Slide 1What is a merchandising business?Sales revenueWhat are sales discounts?What are sales returns? Sales allowances?Slide 6What does “FOB” mean?Slide 8Slide 9What costs should be included in Inventory?Cost of goods soldCalculating Cost of Goods SoldSlide 13Classified Income Statement, Merchandising CompanyGross profitExample problem: Income statement for a merchandising firmHempstead Company, solutionAccounting for Merchandising TransactionsWhat is a merchandising business?A merchandising business buys products for resale to customers.The company can have a traditional “bricks and mortar” store, can conduct operations on-line, or both.Each merchandising transaction involves two parties: a buyer and a seller. The merchandising company takes the part of the buyer when acquiring its merchandise, and the seller when it sells the merchandise to its customers.Sales revenueSales revenue•represents amounts earned from selling merchandise (inventory) to customers•a sale is a transfer of ownership (title) of goods •sales may be for cash or credit (on account)What are sales discounts?•Some sellers, to encourage prompt payment by the buyer, offer a discount if the invoice is paid within a certain time period. •For example, if a company sells merchandise and offers credit terms of 3/10, n/30, it means the buyer can take a 3% discount if payment is made within 10 days of the purchase; the full amount of the invoice must be paid within 30 days.•Credit terms of 2/15, n/eom mean the buyer can take a 2% discount if payment is made within 15 days of the sale; the full amount is due at the end of the month.•From the buyer’s point of view, this same discount taken due to early payment is called a purchase discount.What are sales returns? Sales allowances?•A sales return is recorded by a seller if the merchandise is returned by the buyer. Buyers may return merchandise that is damaged, defective, or simply because it is not as expected. Some sellers have a very liberal return policy; others have a strict guidelines regarding what merchandise can be returned and when.•A sales allowance is a reduction in the price of the merchandise allowed by the seller, usually offered if the buyer is somewhat dissatisfied but willing to keep the goods. •From the buyer’s point of view, any returns or allowances are called purchase returns and allowances.How are sales discounts and sales returns and allowances recorded?•Both sales discounts and sales returns and allowances represent reductions in total sales revenues.•Rather than directly reduce the Sales account, most companies maintain separate accounts for Sales discounts and for Sales returns and allowances, because these amounts provide important information to sellers.•The income statement of a merchandising company shows Net Sales. Net Sales = Sales – Sales Discounts – Sales returns and allowances.What does “FOB” mean?•FOB is a shipping term that stands for “free on board”.•When goods are shipped FOB shipping point, the buyer must pay the cost of shipping.•When goods are shipped FOB destination, the seller is paying the cost of shipping.•FOB terms usually determine when title to the goods passes from the buyer to the seller.What are two basic systems used to account for purchasing merchandise (inventory)?1. Perpetual inventory system – Each purchase of inventory, and each sale of inventory, is recorded in the inventory account.The inventory account is continuously updated, so that the balance in the inventory account matches the actual count of inventory on handThis system offers more control over inventory for a company, but it is more time-consuming and costly to maintain. Due to the amount of record-keeping involved, many companies could not afford to use this system in the past. Computer software and inventory bar codes have made perpetual systems more affordable and practical.2. Periodic inventory system – The inventory account is not updated with each purchase and sale.Instead, purchases of inventory are added to a special “Purchases” account. At the end of the accounting period, an adjusting entry is made to update the inventory account to reflect the actual amount of merchandise on hand, and to show the cost of the merchandise sold during the period.Even though bar codes and computers have made the perpetual system more affordable than previously, many companies continue to use the periodic inventory system.2.What costs should be included in Inventory?Generally, assets are recorded at cost. For inventory, cost includes the purchase price AND costs such as•freight costs incurred by the buyer to ship the merchandise to the place of business•cost of insurance acquired to cover the merchandise while in transit•taxes, such as excise and sales taxes•any costs incurred to get the inventory ready for sale to customers.Cost of goods sold•Cost of goods sold is also known as cost of merchandise sold, or simply cost of sales. For many companies, COGS is the largest expense.•COGS represents the selling company’s cost for the merchandise that was sold in the current period.•Using a periodic inventory system, COGS is calculated at the end of an accounting period.Calculating Cost of Goods SoldThe basic computation of cost of goods sold is that it is equal to the cost of beginning inventory plus the net cost of goods purchased during the period less the cost of ending inventory.Cost of goods sold:Beginning inventory Purchases+ Net cost of inventory purchased Less: Purch DiscountsGoods available for sale Purch R & A - Ending inventory Plus: Freight inCost of goods sold Net cost of inv purchHow does the income statement of a merchandising company differ from that of a service business?The income statement for any type of company shows the results of operations; that is, it shows revenues and gains for the period less expenses and losses incurred during the period.Often, the income statement for a merchandising company is more complex because the merchandising company has more accounts. Also, merchandising companies often use the multi-step format, which presents the revenues and expenses in several sections.Classified Income Statement, Merchandising Company Net Sales Revenue - Cost of goods sold Gross profit - Operating expenses1 Income from operations + Non-operating revenues2 - Non-operating expenses3 Income before taxes1