Accounting for Merchandise

Operations

Chapter Preview
Merchandising is one or the largest and most influential industries in the world. It is likely
that a number or you will work for a merchandiser. Theref01:e. understanding the tinancial
statements of merchandising companies is important. In this chapter. you wil l learn the basics
about reporting merchandising transactions. In addition . you will learn how to prepare and
ana ly ze a commonly used form of the income statement.

nearly I0.000 stores employ 4 7 1.000 people and generate ~ ales

Feature Story
Who Doesn't Shop?
Cat-refour. headquartered in Fra lll'C. i .~ thL' lar!:!cst rL'tailcr in
Europe and the sccund large st rctaikr 111 till' world . W hik -1-0'X
of its sa les arc in FranL·c. it opnatL' S storL'S unckr a variL·t y of
name s in l2 UlllntriL· s in Fumpc. Asia. and Latin America. s ud1
as Carrcl(lur ExprL·ss. Dit y. l·:d. Miniprcco. and PronH1cash . Its
of € I 12 billion.
Ben1111ing an international titan hasn't always been eas y.
Carrcfour has enjoyed some successfu l mergers and aL'LJLII SI-
tions . But. it has alsocxperienL·L·d scthad.s. im·iuding a raikd
effort to acquire a giant Bra/ilian rctaikr. It has had sPillL'
s uL·L·css in i11l'rca s ing lll<lrkct sharL' in L'lllL' rgin g lllarh.L·t-.. .
But. hy far tilL' largest sharL' or its sail's arL' Ill FtHOJ1l' . \o\ hiL'il
has l'Xj1L' I'il'lll'L'lf illW L'llnSlllllLT L'llllfilfCnL·L• ill I'L'l'L'Ill \L': lr -..
5 1
5-2 CHAPTER 5 Accounting for Merchandise Operations

due to the recession and debt crisis. As a result, Carrefour's
increases in emerging markets have only served to offset
dec lines in Europe.
Managem e nt has experienced upheaval, with three new
chief exec uti ve officers during a seven-year period. Inves-
tors in recent years have withdrawn support for the company,
resulting in a drop in Carrefour's share price of two-thirds in
less than five years. At times, the company has struggled stra-
tegically. Recently, it decided to quit using temporary price
cuts to promote products. Instead, Carrefour sets prices low
on certain key items. It also decided to not set its prices as
low as those of bargain stores, such as E.Leclerc (FRA).
Carrefour's management felt that the additional services the
company provides would enable it to charge slightly hi gher
prices than b argain stores without losing customers. However,
poor economic conditions made con s um e rs ex tre me ly pri ce-
conscious. As a result, th e company ha see n a s ig nificant d ro p
in customer traffic.
Nobody said retailing is easy, but at numbe r l\\ ·o in th e
world, Carrefour has no intenti on of throw in g in th e towe l. The
company recently launch ed a makeove r of 500 s upe rstores in
Europe, and it continues to look for expa ns io n oppo rtunities in
countries that have good growth oppo rtuniti es . Recentl y. th e
company opened its first store in Indi a. Lars O lo t"sso n . CEO
of Carrefour, declared: "The open ing of thi s fir st sto re marks
Carrefour's entry into the Indian market a nd w ill be ro llm,v e d
shortly by the opening of oth er Cash & Carry sto res. T hi s firs t
step is essenti al to allow the Carrefour tea m s to full y und er-
stand the specificities of the Indi an mark et and th e n build o ur
presence in other formats."

Chapter Outline
LEARNING OBJECTIVES

LO 1 Describe merchandising • Operating cycles DO IT! 1 Merchandising

operations and inventory systems. • Flow of costs Operations and Inventory
Systems

LO 2 Record purchases under a • Freight costs DO IT! 2 Purchase Transactions

perpetual inventory system . ·Purchase returns and
allowances
·Purchase discounts
·Summary of purchasing
transactions

LO 3 Record sales under a ·Sales returns and allowances DO IT! 3 Sales Transactions
perpetual inventory system. ·Sales discounts

LO 4 Apply t he steps in • Adjusting entries DO IT! 4 Closing Entries

the accounting cycle to a ·Closing entries
merchandising compa ny.
·Summary of merchandising
entries

LO 5 Prepare financial statements ·Income statement DO IT! 5 Financial Statement

for a merchandising company. • Classified statement of financial Classifications
position

I Go to the Review and Practice section at the end of the chapter for a review of key concepts
I and practice applications with solutions.
 Me rchand ising Operations a n d In e n to ry S 1stem s 5-3

Merchandising Operations and Inventory Syst e m s

LEARNING OBJECTIVE 1
Describe m erchandising op erations and inventory systems.

Metro (DEU) . Ca rTefour (F Rr\ ). and Tesco (GB R) arc L'allcd mL·rc h and i ~ ing compa-
nie s hecau ~ c the y hu y and sc II merchandi se rather th an perfor m se n ·ices as their primary
source of re,·enue . Me rchandising companies that purchase and sell dire ctl y to consumer~
are call ed retailers. Mc rL"i1andi sing L·ompanics that sc· ll to retailers arc known as whol esa l-
ers. For example. reta i kr \Yalgreen s ( SA) might buy good~ from " ·twk sale r Grupo Casa
SA de CV (MEX) . Retailer OH'il:e Depot (USA) might bu y otlicc ~ up p li e ~ from \\hok~akr
Corporate Express (N LD ). The primar y sourc e of re,·enue for m e rchandi~ing companie~ i~
th e sal e of me rchandi se. often referred to ~ im ply as sales r·en ·nue or sales . A merd1andi sing
co mpan y has tWO categories of e:\ penses: CO S[ of gl)Ods sold and operating e:\pe nse s.
C ost of goods sold is the tot al cost of merchandise sold during the peri od . This e:\pcnsc
is direc tly related to the re,enue recogni zed frnmthe sale of goods . Illustration 5.1 shu\\ s th e
inco me me asurement pwL·c ss for a merchandising company. The items in the t\\"l) blue hn:\es
are unique to a me rchandising company: they are not used by a se rviL·e compan y.

