allowances are granted
by the seller to customers for damaged or
defective merchandise.
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LO 2
Revenue from Sales
Sales discounts are granted by the seller to
customers for early payment of amounts
owed.
Net sales is determined by subtracting sales
returns and allowances and sales discounts
from sales.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Cost of Merchandise Sold
The cost of merchandise sold is the cost of
the merchandise sold to customers.
Merchandise costs consist of all the costs of
acquiring the merchandise and readying it
for sale, such as purchase and freight costs.
A single figure for cost of merchandise sold
is shown on the multiple-step income
statement on the next slide.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Cost of Merchandise Sold
The buyer may return merchandise to the
seller (purchase return), or the buyer may
receive a reduction in the initial price at
which the merchandise was purchased
(purchase allowance).
You have seen that sellers may offer
customers sales discounts for early
payment of their bills. From the buyer’s
perspective, such discounts are referred to
as purchase discounts.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Cost of Merchandise Sold
If merchandise inventory at the end of the
period is determined by taking a physical
count of inventory on hand, a periodic
inventory system is being used.
Under the perpetual inventory system, the
amounts of inventory purchased, available
for sale, and sold are continuously
(perpetually) updated in the inventory
records.
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LO 2
Gross Profit
Gross profit is computed by subtracting the
cost of merchandise sold from net sales.
Gross
Profit
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LO 2
Selling expenses are incurred directly in the
selling of merchandise.
Multiple-Step Income Statement
Administrative expenses, sometimes called
general expenses, are incurred in the
administration or general operations of the
business.
Income from operations, sometimes called
operating income, is determined by
subtracting operating expenses from gross
profit.
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LO 2
Other Income and Expense
Other income is revenue from sources other
than the primary operating activity of a
business.
Other expense is an expense that cannot
be traced directly to the normal operations
of the business.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Single-Step Income Statement
An alternative form of income statement is
the single-step income statement. As shown
in the next slide, the income statement for
NetSolutions deducts the total of all
expenses in one step from the total of all
revenues.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Balance Sheet
The form of balance sheet with the assets
on the left-hand side and the liabilities and
stockholders’ equity on the right-hand side
is called the account form.
LO 2
When the balance sheet is presented in a
downward sequence in three sections, it
has been prepared using the report form.
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Learning Objective 3
Describe and illustrate the accounting
for merchandise transactions
including: sale of merchandise;
purchase of merchandise; freight;
sales taxes and trade discounts; dual
nature of merchandising transactions.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On January 3, NetSolutions sold $1,800 of
merchandise for cash.
Cash Sales
LO 3
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Using the perpetual inventory system, the cost of
merchandise sold and the decrease in
merchandise inventory are also recorded. The
cost of merchandise sold on January 3 is $1,200.
LO 3
Cash Sales
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Sales made to customers using credit cards are
recorded as cash sales. Assume that NetSolutions
paid credit card processing fees of $48 on January
31.
Cash Sales
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On January 12, NetSolutions sold merchandise
on account for $510.
Sales on Account
LO 3
The cost of merchandise sold was $280.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The terms for when payments for
merchandise are to be made are called
credit terms.
If payment is required on delivery, the
terms are cash or net cash. Otherwise, the
buyer is allowed an amount of time, known
as the credit period, in which to pay.
Sales Discounts
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On January 17, NetSolutions receives the amount
due within ten days, so the buyer deducted $30
($1,500 x 2%) from the invoice amount.
Receipts on Account
LO 3
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Credit Memo
LO 3
A credit memorandum, often called a credit
memo, authorizes a credit to (decreases)
the buyer’s account receivable.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On January 13, issued Credit Memo No. 32 to Krier
Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.
Credit Memo
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Purchase Transactions
LO 3
On January 3, NetSolutions purchased merchandise
for cash (assume a perpetual inventory is used).
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*
Purchase Transactions
LO 3
On January 4, NetSolutions purchased
merchandise on account from Thomas Corporation.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Purchases Discounts
A buyer may receive a discount from the
seller (sales discount) for early payment of
the amount owed.
