Preview of Chapter 5 Financial Accounting Seventh Edition Kimmel Weygandt Kieso 5 1 Merchandising Merchandising Operations Operations Merchandising Companies Buy and Sell Goods Retailer Wholesaler Consumer The primary source of revenues is referred to as 5 2 LO 1 Identify the differences between service and merchandising companies Merchandising Merchandising Operations Operations Income Measurement Sales Revenue Less Cost of Goods Sold Not used in a Service business Equals Gross Profit Cost of goods sold is the total sold during the period 5 3 Illustration 5 1 Income measurement process for a merchandising company Less Operating Expenses Equals Net Income Loss LO 1 Identify the differences between service and merchandising companies Merchandising Merchandising Operations Operations Flow of Costs Illustration 5 3 Companies use either a perpetual inventory system or a periodic inventory system to account for inventory 5 4 LO 1 Identify the differences between service and merchandising companies Merchandising Merchandising Operations Operations Flow of Costs Perpetual System 5 5 Maintain detailed records of the cost of purchase and sale Records show inventory that should be on hand for every item Company determines each time a sale occurs LO 1 Identify the differences between service and merchandising companies Merchandising Merchandising Operations Operations Flow of Costs Periodic System Do not keep detailed records of the goods on hand Cost of goods sold determined by count at the end of the accounting period Calculation of Cost of Goods Sold Beginning inventory 100 000 Add 5 6 800 000 Goods available for sale LO 1 Merchandising Merchandising Operations Operations Flow of Costs Advantages of the Perpetual System 5 7 Traditionally used for merchandise with high unit values Shows the quantity and cost of the inventory that should be on hand at any time Provides better control over inventories than a periodic system LO 1 Identify the differences between service and merchandising companies Recording Recording Purchases Purchases of of Merchandise Merchandise Made using Illustration 5 5 Normally record when goods are received from the seller Purchase invoice should support each credit purchase 5 8 LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Illustration 5 5 Illustration Sauk Stereo the buyer uses as a purchase invoice the sales invoice prepared by PW Audio Supply Inc the seller Prepare the journal entry for Sauk Stereo for the invoice from PW Audio Supply May 4 5 9 3 800 3 800 LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Freight Costs Terms of Sale Illustration 5 6 Shipping terms Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller Ownership of the goods remains with the seller until the goods reach the buyer 5 10 Freight costs incurred by the seller are an LO 2 Recording Recording Purchases Purchases of of Merchandise Merchandise Illustration Assume upon delivery of the goods on May 6 Sauk Stereo pays Public Freight Company 150 for freight charges the entry on Sauk Stereo s books is May 6 Cash 5 11 150 150 LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Purchase Returns and Allowances Purchaser may be dissatisfied because goods are damaged or defective of inferior quality or do not meet specifications 5 12 Purchase Return Purchase Allowance Return goods for credit if the sale was made on credit or for a cash refund if the purchase was for cash May choose to keep the merchandise if the seller will grant a reduction of the purchase price LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Illustration Assume Sauk Stereo returned goods costing 300 to PW Audio Supply on May 8 May 8 5 13 300 300 LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Review Question In a perpetual inventory system a return of defective merchandise by a purchaser is recorded by crediting 5 14 a Purchases b Purchase Returns c Purchase Allowance d Inventory LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Purchase Discounts Credit terms may permit buyer to claim a cash discount for prompt payment Advantages 5 15 Purchaser Seller Example Credit terms may read 2 10 n 30 LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Purchase Discounts Terms 5 16 2 10 n 30 1 10 EOM n 10 EOM 2 discount if paid within 10 days otherwise net amount due within 30 days 1 discount if paid within first 10 days of next month Net amount due within the first 10 days of the next month LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Illustration Assume Sauk Stereo pays the balance due of 3 500 gross invoice price of 3 800 less purchase returns and allowances of 300 on May 14 the last day of the discount period Prepare the journal entry Sauk Stereo makes on May 14 to record the payment May 14 Discount 3 500 x 2 70 5 17 LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Illustration If Sauk Stereo failed to take the discount and instead made full payment of 3 500 on June 3 the journal entry would be June 3 5 18 LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Purchase Discounts Should discounts be taken when offered Example 2 for 20 days Annual rate of 36 5 3 500 x 36 5 x 20 365 70 5 19 LO 2 Explain the recording of purchases under a perpetual inventory system Recording Recording Purchases Purchases of of Merchandise Merchandise Summary of Purchasing Transactions 4th Purchase 6th Freight in 8th Return 14th Discount Balance 5 20 LO 2 Explain the recording of purchases under a perpetual inventory system practice practice On March 2 Grace Company bought