ILLUSTRATION S.l
Sales Less Income measurem ent process

l
Revenue fm· a met-chandi sing company

Cost of Equ als Gross Less

l
Goods Sold ____. Profit

Equals Net
Operating
~ Income
Expenses
(Loss)

Operating Cycles
The operating cycle of a merchandi sing company ordinari ly is longer than that o f a service
company. The purchase of merchandi se inventory and it s eve ntual sale lengthe n th e cyc le.
lllustr·ation 5.2 shows th e operat in g cyc le of a service company.

ILLUSTRATION 5.2
Service Company
Openctting cycle for a wn ice
company
Receive Cash Perform Services
Cash
I

MAIL

t Accounts
Receivable
5-4 CHAPTER 5 Accounting for Merchandise Operations

Illustration 5.3 shows the operating cycle of a mercha ndi s in g compa ny.

ILLUSTRATION 5.3
Merchandising Company
Operating cycle for a
merchandising company
I
~AIL
Receive Cash Buy Inventor-y
Cash
I

Sell Inventory

__..1'------w
Accounts
Inventory
Receivable

Note that the added asset account fo r a merchandi sing co mpa ny is th e In ve nt o ry account.
Companies report inventory as a current asset on the stateme nt of financial position.

Flow of Costs
The flow of costs for a merchandising company is as follows. Beginning in ve ntor y plu s th e
cost of goods purchased is the cost of goods avail ab le for sale. As goods arc so ld . the y arc
assigned to cost of goods so ld. Those goods th at are not so ld by th e en d o r th e accounting
period represent ending inventory. Illustration 5.4 describes these re la ti o nship s . Co mpanies
use one of two systems to account for inve ntory: a perpetual inventory system or a periodic
inventory system.

ILLUSTRATION 5.4
Flow of costs Beginning Cost of Goods
Inventory Purchased

Cost of Goods
Available for Sale

T
Cost of
Goods Sold

Perpetual System
HELPIFOL HINT In a perpetual inventory system, companies keep deta iled records of th e cost or each in,·l.'ll -
E ven under perpetual inven- t ory pure hase an d sa Ie ( see H e I p f u I H .mt). These record s continuously- P c riJei Uall y. - ·sht)\' .
tm-~' systems. companies take . . . _ ( JPN) dcakr:-.h 1
t h e mventory that should be on hand fo r every Item. For exa mpl e, a 1 oyota · · P
a physical inventory count. h as separate mventory records for each automobil e, truck , and van on 1ts 10 1 •·tnd s, hl
· · .
.
l\\Tuu 1
11
This is done as a control pro- fl . s· - . . ... 1 scannu s tu kl',
001. llnJ 1arly, a Mornsons (GBR) grocery store uses bar codes ami optic<:! · · II t , l. P
cedure to ve rif:v inventory . . . . h Y" ·tnd sc :-.. Ild • 1.
a d a11y runnmg record of' every box of cereal and every jar of jelly that 11 u · " t. l.
lt:'vels. in order to detect theft · . . 1 · ach uneas·•l
a perpetual in ventory system , a company deter mines the cost of goods so 1u e · c l'
or '"slu·inkage:·
occurs.
 Me rchandisin g Operat io n s an d In v en to ry Sy stem s 5-5

Periodic System
In a p e l"iodic imentory sys tem . companies do not keep detailed imentory reco rd s or the
good s o n hand throug ho ut the period . In stead. they determine th e cost l)f goods sold only at
the end of the accounting period-th at is. periodicall y..-\t that point. the company takes a
phys ical im·e ntor y COUilt to determine the COS[ o r good s o n hand .
To determine the COS[ or goods so ld un de r a periodic ii1\'e i1l o ry sys te m. th e li.) ll m\·ing
steps are necessary:

1. Determine the COS[ or gomb unhand at the beginning ur the accounting period.
2. Add [O it the CO S [ ur goods purchased.
3. S ubtrac t the cost or goo ds on ha nd a~ determined by the physical in\'entory CO Ull[ at the
e nd o r the ac co untin g period .

Illustration 5.5 graphicall y compare s the sequence o r acti\'iti es and the timing of the cost
o f goods sold computation unde r the (\\'C) in\'e nt o ry sys te m s.

