Accounting for Merchandising Businesses Chapter 4 A200 Survey of Accounting University of Tennessee Fall 2015 2 Merchandising Operations A merchandiser is both a buyer and a seller of goods 1 Purchases goods from manufacturers Cost of merchandise purchased is recorded on the balance sheet as the current asset Inventory 2 Sells goods to customers Cost of merchandise sold is removed from Inventory on the balance sheet and is recorded on the income statement as Cost of Goods Sold Expense matching it with the revenue from the sale 3 Costs of running the business are recorded as Selling Expense and Administrative Expense on the income statement 4 Income and expenses not related to buying and selling merchandise are recorded as Other Income or Other Expense on the income statement 3 Merchandising Business Income Statement Merchandising Company Income Statement Multi Step For the year ended 12 31 15 Revenue Sales xx Sales Returns Allowances Sales Discounts Net Sales xx xx xx Expenses Cost of Merchandise Sold Expense Gross Profit xx xx 4 Merchandising Business Income Statement continued Gross Profit xx Operating Expenses Selling Expenses xx Administrative Expenses xx Income from operations xx Other income Other expenses Net income xx xx 5 Merchandiser Returns and Allowances Merchandiser as Seller Sales Returns and Allowances Price reductions given by merchandisers to customers when customers return goods Sales R A reduce the seller s Sales Revenue for the period Merchandiser as Buyer Purchase Returns and Allowances Cost reductions taken by merchandisers when they purchase goods from manufacturers and then return them Purchase R A reduce the buyer s cost of Inventory Not pre set amounts negotiated situation by situation 6 Merchandiser Discounts Merchandiser as Seller Sales Discounts Price reductions given by merchandisers when they sell goods to customers to encourage customers to pay quickly Sales Discounts reduce the seller s Sales Revenue for the period Merchandiser as Buyer Purchase Discounts Cost reductions taken by merchandisers when they buy goods from manufacturers and then pay quickly Purchase Discounts reduce the buyer s cost of Inventory Typical discount terms 2 10 net 30 a 2 discount is offered if payment is made within 10 days otherwise full payment is due within 30 days n 30 or net 30 no discount is offered full payment is due within 30 days n eom no discount is offered full payment is due at the end of the month 7 Discount Example On July 1 Sharp Company sold on account 100 units of product to Bean Company for 3 500 Sharp offered a discount of 2 10 net 30 1 How much will Bean pay to Sharp if it pays the invoice on July 5 3 430 Purchase discount to the buyer Bean reduces cost of Inventory Sales discount to the seller Sharp reduces Sales Revenue 2 How much will Bean pay to Sharp if it pays the invoice on July 25 3 500 8 Freight cost transportation in a Merchandising business Who owns the goods during transit Who is responsible for shipping costs FOB Shipping Point The Buyer owns the goods during transit The Buyer pays the shipping costs which increase buyer s cost of inventory a current asset on the Balance Sheet FOB Destination The Seller owns the goods during transit The Seller pays the shipping costs which increase seller s Transportation Out a selling expense on the Income Statement 9 Freight transportation Example On August 1 Best Company purchased on account 100 units of product from Slope Company for 4 600 The credit terms are n eom and shipping costs are 50 Slope Company pre paid the shipping costs because the trucking company demanded payment before it would take the shipment 1 How much will Best pay to Slope if the shipping terms were FOB shipping point 4 650 2 How much will Best pay to Slope if the shipping terms were FOB destination 4 600 10 Accounting for the sale of merchandise Transaction 1 Seller On May 1 Sink Company sold goods on account to Boot Company for 2 500 Sink s cost of merchandise sold is 1 500 Terms are 2 10 net 30 FOB shipping point Boot paid 75 of transportation costs Sink will record STATEMENT OF CASH FLOWS BALANCE Assets Accounts Receivable SHEET Merchandise Inventory 2 500 1 500 INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Liabilities Equity Retained Earnings 2 500 2 500 Sales Revenue 1 500 1 500 COMS Expense 11 Accounting for the return of merchandise Transaction 2 Seller On May 5 Boot returned 500 worth of merchandise to Sink Sink s cost of the returned merchandise was 350 Sink will record STATEMENT OF CASH FLOWS BALANCE Assets Accounts Receivable SHEET Merchandise Inventory 500 350 INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Liabilities Equity Retained Earnings 500 500 Sales R A 350 350 Contra COMS Expense 12 Accounting for the receipt of payment Transaction 3 Seller On May 9 Boot paid Sink the amount due Sink will record STATEMENT OF CASH FLOWS BALANCE Assets 1 960 Cash in Operating SHEET Cash Accounts Receivable 1 960 2 000 INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Liabilities Equity Retained Earnings 40 40 Sales Discounts 13 Accounting for the purchase of merchandise Transaction 1 Buyer On May 1 Sink Company sold goods on account to Boot Company for 2 500 Sink s cost of merchandise sold is 1 500 Terms are 2 10 net 30 FOB shipping point Boot paid 75 of transportation costs Boot will record STATEMENT OF CASH FLOWS BALANCE Assets Cash 75 Cash out Operating 75 INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS SHEET Merchandise Inventory Liabilities Accounts Payable 2 500 75 2 500 Equity 14 Accounting for the return of merchandise Transaction 2 Buyer On May 5 Boot returned 500 worth of merchandise to Sink Sink s cost of the returned merchandise was 350 Boot will record STATEMENT OF CASH FLOWS BALANCE Assets SHEET Merchandise Inventory 500 INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Liabilities Accounts Payable 500 Equity 15 Accounting for the payment Transaction 3 Buyer On May 9 Boot paid Sink the amount due Boot will record STATEMENT OF CASH FLOWS BALANCE Assets 1 960 Cash out Operating SHEET Cash Merchandise Inventory 1 960 40 INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Liabilities Accounts Payable 2 000 Equity Retained Earnings 16 Financial Statement Analysis Gross Profit Gross Profit Net Sales GP measures how much of each dollar in a sales transaction is profit to the seller before other expenses Sink Company recorded 1 960 of net sales revenue 2 000 40 and 1 150 of cost of merchandise sold 1