Introduction*to*Financial*Accounting

Chapter(5
Accounting(for(the(Sale(of(Goods

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 Chapter 5)Learning)Objectives

LO1%– Describe%merchandising%and%explain%the%financial%statement%
components%of%sales,%cost%of%goods%sold,%merchandise%inventory,%and%
gross%profit;%differentiate%between%the%perpetual%and%periodic%
inventory%systems

LO2%– Analyze%and%record%purchase%transactions%for%a%merchandiser

LO3%– Analyze%and%record%sales%transactions%for%a%merchandiser

LO4%– Record%adjustments%to%merchandise%inventory

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 5.1$The$Basics$of$Merchandising
LO1"– Describe"merchandising"and"explain"the"financial"statement"
components"of"sales,"cost"of"goods"sold,"merchandise"inventory,"and"
gross"profit;"differentiate"between"the"perpetual"and"periodic"
inventory"systems

A"merchandising"company,"or"merchandiser,"differs
from"a"company"that"provides"services
! a"merchandiser"purchases"and"then"sells"goods"
whereas"a"service"company"sells"services
! e.g.""a"car"dealership"is"a"merchandiser"that"sells"cars"
while"an"airline"is"a"service"company"that"sells"air"travel"

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 5.1$The$Basics$of$Merchandising
! Because'merchandising'involves'the'purchase'and'
then'the'resale'of'goods,'an'expense'called'cost'of'
goods'sold'results'
! cost'of'goods'sold'is'the'cost'of'the'actual'goods'sold'(e.g.'
the'cost'of'goods'sold'for'a'car'dealership'would'be'the'
cost'of'the'cars'purchased'from'manufacturers'and'then'
resold'to'customers)
! A'service'company'does'not'have'an'expense'called'
cost'of'goods'sold'since'it'does'not'sell'goods'
! Because'a'merchandiser'has'cost'of'goods'sold'
expense'and'a'service'business'does'not,'the'income'
statement'for'a'merchandiser'includes'different'
details
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Differences)Between)the)Income)Statements)of)
Service)and)Merchandising)Companies
! A"merchandising"income"statement"highlights"cost"of"goods"
sold"by"showing"the"difference"between"sales"revenue"and"
cost"of"goods"sold"called"gross"profit"or"gross"margin

Service Company Merchandising Company

Revenues Sales
Less:%%Cost"of"Goods"Sold
Equals:""Gross"Profit
Less:%%Expenses Less: Expenses
Equals:""Net"Income Equals:""Net"Income

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 5.1$The$Basics$of$Merchandising
! Assume&that&Excel&Cars&Corporation&decides&to&go&
into&the&business&of&buying&used&vehicles&from&a&
supplier&and&reselling&these&to&customers
! If&Excel&purchases&a&vehicle&for&$3,000&and&then&sells&
it&for&$4,000,&the&gross&profit&would&be&$1,000,&as&
follows:
Sales$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$4,000
Cost$of$goods$sold$$$$$$$$$$$$ 3,000
Gross$profit$$$$$$$$$$$$$$$$$$$$$$$$$1,000

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 5.1$The$Basics$of$Merchandising

! The$word$"gross"$is$used$by$accountants$to$indicate$
that$other$expenses$incurred$in$running$the$business$
must$still$be$deducted$from$this$amount$before$net$
income$is$calculated
! gross$profit$represents$the$amount$of$sales$revenue$that$
remains$to$pay$expenses$after$the$cost$of$the$goods$sold$is$
deducted

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 5.1$The$Basics$of$Merchandising
! A"gross"profit"percentage"can"be"calculated"to"express"
the"relationship"of"gross"profit"to"sales"
! The"sale"of"the"vehicle"that"cost"$3,000"results"in"a"25%"
gross"profit"percentage"($1,000/4,000)
! for"every"$1"of"sales,"the"company"has"$.25"left"to"cover"other"
expenses"after"deducting"cost"of"goods"sold
! Readers"of"financial"statements"use"this"percentage"as"a"
means"to"evaluate"the"performance"of"one"company"
against"other"companies"in"the"same"industry,"or"in"the"
same"company"from"year"to"year
! Small"fluctuations"in"the"gross"profit"percentage"can"have"
significant"effects"on"the"financial"performance"of"a"
company
! the"amount"of"sales"and"cost"of"goods"sold"are"often"very"large"
in"comparison"to"other"income"statement"items

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 5.1$The$Basics$of$Merchandising

Another(difference(between(a(service(company(and(a
merchandiser(relates(to(the(balance(sheet:
! a(merchandiser(purchases(goods(for(resale
! goods(held(for(resale(by(a(merchandiser(are(called(
merchandise$inventory$and(are(reported(as(an(asset(
on(the(balance(sheet
! a(service(company(would(not(normally(have(
merchandise(inventory

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 5.1$Inventory$Systems

Inventory$Systems
There%are%two%types%of%ways%in%which%inventory%is
managed
❶ perpetual%inventory%system%
❷ periodic%inventory%system

Video:

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 5.1$Perpetual$Inventory$Systems

❶ Perpetual*inventory*system
! the$merchandise$inventory$account$and$cost$of$goods$sold$
account$are$updated$immediately$when$transactions$occur
! as$merchandise$inventory$is$purchased,$it$is$debited$to$the$
merchandise$inventory$account
! as$inventory$is$sold$to$customers,$the$cost$of$the$inventory$
sold$is$removed$from$the$merchandise$inventory$account$
and$debited$to$the$cost$of$goods$sold$account
! a$perpetual$system$means$that$account$balances$are$
known$on$a$real9time$basis
! this$chapter$focuses$on$the$perpetual$system

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 5.1$The$Basics$of$Merchandising
❷ Periodic(Inventory(System
! purchase*of*merchandise*inventory*is*debited*to*a*
temporary*account*called*Purchases
! at*the*end*of*the*accounting*period,*inventory*is*counted*
(known*as*a*physical*count)*and*the*merchandise*
inventory*account*is*updated*and*cost*of*goods*sold*is*
calculated*
! the*real=time*balances*in*merchandise*inventory*and*cost*
of*goods*sold*are*not*known*
! even*in*a*perpetual*system*a*physical*count*must*be*
performed*at*the*end*of*the*accounting*period*to*record*
differences*between*the*actual*inventory*on*hand*and*the*
account*balance

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 Homework(
Consider)the)following)information)of)Jones)
Corporation)over)four)years:
2014) 2013) 2012) 2011
Sales) $10,000) $9,000 $)?) $7,000
COGS ?) 6,840) 6,160) ?
Gross)Profit)2,500) ?) 1,840) ?
% ?) ?) ?) 22%

• Required:
• a.)Calculate)the)missing)amounts)for)each)year.
• b.)What)does)this)information)indicate)about)the)
company?

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 Homework(Answer
• a.#The#completed#table#is#as#follows:
2014 2013 2012 2011
Sales $10,000 $9,000 $8,000 $7,000
COGS 7,500 6,840 6,160 5,460
Gross Profit 2,500 2,160 1,840 1,540
% 25% 24% 23% 22%

b.#The#company’s#gross#profit#percentage#has#increased#each#year#from#2011#to#2014#
inclusive.##This#means#it#is#earning#more#per#sales#dollar#each#year#(from#22#cents#per#
dollar#in#2011#to##25#cents#per#dollar#in#2014).#This#is#a#favourable#trend#because#the#
company#is#generating#more#gross#profit#to#apply

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