ILLUSTRATION 5.5
Inventory Purchased Item Sold End of Period
Co mparing p erp etual a nd

c:J Q Q - iif]-
p eriodic inventory systems

No entry
Perpetual

Record purchase Record revenue

of inventory and
compute and record
cost of goods so ld

Inventory Purchased Item Sold End of Period

Compute and
Periodic recor·d cost
of goods sold
Record purchase Record revenue
of inventory only

Advantages of the Perpetual System

Companies that sell m e rchandise with high unit va lu es. such as automobil es. furniture.
a nd m ajor hom e appliances. have traditi o nall y used pe rpetual systems. Th e grow in g use or
computers and e lec tronic scann e rs has e nahl ed many more companies to in stall perpetual
in ve ntory systems. The pe rpe tual in ve nto ry syste m is so nam ed beca use th e accounting
records continuously- perpetually-show th e qu a ntit y and cost of th e inve ntory that should
be on ha nd a t any time .
A pe rpe tu a l inv e ntory system provides be tt e r co ntrol over in ve ntori es th a n a p e ri -
od ic sys te m . Since th e in ve ntor y records show th e quantiti es that should be on hand. th e
co mpany ca n count th e goods at any tim e to see w he th e r th e a mount or goods actuall y
o n hand agree s with the inve ntor y reco rds. If shortages are uncov e red . th e cnmpany can
inv es tigat e imm e diat e ly. Althnugh a pe rpet ual in ve ntor y sys tem requires hnth additional
clerical work and ex pen se to maintain the subsidiar y re cord s . a cnmputeri;ed sy stem can
minimize this co st. Much or A mazoll .l'Oill .S (USA) SUCL'CSS is attributed to it s s ophi s ti -
cat e d inv e ntor y sys tem.
Some bu s in esses lind It e ith e r unn ecessary o r unen1nomical tll ill\L' St in a Cll!llp ut c ri; e d
perpetual in ven tor y sys tem . Man y s ma ll me rL·h a ndi si ng bu s in esses IHl'v\' usc basic an·llunt -
in g software. w hi c h pro \ id es some 11lthe esse ntial hL' I1L' Iits lll a Jl L' rpL· tu <tl ill\ L' Ilt\lr \ "' '- lL' Ill .
5-6 CHAPTER 5 AccountingforMerchandiseOperations

Also , managers of so me small businesses still find that they can co ntrol th e ir m e rc h a ndi se
and manage day-to-day operations us ing a periodic inventory sys te m.
Because of the widespread use of the perpetual inventory system, we illus t1·ate it in
this chapter. We discu ss and illustrate the periodic syste m in Appendix 5B.

Investor Insight

Improving Its Share control problems. To reduc e in vesto r co nce rn s . th e co mpan y

© Ben Blankenburg/iStockphoto
Appeal
Investors are often eager to invest
in a company that has a hot new
product. However, when a fast-
growing snowboard-maker iss ued
ordinary shares to the public
for the first time, some investors
expressed reluctance to invest in it
because of a number of accounting
implem e nted a perpetual inve nt ory sys te m to i Ill prove i1s con-
trol over inventory. In additi on, th e co mpany stated th a i i1 \\UUid
perform a physical in ve ntory count eve ry quarter until it felt that
its perpetu al inve ntory sys tem wa s re liable.
If a perpetual system keeps track of invento•·y on a daily has is.
why do companies ever need to do a physical count'? (Co to
the book's companion website for this an s wer and additional
questions.)

DO IT! 1 I Merchandising Operations and Inventory Systems ACTION PLAN

• Review me1·chandising
Indicate whether the following statements are true or false. If false, indicate how to correct the concepts.
statement.
• Understand the flow of
1. The primary source of revenue for a merchandi sing co mpany res ults from performing services
costs in a me•·chandising
for customers.
company.
2. The operating cyc le of a service company is usually shorter than that of a merchandi sing company.
3. Sales revenue less cost of goods sold equals gross profit.
4. Ending inventory pl us the cost of goods purchased equals cost of goods available for sale.

Solution
1. False. The prim ary source of revenue for a serv ice co mpany res ults from performing services for
custo mers. 2. True. 3. True. 4. False. Beginning inventory plus the cost of goods purchased
eq uals cost of goods ava ilab le for sale.

Re lated exerc ise mate ria l: BES.l , and DO IT! 5.1, ES.l.

Recording Purchases Under a Perpetual System

LEARNING OBJECTIVE 2
Record purchases under a perpetual inventory system.

Co mpanies purchase in ve nto ry using cas h o r credit (on account). They normall y record
purchases w he n they receive the goods from the se ll e r. Every purchas e shou Id he ·" u ppurt cd
by bu sin ess documents th at provide w ritte n ev id e nce of the tran sac tion . Eac h cash purchas l'
s h o ul d be s uppo rted by a cancele d check or a cas h reg ister rece ipt indicatin g th e it e m s pur-
c h ased and amo unts patd · . C om pa m· es· reco rc1 cas h purch ases by a n m .. . 1· n Inv e ntor y '·111 l 1
· c tease
a decrease in Cas h.
 Record in g Purc h ases Under a Perpet ua l S stem 5-7

A pur·c hase inYoi ce ~lw uld ~ upport each credit purchase. Thi~ im·oice in dicates t he
tot a l purchase price and other re !cYan t in ft)rnwt ion. Hm\ e\·e r. th e purchaser docs not p re-
pare a sepa rat e purcha~e inn Jice. In s te ad. the p urchaser u ses a~ a purchase inYoi c e a L·opy l)f
the sa le s in vo iL·e ~ ent by the se ller. In Illus trati on 5.6. for e:-;amplc. Sa uk S tereo (t he buyer )
uses as a purcha se im o ice the sales inYoicc prepared by P\\ . .-\udio S uppl y (the selle r ) t see
Helpful H int ).