From the buyer’s perspective, such
discounts are called purchases discounts.
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Alpha Technologies issues an invoice for $3,000 to
NetSolutions dated March 12, with terms 2/10,
n/30. NetSolutions is trying to determine if it should
pay the invoice within the discount period.
LO 3
Purchase Transactions
LO 3
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LO 3
Alpha Technologies issued an invoice for $3,000 to
NetSolutions dated March 12, with terms 2/10,
n/30.
Based on the calculation in the previous slide,
NetSolutions pays the amount due, less the
discount, on March 22.
Purchase Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Assume that, instead of paying the invoice within
the discount period, NetSolutions pays the invoice
on April 11.
Discount Not Taken
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Purchases Returns and Allowances
A purchases return involves actually
returning merchandise that is damaged or
does not meet the specifications of the
order.
From a buyer’s perspective, such returns
are called purchases returns and
allowances.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Debit Memo
A debit memorandum, often called a debit
memo, informs the seller of the amount the
buyer proposes to debit to the account
payable due the seller.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
NetSolutions records the return of the
merchandise as follows:
Debit Memo
NetSolutions receives a delivery from Maxim
Systems and determines that $900 of the items
are not the merchandise ordered. Debit
memorandum #18 is issued to Maxim System.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On May 2, NetSolutions purchased $5,000 of
merchandise on account from Delta Data Link,
terms 2/10, n/30.
Merchandise Purchased
LO 3
On May 4 , NetSolutions returned $3,000 of the
merchandise purchased from Delta Data Link.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On May 12, NetSolutions paid for the purchase of
May 2 less the return and discount.
Invoice Paid
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Freight
If ownership of the merchandise passes to
the buyer when the seller delivers the
merchandise to the freight carrier, the terms
are said to be FOB (free on board) shipping
point.
LO 3
If ownership of the merchandise passes to
the buyer when the buyer receives the
merchandise, the terms are said to be FOB
(free on board) destination.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB
shipping point and pays the shipping cost of $50.
Two entries are required.
LO 3
Freight
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On June 15, NetSolutions sells merchandise to
Kranz Company on account, $700, terms FOB
destination. The cost of the merchandise sold is
$480. Again, two entries are required.
Sale Plus Freight Cost
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On June 15, NetSolutions pays freight of $40 on
the sale of June 15.
Sale Plus Freight Cost
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
On June 20, NetSolutions sells merchandise to
Planter Company on account, $800, terms FOB
shipping point. NetSolutions paid freight of $45,
which was added to the invoice. The cost of the
merchandise sold is $360. Three entries are
needed. These are shown on the next slide.
LO 3
Seller Prepays Freight
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LO 3
Seller Prepays Freight
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On August 12, merchandise is sold on account to
Lemon Company, $100 (plus a 6% sales tax).
Sales Taxes
LO 3
The seller pays to the taxing authority (state) the
total amount of the sales taxes collected.
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Trade Discounts
When wholesalers offer special discounts to
certain classes of buyers who order large
quantities, these discounts are called trade
discounts.
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Each merchandising transaction affects a
buyer and a seller. In the following
illustrations, we show how the same
transactions would be recorded by both
the seller and the buyer.
Dual Nature of Merchandise Transactions
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Dual Nature of Merchandise Transactions
LO 3
July 1. Scully Company sold merchandise on
account to Burton Co., $7,500, terms
FOB shipping point, n/45. The cost of the
merchandise sold was $4,500.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Scully Company (Seller)
Accounts Receivable—Burton Co. 7,500 Sales 7,500 Cost of Merchandise Sold 4,500 Merchandise Inventory 4,500
Burton Company (Buyer)
Merchandise Inventory 7,500 Accounts Payable—Scully Co. 7,500
Dual Nature of Merchandise Transactions
LO 3
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
July 2. Burton Company paid
transportation charges of $150 on
the July 1 purchase from Scully
Company.
LO 3
Dual Nature of Merchandise Transactions
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No entry.
