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 shoesREVENUE FOR A MERCHANDISING COMPANYSales revenue (or {just} SALES)- Revenue recognition- generally revenue is recognized when the customer receives the goodso Point of saleSales 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/30o Means that the customer will get a 2% discount if paid within 10 dayso But, also it must be paid in full within 30 days- 3/15, n/60o 3% discount if paid within 15 dayso Must be paid in full within 60 daysSales returns and allowances- Companies have a separate account from revenue- Contra- revenue- Used when customer returns goodso 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 seethe ratio of defective or not liked productsExample 1Kyle 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 Sales rev 40003400 X .02 = 68 disc - Sales R&T (600)3400 – 68 = 3332 - Sales Disc (68)_Net Sales 3332COST OF GOODS SOLD (= expense, aka “cost of sales”)Objective:- Matching- Record expense in the same period as revenue that the inventory helped generateo When you buy inventory it is an asset, when you sell inventory it becomes an expenseThere 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 expenseis determined at end of accounting period- Use adjusting at end of period2. 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 saleo 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 highero This method was very unattainable before computersDoes 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 increasesPurchase discounts- Offered by the seller to encourage the buyer to pay promptly- If we pay within a set time, we get a purchase discountPurchase returns and allowances- Buyer returns goods to sellerFreight charges (Transportation in) “Freight In”- Increases inventory cost- Generally, the party paying freight owns the goods in transito If you are the seller and the buyer pays shipping you get revenue as soon as it shipso If the seller pays shipping you do not record revenue until the customer receives the goodsFOB shipping point- Buyer pays freightFOB destination- Seller pays the freight*Asset cost- all costs to get assets in location and condition that we want it in*Example 2 Purchasing inventorySunshine 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 + 50.00792.50b. If Sunshine pays on April 26, what is the amount of the payment?750 + 50 = 800c. 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 transitInventory and the matching principle – ***Calculating Cost of goods sold***Beginning inventory+ Net cost of purchases for the periodGoods available for sale- Ending inventoryCost of goods soldCalculating Gross ProfitNet Sales- Cost of goods soldGross ProfitExample problem #3: Income Statement for a merchandising companySES Company has the following account balances as of December 31, X6:Purchase returns and allowances $ 10 Inventory, January 1 200Sales 400Freight - In 50Sales returns and allowances 25Purchase discounts 5Inventory, December 31 190Purchases 350 Sales Discounts 10Selling costs 45Freight out 10Administrative and general expenses 12Required: Determine the gross profit and net income of SES Company. Also determine the company’s gross profit