ILLUSTRATION 5.6
Sa les invoict' u s ed a~ purcha se
INVOICE NO. 731
ilwoice by Sa uk S t ereo

PW A UD IO SUPP LY
27 C IRC LE DRI VE
A MSTERDAM . THE NETHERLANDS 1081

s Firm N ame Sa uk Stereo

0
H F. I.PITI. HI'\T
L Attention of J ames H oover. Purchasing Agent
D
To better under.:-tand th t•
Address 1 2 5 Main Street contents of this invoice. iden-
T
0 Oslo Norwa,y 2 83 tif\ these item s :
I. Sell er
., Invoice date
Date 5/4 / 2 0 Salesperson Malone I Terms 2 / 10, n / 30 I FOB Shipping Point -~ - Purchaser

Catalog N o. Description Quantity Price Amount ..J. Sale~per s on

5. C redit terms
X572Y9 8 20 Printed Circuit 6 . F n •ight term~
Boa rd-prototype 1 2 ,300 €2, 300
7 . Goods sold : catalog num-
ber. description. q uantity.
price pt' I- unit
S. Total invoice amount
A2547Z45 Production Model
Circuits 5 300 1, 500

IMPORTANT: ALL RETURNS MUST BE MADE WITHI N 10 DAYS TOTAL € 3,800

..+•.,.
Sau k Stereo makes the follo w ing journal e ntry to record it s purchase from PW A udio
Supp ly an account. The e ntry increases (debits) Inve ntory and increases (c redit s) Acco unt s
Payabl e.

May 4 Inventory 3 .XOO

Acco unt s Paya ble 3.XOO
(To record goods purchased on account rrom Cash Flows
IH l l ' f i'L'L' I
PW Audio Supp ly\

U nd er the perpetua l in ve ntory system. companies rec ord purchases of merchandi se for
sa le in th e In ven tor y account. Thus. C al'l'efour wou ld in crease (debit) In ve ntory for L·lnthing.
sporting goods. and an y thing else purchased for resa le to customers .
Not a ll purchase s a rc debited to In ve ntory. howeve r. Cu mpanic s recurd purd1a scs uf
assch acqui red l(lr usc a nd nut !'or resa le . s ud1 as s uppli es . L'quipmcnt. and s imilar itL·rn s. ~Is
in crease s to s pel· ilic asSL't dL'CllLI!lls ra ther than\(} In ve ntor y. F(lr C\< ll llple. to rL'Ul rd tlw pur-
chase of material s use d\(} n1ah· shelf s i~n s m fnr L·ash rL·~istn rcL·L·ipt paper. ( ' ;trrcfllur Wllu ld
increase (dch it l Supp l ic~
S-8 CHAPTER 5 Accounting for Merchandise Operations

Freight Costs
The sales agreement should indicate who-the seller or the buyer-is to pay for trans po rting
the goods to the buyer' s place of business. When a common carrier such as a railroad. tru c k-
ing company, or airline transports the goods, the carrier prepares a freight bill in acco rd w ith
the sales agreement.
Freight terms are expressed as either FOB shipping point or FOB des tinati o n. The letters
FOB mean free on board. Thus, FOB shipping point means th at the se ll er places th e goods
free on board the carrier, and the buyer pays the freight costs. Converse ly, FOB destination
means that the seller places the goods free on board to the buyer's place of business , and th e
seller pays the freight. For example, th e sales invoice in Illustrati o n 5.6 indi cates FOB ship-
ping point. Thus, the buyer (Sauk Stereo) pays the freight charges. Illustration 5.7 illu strat es
these shipping terms.

ILLUSTRATION 5.7 Shipping terms

FOB Shipping Point FOB Destination

Buyer pays freight costs Seller pays freight costs

Freight Costs Incurred by the Buyer

When the buyer incurs the transportation costs, these costs are considered part of the cost
of purchasing inventory. Therefore, the buyer debits (increases) the Inventory acco unt. For
example, if Sauk Stereo (the buyer) pays Acme Freight €150 for freight charges on May 6 , th e

-+150
- 150
Cash Flows
- 150
. . + ••, .

•
I
entry on Sauk Stereo's books is:

May 6 Inventory
Cash
(To record payment of frei ght on goods
purchased)
ISO
150

Thus, any freight costs incurred by the buyer are part of the cost of merchandi se purchased.
The reaso n: Inventory cost should include all costs to acq uire the inventory, including _fre ight
necessary to deliver the goods to the buyer. Companies recognize these costs as cost of goods
sold when the in ventory is sold .

Freight Costs Incurred by the Seller

In contrast, freight costs incurred by the seller on outgoing merchandise are an operating
expense to the seller. These costs increase an ex pense account titled Freight-Out (sometimes
called Deli very Expense). For exampl e, if the freight terms on th e invoi ce in Illu stration 5.6
+ .,.
had required PW Aud io Suppl y (the sell er) to pay th e freight charges, th e entry by PW Audio
- 150 Exp
-- /_'; ()
Supply wo uld be:
Cash Flows
- J 'i () May4 Freight-Out (or De li very Expense) 150
15()
Cash
(To record pay ment of fre ight on goods so ld)
 Recording Purchases Under a Perpetua l Sy stem 5-9

Whe n the se lkr pa y~ the rrcight cha rge~ . the ~c l kr \\" i llu ~ua ll y C!' l ab l i~ h a hi g her ii1H1icc price
fo r th e goods to cm cr the ~hippi n g c:-; pc n ~c.