Burton Company (Buyer)
Merchandise Inventory 150 Cash 150
LO 3
Scully Company (Seller)
Dual Nature of Merchandise Transactions
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July 5. Scully Company sold merchandise on
account to Burton Co., $5,000, terms
FOB destination, n/30. The cost of the
merchandise sold was $3,500.
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounts Receivable—Burton Co. 5,000 Sales 5,000 Cost of Merchandise Sold 3,500 Merchandise Inventory 3,500
Scully Company (Seller)
Burton Company (Buyer)
Merchandise Inventory. 5,000 Accounts Payable—Scully Co. 5,000
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
July 7. Scully Company paid transportation
costs of $250 for delivery of
merchandise sold to Burton Company
on July 5.
LO 3
Dual Nature of Merchandise Transactions
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Scully Company (Seller)
Delivery Expense 250 Cash 250
Burton Company (Buyer)
No entry.
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
July 13. Scully Company issued Burton
Company a credit memorandum for
merchandise returned, $1,000. The
cost of the merchandise returned was
$700.
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Scully Company (Seller)
Sales Returns and Allowances 1,000 Accounts Receivable—Burton Co. 1,000 Merchandise Inventory 700 Cost of Merchandise Sold 700
Burton Company (Buyer)
Accounts Payable—Scully Co. 1,000 Merchandise Inventory 1,000
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
July 15. Scully Company received payment
from Burton Company for purchase
of July 5.
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Scully Company (Seller)
Cash 4,000 Accounts Receivable—Burton Co. 4,000
Burton Company (Buyer)
Accounts Payable—Scully Co. 4,000 Cash 4,000
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
July 18. Scully Company sold merchandise
on account to Burton Company,
$12,000, terms FOB shipping point,
2/10, n/eom. Scully prepaid
transportation costs of $500, which
were added to the invoice. The cost
of the merchandise sold was $7,200.
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Scully Company (Seller)
Accounts Receivable—Burton Co. 12,000 Sales 12,000 Accounts Receivable—Burton Co. 500 Cash 500
Cost of Merchandise Sold 7,200 Merchandise Inventory 7,200
Burton Company (Buyer)
Merchandise Inventory 12,500 Accounts Payable—Scully Co. 12,500
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
July 28. Scully Company received payment
from Burton Company for purchase
of July 18, less discount (2% ×
$12,000).
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Scully Company (Seller)
Cash 12,260 Sales Discounts 240 Accounts Receivable—Burton Co. 12,500
Burton Company (Buyer)
Accounts Payable—Scully Co. 12,500 Merchandise Inventory 240 Cash 12,260
LO 3
Dual Nature of Merchandise Transactions
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 4
Describe the adjusting and
closing process for a
merchandising business.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Adjusting Entry for Inventory Shrinkage
Merchandising businesses may experience
some loss of inventory due to shoplifting,
employee theft, or errors in recording or
counting inventory.
If the balance of the Merchandise Inventory
account is larger than the total amount of
the merchandise count, the difference is
often called inventory shrinkage or
inventory shortage.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Debit each temporary account with a credit
balance, such as Sales, for its balance and credit
Income Summary.
LO 4
Step 1: Closing Entries
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Credit each temporary account with a debit
balance, such as an expense, for its balance and
debit Income Summary.
Step 2: Closing Entries
LO 4
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3. Debit Income Summary for the amount of its
balance (net income) and credit Retained
Earnings.
LO 4
Steps 3 and 4: Closing Entries
4. Debit Retained Earnings for the balance of the
Dividends account and credit the Dividends
account.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 5
Describe and illustrate the
use of the ratio of net sales
to assets in evaluating a
company’s operating
performance.
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Ratio of Net Sales to Assets
The ratio of net sales to assets measures
how effectively a business is using its assets
to generate sales.
Ratio of Net
Sales to
Assets
Net Sales
Average Total Assets =
LO 5
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Ratio of Net Sales to Assets
The ratio of net sales to assets for each year
are as follows:
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounting for Merchandising Businesses
The End