Chapter 4 Reporting and Analyzing Merchandising Operations Merchandising Activities customers wholesaler or a retailer Merchandise consist of products goods that a company acquires to resell to Merchandiser earns net income by buying and selling merchandise either a o Wholesalers is an intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers o Retailer is an intermediary that buys products from manufacturers or wholesalers and sells them to consumers Some service companies use the term sales instead of revenues Expense of buying and preparing merchandise cost of goods sold Merchandiser net sales cost of goods sold gross profit expenses net Service company revenues expenses net income income Gross profit net sales cost of goods sold aka gross margin Merchandise inventory goods that a company owns and expects to sell to customers aka inventory not on a service company s balance sheet Cash sales shorten operating cycles We want shorter operating cycles because assets tied up in inventory and receivables are not productive A merchandising company s operating cycle begins by purchasing merchandise and ends by collecting cash from selling the merchandise Beginning inventory what a company starts with net purchases what a company purchases merchandise available for sell later on the available merchandise is either ending inventory kept for future sales or cost of goods sold merchandise was sold Perpetual inventory system continually updates accounting records for merchandising transactions used more Periodic inventory system updates the accounting records for merchandise transactions only at the end of the period Accounting for Merchandise Purchases The cost of merchandise purchased for resale is recorded in the merchandise inventory asset account List price catalog price of an item before any trade discount is deducted Trade discount reduction from a list price that can vary for wholesalers retailers and consumers usually higher for wholesalers buying in bulk Credit terms descriptions of the amounts and timing of payments that a buyer debtor agrees to make in the future EOM end of month used to describe credit terms o n 10 EOM means net 10 days after end of month credit period time period that can pass before a debtor s payment in due Cash discount reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period used to encourage buyers to pay earlier o Discount period time period in which a cash discount is available and the buyer can make a reduced payment o Purchase discount term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period o Sales discount term used by a seller to describe a cash discount granted to buyers who pay within the discount period o 2 10 n 60 means that full payment is due within a 60 day credit period but the buyer can deduct 2 of the invoice amount if payment is made within 10 days of the invoice date Nov 2 merchandise inventory debit 1 200 and credit accounts payable 1 200 o Purchased merchandise on credit invoice dated nov 2 terms 2 10 o Nov 12 debit accounts payable 1 200 credit merchandise inventory 24 2 times 1 200 and credit cash 1 176 paid for the purchase on nov 2 less the discount of 24 n 30 o Purchase returns refer to merchandise that a buyer acquires and then returns to the seller Purchase allowance is a reduction in the cost of defective or unacceptable merchandise that a buyer wants most buyers will buy defective items for a lower price Debit memorandum notification that the sender has debited the recipients account in the sender s records When cash is refunded the cash account is debited instead of accounts FOB free on board the point when ownership of goods passes from the payable seller to the buyer o FOB shipping point FOB factory means the buyer accepts ownership when the goods depart the seller s place of business buyer is responsible for paying shipping costs and bearing the risk of damaged goods during transit o FOB destination means ownership of goods transfers to the buyer when the goods arrive at the buyer s place of business seller is responsible for shipping costs seller does not record revenue from this sale until the goods arrive at the destination Purchases are recorded as debits to merchandise inventory any later purchase discounts returns and allowances are credited decreases to merchandise inventory transportation is debited added to merchandise inventory Supplementary records information outside the usual accounting records Accounting for Merchandise Sales Each sales transaction for a seller of merchandise involves 2 parts o Revenue received in the form of an asset from the customer o Cost recognition of the merchandise sold to the customer Each sales transaction for merchandisers whether for cash or for credit requires 2 entries one for revenue and one for cost o Debit accounts receivable or cash and credit sales adding to assets o Debit cost of goods sold and credit merchandise inventory decreases and equity assets and equity Sales discounts is a contra revenue account meaning that sales discounts is deducted from the sales account A company completes a credit sale for 1 000 revenue part of sale recorded below If the buyer decides to pay the full 1 000 and not use the discount sale then it is recorded as IF the buyer decides to pay within the discount period then it is recorded as Sales Returns Must reflect the decrease in sales from the return by debiting sales returns and allowances and crediting accounts receivable decreasing both accounts It the merchandise returned in not defective then we must debit add to merchandise inventory bc we now have more inventory and credit cost of goods sold adding to both accounts If the merchandise is defective then we must debit merchandise inventory the amount the stuff is worth less now that it is defective such as 150 debit loss from defective merchandise such as 450 how much we lost and credit cost of goods sold 600 original worth Sales allowances debit sales returns and allowances credit accounts receivable Completing the Accounting Cycle Adjustments o Merchandising companies are similar to service companies in regards to prepaid expenses accrued expenses unearned revenues and accrued revenues however we must made another adjustment to update the merchandise inventory account to reflect any loss of merchandise o
View Full Document
Unlocking...