Purchase Returns and Allowances

A purchase r may he di ~~<lli ~ fi c d \\·ith th e m crc h a n d i ~c rccc iYed b cG\ u ~e th e guod~ arc da m -
aged or d e f cc ti n~ . o r inkri m qu a lity. nr do not meet th e p urc h a~cr"s ~pcc i ticat i o n ~. In ~ u ch
ca es. the pu rc haser m ay re turn the gomb to the ~c l kr for credi t if the ~ak \\· a~ m ade nn credi t.
or for a cas h refun d ir the purc hase \\·as rnr cas h . T h i~ tra n ~act i o n i ~ k nm\·n as a purc ha se
r eturn . A lt c rn ati \·e ly. the purd1a~cr m ay chou~c to kee p the m c rchand i ~e if the ~clkr i ~
willin g to g ra nt a n a ll ln\·a ncc (dcdu \.·t io n) fro m the purd 1asc pr ice. T h is tra n ~ac ti lln i~ k n n \\·n
as a purch ase a ll o w ance .
Ass um e th a t S au k S te r\.'ll r\.·turn cd gond~ \.·os tin g €300 toP\\ ..-\u d io S up p ly o n l\ lay ~ ­
T he fo ll ow in g entry hy Sa u k S te rt: ll fnr the returned m c rc han d i ~ c dt:\.TC<bCS ( debit ~) .-\cco un h
Payabl e a nd d ecreases ( crc d it s) ln Yc nt nry.

+ • •, .
May 8 Accll un ts Payahk -_;no
300 -300
I 11 \"\.'Illor v
(To rL'co rd re tur n 11f g11ods purdJaSL' d fmm Cash Flo w s
nn e ft<: .,
P\ \ ' :\ udi n S up pl y l

Because S auk S tereo in c reased lnYe ntnry \\·hen the g o o d ~ \\·ere n~ cciYcd . ln Yentmy is
dec reased w he n Sauk S te re o re turn s the gom b (nr \\·he n it is g ranted an a llmYan cc ).
S up po se in stead that S au k S te reo c hose to kee p th e gnmb afte r be in g g ra nt ed a €50 ;t\lm\·-
ance (re du c ti o n in pr ic e ). It wu ul d redu ce (d ebit ) Accu unt s Payab le ami redu ce (credit ) !m e n-
lo ry fo r €5 0 .

Purchase Discounts
The c redit term s o r a purchase O il acco unt may pe rmit the bu ye r to cl a im a cas h di scu unt rm
pro mpt paym e nt. Th e bu ye r call s thi s cas h di scount a purchase dis count . Thi s iiK'entiYc
offers ad vantages to bo th pa rtie s: The pu rchaser saves mo ney. and the sel le r is able to sh u n e n
the o pe ratin g c yc le by co nve rt in ~ the ac count s rccciYab lc int o cas h .
C t·e dit terms s pec ify the a mo unt o r the cash d iscount a nd time peri od in w h ic h it is HELPJTL HI:\T
offe red . Th ey a lso in d icate the time per iod in w hi ch the purc hase r is expec te d to pay the
T h t• term net in ··nl't 30 ..
full in vo ice pr ic e. In the sales in voice in Illu strati o n 5.6 cred it te rm s are ~II 0. n/30. w hi c h is
m ea ns th l' n •main ing amount
read " two-l e n. ne t thirt y .. (sec He lpful H in t). Thi s means th at the bu ye r m ay take a 27c cas h
due afte t· s u btractin g an~
di scount o n th e in vo ice p r ice le ss ( .. ne t of" ) a ny return s or all owa nces. if pay m e nt is m ad e s a il's t·et urns and allowanct.>s
w ithin I 0 d ays o f th e in vo ice d ate (the discount period ). O the rw ise. the in vo ice p ri ce. less a nd par ti a l paymen ts .
any re turn s o r all o w a nce s. is du e .\0 d ays from the in vo ice dat e.
A lte rn at ive ly. th e di sco unt pe riod may ex te nd to a spec ifi ed numbe r o f d ays fo ll ow in g
th e mo nth in w hi c h the sa le occ urs. For ex am ple. 111 0 EO M (e nd o r m o nth ) m ea ns th a t a
1% di sco unt is ava il a bl e if the in vo ice is paid w ith in th e first 10 d ays of th e nex t m o nth .
W he n t he se ll e r e lec ts no t to n iTe r a cas h discoun t for pm mpl pay m e nt. cre dit te rm s
w ill spec ify o nl y th e max im um tim e pe ri od for pay in g the ba la nce du e. For exa m p le. th e
invo ice m ay slate t he t im e pe ri o d as n/30. n/60 . or n/ 10 EOM. T hi s mea ns . rc~pcct i ve l y.
th a t th e bu ye r mu s t pay th e ne t a mo unt in 30 d ays. 60 d ays. o r v\·ithin th e fir st I 0 d ays o i' th e
nex t mo nth .
Wh e n the bu ye r pays an in voi ce w ithin the di sco unt pe riod . the am n unl llf till' di sc nunt
dec reases In ve ntory. Wh y·.> Bec au se co mpa ni es rcn1 rd in vc ntur y at c o st. and by pay in g w ithin
th e di sco unt pe riod . th e bu yer has reduced it s L·ost. Tn illu -. tral e. a-.~ umc Sa uk S te r\.'ll pay-. th e
ba lance du e of €.''.) ()() (gms~ in\·o icc pri ce o r € .\.X ()() less purc h a~c re turn ~ am\ a l] PW<l ll L'L' ~
or €.\00) o n May 1-L th e l a~l d a) uf th e d i ~l' lllllll pe riod . Si n\.'\.' th L' l \.' r l11~ ar\.' 2/1 0 . n/30. tlK
cas h d iscoun t is €70 ( €.\.) ()() x 2' ; ). an d Saul-. Stnco pay ~ € .1 .4.\0 ( €.\. )00 - €7 0). T il \.' \.' nlr)
Sauk S te reo m akes tu rcnnd i t ~ Ma) 1-J. pa) 111en t d enL·a~ \.':-> (Lk h it:-. l AL'\.'llUilh Pa) ahk h)
5-10 CHAPTER 5 Accounting for Merchandise Operations

- 3.430
- 70
..
- 3,500
+
··~·
the amount of the gross invoice price, reduces (credits) Inve ntory by th e €70 di sco unt. and
reduces (credits) Cash by the net amount owed .

