Slide 1Merchandising OperationsMerchandising Business Income StatementMerchandising Business Income Statement , continuedMerchandiser Returns and AllowancesMerchandiser DiscountsDiscount ExampleSlide 8Freight (transportation) ExampleSlide 10Slide 11Slide 12Slide 13Slide 14Slide 15Illustrating the dual nature of merchandising transactionsDiscount ,Return/Allowance, & Shipping Cost RecapDiscount ,Return/Allowance, & Shipping Cost RecapFinancial Statement AnalysisAccounting for Merchandising BusinessesChapter 4A200 – Survey of AccountingUniversity of Tennessee2Merchandising 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 (normal operations) are recorded as Other Income or Other Expense on the income statement.3Merchandising Business Income StatementMerchandising CompanyIncome Statement (Multi-Step)For the year ended 12-31-12Revenue: 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 merchandisers (sellers) to customers when customers return goods. Sales R&A reduce the seller’s Sales Revenue for the period, thus is defined as contra-revenue.Merchandiser as BuyerPurchase Returns and Allowances: Cost reductions taken by merchandisers (buyers) 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.6Merchandiser DiscountsMerchandiser as SellerSales Discounts: Price reductions given by merchandisers (sellers) when they sell goods to customers - to encourage customers to pay quickly. Sales Discounts reduce the seller’s Sales Revenue for the period, thus is defined as contra-revenue.Merchandiser as BuyerPurchase Discounts: Cost reductions taken by merchandisers (buyers) 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 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 = [$3,500 – ($3,500 x .02)] 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)Note: Whoever owns the goods during transit pays for the shipping!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? $4,600Merchandiser as Seller: accounting for the sale of merchandise Transaction #1 (Seller): On May 1, Sink Company sold goods on account to Boots Company for $2,500. Sink’s cost of merchandise sold is $1,500. Terms are 2/10, net 30, FOB shipping point. Transportation costs of $75 were paid by Boots. Sink will record two separate entries: 1. Record the revenue and 2. Remove the inventory from their booksNote: Always ask yourself who pays for shipping before you work a problem!Sink (seller) will recordEffect on Statement of Cash FlowsBalance SheetEffect on Income Statement and Stmt. of Retained Earnings Assets = Liabilities + EquityAccounts ReceivableMerchandise InventoryRetained Earnings2,500 = 2,500 2,500Sales Revenue(1,500) = (1,500) (1,500) COGS Expense10Merchandiser as Buyer: accounting for the purchase of merchandise Transaction #1 (Buyer): On May 1, Sink Company sold goods on account to Boots Company for $2,500. Sink’s cost of merchandise sold is $1,500. Terms are 2/10, net 30, FOB shipping point. Transportation costs of $75 were paid by Boots in cash. Boots will record two separate transactions: 1. The purchase of the inventory and 2. The payment for shipping expense.Boots (buyer) will recordEffect on Statement of Cash FlowsBalance SheetEffect on Income Statement and Stmt. of Retained Earnings Assets = Liabilities + EquityCash Merchandise InventoryAccounts PayableRetained Earnings2,500 = 2,500(75)Cash out Operating(75) 75 =11Merchandiser as Seller: accounting for the return of goods to the seller Transaction #2 (Seller): On May 5, Boots returned $500 worth of merchandise to Sink. Sink’s cost of the returned merchandise was $350. Sink will record:Increase Sales Returns & Allowances (contra-revenue) $500Decrease Accounts