Chapter 5 MERCHANDISING TRANSACTIONS Distinguish between service merchandising and manufacturing businesses Service business provides a service does something for you o Doctor landscaper etc Merchandising business buys products for resale to customers o Sears target amazon etc Manufacturing business creates new products for sale o Buy rubber and leather and turn it into shoes REVENUE FOR A MERCHANDISING COMPANY Sales revenue or just SALES Revenue recognition generally revenue is recognized when the customer receives the goods o Point of sale Sales discounts Credit terms Also a contra account to revenue Offered by the seller to encourage prompt payment Trying to encourage the customers to pay their balances At the bottom of the invoice it might have 2 10 n 30 o Means that the customer will get a 2 discount if paid within 10 days o But also it must be paid in full within 30 days 3 15 n 60 o 3 discount if paid within 15 days o Must be paid in full within 60 days Sales returns and allowances Companies have a separate account from revenue Contra revenue Used when customer returns goods o Every company has their own policy Add to the company when they make a sale and when someone returns instead of just reducing the sale they put it in this category Lets the company keep track of anything that has been returned so they can see the ratio of defective or not liked products Example 1 Kyle Company sold 4 000 of merchandise on account to a customer on November 23 with credit terms of 2 10 n 30 On November 25 the customer returned 600 of the goods on November 30 the customer paid the balance due How much cash did Kyle Company receive from the customer What is the amount of Net sales revenue Kyle will report from this transaction 4000 600 3400 3400 X 02 68 disc 3400 68 3332 Sales rev Sales R T Sales Disc Net Sales 4000 600 68 3332 COST OF GOODS SOLD expense aka cost of sales Objective Matching Record expense in the same period as revenue that the inventory helped generate o When you buy inventory it is an asset when you sell inventory it becomes an expense There are two basic approaches to determining a company s cost of goods sold for a period perpetual and periodic inventory 1 Periodic method inventory account balance is updated and the amount of expense is determined at end of accounting period Use adjusting at end of period 2 Perpetual method inventory account balance and amount of expense is calculated continuously throughout the accounting period At any time the inventory balance should be equal to the inventory on hand Example o T shirts for sale o As soon as someone buys a t shirt I record Record selling price of the item to revenue Record my price for the t shirt to expense This method equals better record but the cost is higher o This method was very unattainable before computers Does a company using a perpetual inventory system need to complete a physical count of inventory at the end of the period Why Need to verify inventory on hand Accounts for theft employee embezzlement miscount etc Purchasing inventory Inventory Purchases At the time of the purchase the asset increases or purchases increases Purchase discounts Offered by the seller to encourage the buyer to pay promptly If we pay within a set time we get a purchase discount Purchase returns and allowances Buyer returns goods to seller Freight charges Transportation in Freight In Increases inventory cost Generally the party paying freight owns the goods in transit o If you are the seller and the buyer pays shipping you get revenue as soon as it ships o If the seller pays shipping you do not record revenue until the customer receives the goods FOB shipping point Buyer pays freight FOB destination Seller pays the freight Asset cost all costs to get assets in location and condition that we want it in Example 2 Purchasing inventory Sunshine company sells outdoor furniture and accessories On March 29 Sunshine purchased 10 patio tables costing 75 each from Picnic Manufacturing Company Credit terms noted on the invoice were 1 10 n 30 Picnic Company prepaid the freight charges of 50 and added that amount to the invoice FOB shipping point buyer pays freight Purchase discount applies only to goods NOT shipping a If Sunshine pays the amount due on April 5 what is the amount of the payment 10 X 75 750 01 X 750 742 50 50 00 792 50 b If Sunshine pays on April 26 what is the amount of the payment 750 50 800 c Assume Picnic Manufacturing shipped the tables from its warehouse in Oregon to Sunshine s store in Bryan the terms of the sale indicate that the tables are being shipped FOB shipping point Oregon The tables leave Picnic s warehouse on March 30 and arrive in Bryan on April 3 Should the tables be included in Picnic Company s inventory when the company prepares its March 31 balance sheet Why Yes picnic owns goods in transit Inventory and the matching principle Calculating Cost of goods sold Beginning inventory Net cost of purchases for the period Goods available for sale Ending inventory Cost of goods sold Calculating Gross Profit Net Sales Cost of goods sold Gross Profit Example problem 3 Income Statement for a merchandising company SES Company has the following account balances as of December 31 X6 Purchase returns and allowances Inventory January 1 Sales Freight In Sales returns and allowances Purchase discounts Inventory December 31 Purchases Sales Discounts Selling costs Freight out Administrative and general expenses 10 200 400 50 25 5 190 350 10 45 10 12 Required Determine the gross profit and net income of SES Company Also determine the company s gross profit percentage