May 14 Accounts Payable

Cash
Inventory
3,500
.1.-nu
70
Cash Flows (To record payme nt within di scount peri od)

..
- 3.430
If Sauk Stereo failed to take the discount and instead made full payme nt of € 3,500 on June 3.
it would debit Accounts Payable and credit Cash for €3 ,500 each .

··~·
+
- 3,500 June 3 Accounts Payable 3,500
- 3,500 Cash 3. )0()

C"hFIOW< '
- 3.500
(To record payment with no di scount take n)

A merchandising company usually shou ld take all avai lable di sco unts. Passing up the
discount may be viewed as paying interest for use of the money. For ex ample . pas s ing
up the discount offered by PW Audio Supply would be comparab le to Sauk Stereo pay-
ing an interest rate of 2 % for the use of €3 ,500 for 20 days. Thi s is th e e quival e nt or an
annual interest rate of approximately 36.5 % (2 % X 365/20). Obviously, it would be better
for Sauk Stereo to borrow at prevailing bank interest rates of 6 % to I 0 7r than to lo se the
di sco unt.

Summary of Purchasing Transactions

The following T-account (with tran saction description s in red) provides a s ummary of the
effect of the prev ious tran sac tion s on Inventory. Sauk Stereo original ly purchased €3.l·WO
worth of inventory on account for resale. It then returned €300 of goods. It paid € 150 in
freight charges, and fin ally, it received a €70 discount off the balance owed because it paid
within the discount period. Thi s results in a balance in Inventory of €3 ,580.

Inventory
Purchase May4 3,800 May 8 300 Purchase retur·n
Freight-in 6 !50 14 70 Purchase discount
Balance 3,580

IDO IT! 2 I Purchase Transactions ACTION PLAN

• Purchase•· reco•·ds goods
O n Se pte mbe r 5 , Z h u Compa ny bu ys merchandi se on acco unt from Gao Company. The pur-
at cost.
c hase pr ice of the good s pa id by Zhu is ¥15 ,000 , and the cost to Gao Company is ¥8,000. On
S e p te mbe r 8 . Z h u re turn s defecti ve good s with a selling price of ¥2,000. Record th e transac- • When goods a•·e retun1ed.
tiun s o n th e boo ks o f Z hu C ompan y. purchaser reduces
Inventory.

Solution
Sc pl. ."i ln ve ntPr y
A cco unts Payable
15,000 I 15,000
(To record good s pu rchased on acco unt)
X / \ cco un h Paya hl c 2,000
In vc rll or y 2.0fHJ
(T" rec ord return o f defec ti ve goods)

l<c·l; ll c'd c·xc rc r,c· llla lc.: r·ia l: BE5.2. B£ 5.4, DO IT! 5.2, E5.2, £5.3, E5.4, and ES. I I.
 Recordi ng Sales Under a Perpet ual S ' St em 5 -11

Recording Sales Under a Perpetual System

LEARNING OBJECTIVE 3
Reco rd sales under a perpet ual invento ry sys tem.

In accordance with the reYenue recogniti on principle. companie~ record ~ ale~ rL'Yenue \\ ·hen
th e per fo rmance obligation i~ ~ ati ~ lied. Typically. the per forman ce obligation i~ ~ati~tied \\·hen
the goods transfer from the ~eller to the bu ye r. .-\t thi s point. the ~ales tran~action i~ complete
and the sales pri ce es tahli ~ hed .
Sales may he made on credit m for c tsh ..-\ business document slwuld support e\·ery
sa les transaction . to pro\·ide \\TillL'n eYidence or the sa le. Cash r·egister document s pmYidt:'
ev ide nce or cas h sale~. A sales inYoice. like the one shm\ n in Illustration 5.6. prm ide~ ~uppnrt
for a credit sal e. The original copy or the inYoi ce goes to the c ustomer. ~md the seller keeps a
copy for usc in recording the sale. Th e inYn ice ~hm\ · s the date or sale. customer name. total
sa les price . and other relc\"~1111 information .
The seller makes two entries for each ~ ale . The firs t entt·y r·ecords the sale: The se ller
increases (debits) Cash (o r Accu unts ReceiYabk. if a credit sale). and also increase~ (crc>dits )
Sales Reven ue . The second entt·y recor·ds the cost of the men~handise sold: The ~eller
increases (debits) Cost of Gouds Sold. and al so dec reases (cred its) Inventory for th e cost of
those goods . As a re s ult. the lnYeillmy aLTntint \\·ill s!Hm· at all times the amount or im·entory
that should be on hand .

