Slide 1Merchandising OperationsMerchandising Business Income StatementMerchandising Business Income Statement, continuedMerchandiser Returns and AllowancesMerchandiser DiscountsDiscount ExampleSlide 8Freight (transportation) ExampleSlide 10Slide 11Slide 13Slide 14Financial Statement AnalysisAccounting for Merchandising BusinessesChapter 4A200 – Survey of AccountingUniversity of Tennessee Fall 20152Merchandising OperationsA 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 fromInventory 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 andAdministrative Expense on the income statement.4. Income and expenses not related to buying and selling merchandise arerecorded as Other Income or Other Expense on the income statement.3Merchandising Business Income StatementMerchandising CompanyIncome Statement (Multi-Step)For the year ended 12-31-15Revenue: Sales $ xx - Sales Returns & Allowances (xx) - Sales Discounts (xx) = Net Sales $ xxExpenses: - Cost of Merchandise Sold Expense (xx)= Gross Profit xx4Merchandising Business Income Statement, continuedGross Profit $ xx- Operating Expenses: Selling Expenses (xx) Administrative Expenses (xx) = Income from operations xx+ Other income - Other expenses (xx)= Net income $ xx5Merchandiser Returns and AllowancesMerchandiser as SellerSales Returns and Allowances: Price reductions given by merchandisersto customers when customers return goods. Sales R&A reduce the seller’sSales Revenue for the period.Merchandiser as BuyerPurchase Returns and Allowances: Cost reductions taken by merchandiserswhen 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.6Merchandiser DiscountsMerchandiser as SellerSales Discounts: Price reductions given by merchandisers when they sellgoods to customers - to encourage customers to pay quickly. Sales Discountsreduce the seller’s Sales Revenue for the period.Merchandiser as BuyerPurchase Discounts: Cost reductions taken by merchandisers when they buy goods from manufacturers and then pay quickly. Purchase Discountsreduce 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 daysn/30 or net 30: no discount is offered; full payment is due within 30 daysn/eom: no discount is offered; full payment is due at the end of the month7Discount ExampleOn July 1, Sharp Company sold on account 100 units of product to Bean Companyfor $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? $3,5008 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 transitThe 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 transitThe Seller pays the shipping costs, which increase seller’s Transportation Out (a selling expense on the Income Statement)9Freight (transportation) ExampleOn August 1, Best Company purchased on account 100 units of product fromSlope 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 companydemanded payment before it would take the shipment.1. How much will Best pay to Slope if the shipping terms were FOB shipping point?$4,6502. How much will Best pay to Slope if the shipping terms were FOB destination? $4,600Accounting for the sale of merchandise Transaction #1 (Seller): On May 1, Sink Company sold goods on account to BootCompany 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 SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityAccounts ReceivableMerchandise InventoryRetained Earnings2,500 = 2,500 2,500 Sales Revenue(1,500) = (1,500) (1,500) COMS Expense10Accounting 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 SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityAccounts ReceivableMerchandise InventoryRetained Earnings(500) = (500) (500) Sales R&A350 = 350 350 Contra COMS Expense11STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityCashAccounts ReceivableRetained Earnings1,960 Cash in Operating1,960 (2,000) = (40) (40) Sales Discounts12 Accounting for the receipt of payment Transaction #3 (Seller): On May 9, Boot paid Sink the amount due. Sink will record: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 SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityCashMerchandise InventoryAccounts Payable2,500 = 2,500(75) Cash outOperating(75) 75 =13Accounting 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 SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets = Liabilities + EquityMerchandise InventoryAccounts