Chapter 5: Merchandising Operations and the Multiple-Step Income Statement

IncomeStatementPresentation
Formats: Single step: all expenses are added together and deducted in a single step from the sum of all revenues advantage is simplicity

Single Step Income Statement

Revenues Expenses Net Income (Loss)

Multiple step: subdivides statement, with important subtotals

MULTISTEP INCOME STATEMENT

__

__
THEMERCHANDISING PROFITOFA COMPANY

__

NOTONSINGLE STEPINCOME STATEMENT

Waynes Worms is a bait shop that sells worms and other fishing supplies. Balances in the Income Statement accounts for Waynes Worms for the year ended 12/31/14 are as follows: Costofgoodssold DepreciationExpense Gainonsaleofplantasset Incometaxexpense InsuranceExpense InterestExpense InterestRevenue Netsales SalaryExpense SuppliesExpense UtilitiesExpense 74,200 2,000 500 5,000 3,600 250 50 147,700 41,000 1,500 1,800

MultistepIncomeStatementandRecordingSales

Yarbrough

Page1of9

Waynes Worms Income Statement For the Year Ending December 31, 2014

Financial Reporting for Merchandise Purchases and Sales

Inventory
Unsoldinventory:_______________;goeson_________________________ Soldinventory:CostofGoodsSold_______________;goeson_________________________

PerpetualInventorySystem
Inventoryrecordsareupdatedperpetually,thatis,everytimeinventoryisbought,sold,orreturned.Usuallycombined withbarcodesandopticalscanners.

PeriodicInventorySystem
Inventoryrecordsareupdatedperiodically,thatis,attheendoftheaccountingperiod.Todeterminehowmuch merchandisehasbeensold,periodicsystemsrequirethatinventorybephysicallycountedattheendoftheperiod. InventoryControl PerpetualInventorySystemContinuousTrackingCanEstimateShrinkage PeriodicInventorySystemNoUptoDateRecordsCantEstimateShrinkage

Costofinventoryincludesallcostsincurredinbringingtheinventorytoitsexistingconditionandlocation.

MultistepIncomeStatementandRecordingSales

Yarbrough

Page2of9

Recording Purchase Transactions

Something Special Gift Shoppe

SomethingSpecialbeginstheaccountingperiodwithinventoryof$5,000.

dr+Inventorycr

InventoryPurchases:SomethingSpecialpurchases$15,000ininventoryitemsoncredit.

1 2 1

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

Shippingcosts:Foramerchandiserwhoisshippinggoodstoacustomer,thetransferofownershipoccursatoneoftwo possibletimes: 1. FOBshippingpointthesaleisrecordedwhenthegoodsleavethesellersshippingdepartment. 2. FOBdestinationthesaleisrecordedwhenthegoodsreachtheirdestination(thecustomer).

FOB SellingPoint Destination

Whopaysforshipping?

Titletransferswhen?

TransportationCosts:SomethingSpecialpays$500cashforshippingcosts.

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

MultistepIncomeStatementandRecordingSales

Yarbrough

Page3of9

PurchaseReturnsandAllowances:Whengoodssoldtoacustomerarriveindamagedconditionorareotherwise unsatisfactory,thecustomercan: (1)returnthemforafullrefundor (2)keepthemandaskforareductioninthesellingprice,calledanallowance. SomethingSpecialreturns2antiquereplicaclockstothesupplierandreceivesa$100reductioninthebalanceowed. 1 Analyze Assets = Liabilities + Stockholders' Equity 2 Journalize

Apurchasediscountisasalespricereductiongiventocustomersfor___________________________oftheiraccount balance.

SomethingSpecialspurchasefor$15,000hadtermsof2/10,n/30.

Discount=

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

MultistepIncomeStatementandRecordingSales

Yarbrough

Page4of9

SummaryofInventoryTransactions

BeginningInventory NetPurchases

CostofGoodsAvailableforSale

ThisinformationrelatestoLewisCo. 1. OnApril5,purchasedmerchandisefromMcCarthyCompanyfor$14,000,terms2/10,n/30. 2. OnApril6,paidfreightcostsof$700onmerchandisepurchasedfromMcCarthy. 3. OnApril7,purchasedequipmentonaccountfor$30,000. 4. OnApril8,returnedsomeofApril5merchandisetoMcCarthyCompany,whichcost$3,600. 5. OnApril15,paidtheamountduetoMcCarthyCompanyinfull.