..+•.,.
To illu strat e a credit sales transaction. P\V A udio S uppl y records its May-+ sale of€.1.800
to Sauk Stereo (see Illu stration 5.6 ) as follm\ ·s (assume the me rchandi se cost P\V A udio
Supply €2,400).

May 4 Accounts Ren:i\·ahk 3 .XOO

Saks Re\·enue _q.;oo
(To record LTL'dit sa k t11 Sauk Stereo per Cash Flows
invuice #73 1) no t:ff.-:c·I
. . + • •, .
4 Cust of Guuds Suld 2.-1-00 -~ .400 bp
ln ventury 2 ...HJ() -~.4()l)

(Tu recurd cnst uf merd1andi se S11 ld 1111 Cash Flows

invuicc #73 1 tu Sa uk Stereu) no eftec·t

For internal deci s ion-making purposes. merchandising companies may use more than
one sales account. For example, PW Audio Supply may decide to ke e p separate sa les
accounts for its sales ofTVs. Blu-ray players. and he ads e ts. Ca r-re fo ur might us e separate
accounts for sporting goods. children·s clothing. and hard ware - or it might ha ve even
more n a rrowly d eli ne d aceuunts . By using separate sa les accounts fo r major product line s .
rather than a s ingle combined sales account. company managem e nt can more closely
monitor sales trends and respond tn changes in sales patterns more strategically. For
exa mple. if TV sales are increas ing while Blu-ray playe r sal es are dencasing. PW A udio
Supply might ree va luate both its ad ve rtising and pricing policies on the se item s t ~) ensure
th ey are optimal.
On it s incom e statement presented tu outside in ves tors. a merchandising compan y nnr-
mally would prov ide onl y a s in g le sales fi g ure- the s um of all of· it s individual sa le~ aL·count~.
This is done for two rea son s. First. pmviding detail on all of its individual ~ale~ accounts
wo uld add considerable length to its incun1e statement. Senmd . mo st L·ompaniL'~ do not wa nt
th e ir competitor~ to knovv the Lktail~ \lf th e ir \ljlL'rating rL'~ ults . 1-l\lWl' VC r. l\1 icrosoft (LISA l
at one point e x palllkd It ~ di ~L· Io :-- ure ur re\CnU L' rrnm three to li\·e t y JK'~. The rL'<I:o-\lil: ThL'
additional categmiL·~ will better enahk tiniiiKiill stat e me nt u ~ n ~ to L' \~du~tte the gr\lwth of th e
co mpan y ·s nm~un1er and IntcrnL'l hu si ne ~se~ .
5-12 CHAPTER 5 Accounting for Merchandise Operations

Anatomy of a Fraud 1 · ·. :·:·~· ,:j·

Holly Harmon was a cashier at a national superstore for only
a short w hile when she began stealing merchandise usi ng
three methods . Under the first method , her husband or friends
took UPC label s from cheaper item s and put them on more
expen s ive items . Holl y then scanned the goods at the register.
Us ing the seco nd method, Holly scanned an item at the regi ster
but then voide d the sale and left the merchandi se in the shop-
ping cart. A third approach was to put goods into large plastic
containers. Sh e scanned the plastic containers but not the goods
w ithin them . After Holly quit, a review of past survei llance
tape s e na bled the store to observe the thefts and to identify the
participants.
.•.
Total take: $12,000
The Missing Controls
Human resource controls. A background check would ha\e
revealed Holly 's previous criminal record . She would not have
been hired as a cashier.
Physical controls. Software can Aag hi gh numbers of \·oided
transactions or a high number of sa les of low-priced goods . Ramie Jill
comparisons of video records with cash reg iste r reco rds ca n ensure
that the goods reported as sold on the reg ister arc the sa me good s
that are shown being purchased on the video rcco rJing . Finall y.
employees should be aware that they are be ing monitored.

Source: Adapted from Well s, Fraud Casebook (2007). pp. 25 I - 259.

At th e end of ''An atomy of a Fraud " stories, wh ich describe some recent real-world frauds, we discuss
the missing contro l activities that would likely ha ve prevented or uncovered the fraud.

Sales Returns and Allowances

We now look at the " flip side" of purchase return s and allowances, which the seller records as
sales r eturns and allowances. These are transactions where the seller either accepts goods
back from the buyer (a return) or grants a reduction in the purchase price (an allowance) so
the buyer will keep the goods. PW Audio Supply's entries to record credit for returned goods
involve (1) an increase (debit) in Sales Returns and Allowances (a contra account to Sales
Revenue) and a decrease (credit) in Accounts Receivable at the €300 selling price. and (2) an

..
- 300
. . + ••, •
-300 Rev
increase (debit) in Inventory (assume a € 140 cost) and a decrease (credit) in Cost or Goods
Sold, as shown be low (assuming that the goods were not defective) .

May 8 Sales Return s and Allowances

Accounts Receivable
300

..
Cash Flows (To record credit granted to Sauk Stereo for
no effect returned goods)
+ ••, .
+1 40 8 Inventory 140
+ 140 Exp 1-1.()
Cost of Goods Sold
Cash Flows (To record cost of goods returned)
no e ffec t

If Sauk Stereo return s goods because they are damaged or defective. thei~ PW Audio
Supply 's entry to Inventory and Cost of Goods Sold should be for the fair value of the returned
goods, rath er than their cost. For example, if the returned goods were defective and ha~ a fair
value of €50, PW Audio Supply would debit Inve ntory for €50, and would credit Cost ur
Goods Solei for €50.
What happens if the goods are not returned but the seller g rants the buyer an allowance h y
reducing the purchase price? In thi s case, the seller debits Sales Returns and Allowances and
. · 1 . no 1111 pau 011
ere d Its Accounts Recetvable for the amount of the allowance. An allowance 1 a~
In ventory or Cost of Good s Sold.