Recording Sales Transactions Everymerchandisesalehastwocomponents,eachofwhichrequiresanentryinaperpetualinventorysystem.

(a) drAccountsReceivable(orCash)(+A) crSalesRevenue(+R,+SE) (b) drCostofGoodsSold(+E,SE) crInventory(A)

400 350

400 350

MultistepIncomeStatementandRecordingSales

Yarbrough

Page5of9

SalesofMerchandiseonAccount:SomethingSpecialmakescreditsalesof$20,000toExpensiveInteriorDesigns.The costofthemerchandisesoldis$7,000
1 2

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

FreightOut:JusttheflipsideofPurchaseReturnsandAllowances SomethingSpecialmakescreditsalesof$20,000toExpensiveInteriorDesigns.Thecostofthemerchandisesoldis $7,000.ThemerchandiseisshippedFOBdestination.Thecostoftheshippingis$795. Whopaystheshippingcosts?

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

Freightoutisacosttothe_____________.Itisan_________________________expenseonthesellersincomestatement.Itisnt areductionofsales.Itisntincludedatallinthecomputationofnetsales,costofgoodssold,orgrossprofit.Itdoesntaffect inventory.

SalesReturnsandAllowances:JusttheflipsideofPurchaseReturnsandAllowances

ExpensiveInteriorDesignsreturnsatablepurchasedonaccountandSomethingSpecialreturnsthetabletoits inventory.SomethingSpecialhadsoldthetablefor$800,andthecosttoSomethingSpecialforthetablewas$300.

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

MultistepIncomeStatementandRecordingSales

Yarbrough

Page6of9


SalesonAccountandSalesDiscounts:Asalesdiscountisasalespricereductiongiventocustomersforprompt paymentoftheiraccountbalance.

AssumethesaleSomethingSpecialtoExpensiveDesignshadcredittermsof2/10,n/30.Thenetamountthat ExpensiveDesignersowesafterthereturnoftheonetableis$19,200(20,000800).Thediscountwouldbe$19,200* 2%=$384.ExpensiveDesignerswouldremit$18,816($19,200384)tosatisfyitsaccountinfull. Analyze 1 Assets = Liabilities + Stockholders' Equity

2 Journalize Thesalesreturnsandallowancesandsalesdiscountsintroducedinthissectionwererecordedusingcontra revenueaccounts.

SomethingSpecialmakescashsalesof$25,000tovariousclients.Thecostofthemerchandisesoldis$10,000 1 Analyze Assets = Liabilities + Stockholders' Equity

Journalize

SummaryofSales

drSales(R,SE)+cr
SalesRevenue Less:SalesReturnsandAllowances SalesDiscounts NetSales

dr+SalesRet.&All.(xR,SE)cr

dr+SalesDiscounts(xR,SE)cr
Yarbrough Page7of9

MultistepIncomeStatementandRecordingSales

SummaryofCostofGoodsSoldandGrossProfit

dr+CostofGoodsSold(E,SE)cr

NetSales CostofGoodsSold GrossProfit

FlowofCosts

DeterminingCostofGoodsPurchasedwithaPeriodicInventorySystem: CostofGoodsPurchased Purchases Less: PurchaseReturnsandAllowances PurchaseDiscounts NetPurchases FreightIn CostofGoodsPurchased DeterminingCostofGoodsSoldwithaPeriodicInventorySystem:

CalculationofCostofGoodsSold BeginningInventory +CostofGoodsPurchased =CostofGoodsAvailableforSale EndingInventory =CostofGoodsSold

MultistepIncomeStatementandRecordingSales

Yarbrough

Page8of9

DeterminingGrossProfit

NetSales CostofGoodsSold =GrossProfit GrossProfitRate

GrossProfitRate

GrossProfit NetSales

100

ProfitMarginRatio

ProfitMarginRatio QualityofEarningsRatio

NetIncome NetSales

QualityofEarningsRatio

NetCashProvidedbyOperatingActivities NetIncome

MultistepIncomeStatementandRecordingSales

Yarbrough

Page9of9