IT h .. . . . . . . . fi·,nn ,tu · ll<~d s,<!,

e A natomy of a Fraud' ston es 111 tht s tex tbook are adapt ed from Fraud Casebook: /.e.,,on.' . . · - .
.r .· - ·nrtl"'...,l ') 11 1 1h.'
01 1
Busrn ess, ed ited by Joseph T. Well s (H oboken. NJ: John Wil ey & Sons. Inc .. 2007 ). ! -.cd hy pc ;~rc· !rilL' .
names of some of th e people and organi zat ion s in th e stor ies are fi ctiti ou s. hut th e fact-. 111the ' 1'"' C'
 Recording Sal es Und er a Perpetua l System 5-13

Sales R e turn s a nd A llm,·a nL·e s is a contra ren•nue account to Sa le s Re, ·e nuc. This m ea ns
th at it is offse t aga in s t a ren: nu e acco unt o n th e in co m e ~tatement. The nor mal balance of
Sales Re turn s and A llm,·a nce s is a debit. Cn mpa nie s use a co ntra account. inst e ad of debiting
Sales Reve nue . to disclusc in the accm1 nt s a nd in the inco me statement th e amount of sales
return s a nd allowances. DisL·losure nf thi s information is important tn manage m en t: E"ccssin~
return s and allm,·anccs may s u~~ es t pruhkm s- i n krinr merchandi se. i nenie icnc ies in ti IIi ng
orde rs. e rrors in hilling customers. or deliHTY or shipment mistake s . l'vloreo\'er. a decrease
(debit) reco rded directly tn Saks Re\'enue \\'(lllld obsc ure the rL'Iati,·e importanL·e of sales
returns and all owa nce s a s a percentage o f saks. It also could di!'!nrt comparisons bet\\'L'en
total sa les in different accounting pe riods .
At the e nd of the aL·co unting perind. if th e company anticipates that sales returns and
allowanc es will he material. the nHnpany s ho uld make an adju s ting entry to estimate the
amount o f re turn s . In some in d u s trie s. s uch as those relating tn the sak of books and periodi-
cals. re turn s arc often material. The aL'L'tHtnting fnr s ituation s ,,·here returns must be e s timated
is addressed in aLh·anced a L·counting cnurses.

Accounting Across the Organization Tesco

Merchandiser's ;ls much as a year bctixc the alherti~cme nt i ~ ru n. T hL' qu e~t inn~
becume. hn\\. slmuld the se a muun h hL' reported by the' merd 1 and i~ ' r
Accounting Causes Alarm
1 . at the time it rece i\ · e~ the fund~. and \\·hen ~h ou l d these amt l llllt ~

TESC r\L'U1 uiHing for mL'rchandising

tran saction s is ntH ah\·a\'. s as cas\'.
as it might tirst appear. Recently.
Tcsco (GBR l annouJKL'd that
it had O\'L'rstated prolit s h\'
£263 million m·L·r a threL'-)'L'ar
period. The error rcl ~ltcd to htl\\'
affec t in co mL· ·.' The scandal surroundin~ this ~KC O U i ll in ~ lrea tlllL' llt
\\·as seriou s enough that it c1u~ed thL' company·~ cha ir ma n to re~i~ n .
and an outside auditing tirm \\ · a~ brought in to im · e ~t ig a te. One an ~ l ­
l\' st cnmmcntatL·J that .. \\ ' C ca n nc\·cr rL'call a pL·ri,ld ~ n J a magi n_,: ttl
the reputationnt' lhL' UllllpanY ...
SouiTl': .k-1111\' .-\11dcr"111. "Tc,n> Chairm:111 l <l Step D'"' 11 :~> ( h c ro- l:ll L' -

Tcsu1 accounted for amounts m c 11l ur Pn> lil Gw\\·<· Til <' .\'('1 1' ) i JI '~ T iiii<'S O niill <' ( (k tn b L· r ~ -~- ::'0 1-l l .

rcL·ci\cd fnHn suppliers for pro-

motional acti\·itics of those com-
<D Juliu s Kielaitis/Shuttcrstuck
paniL· s' products. \Vhcn a retailer
run s ad ve rt isc me nts promo ting a particular prnduL't. the producer
of that product shares part of the ad\'e rtising cost. Typicall y. th e
producer pays the merchandi se r its share of the alhcrtising cos t
\\'hy would an t:Trot· of this type be of concern to inYestors. and
what steps did the compa ny takt• to address these conn·r·ns'?
(Go to the hook' s companion wl'bsite for this answer and
a dditional questions.)

Sales Discounts
As mention e d in our discussion of purchase transactions . the seller may offer th e customer a
cash di sc ount-call e d by the sell e r a sales discount - fo r th e prompt pay m en t of the balance
due. Like a purchase discount. a sales discount is based on the in voic e price less re turns and

..+•.,.
allowances, if any. The seller increase s (debits) the Saks Discounts account for discounts that
are take n. For exa mpl e . PW Audio Supply makes th e follo w ing entry to record th e cash rec e ipt
on M ay 14 from Sauk Stereo within the discount period.

May 14 Cas h 3.430

7() - 7() R L'\
Sales Di sco unt s
- .~. :" ()()
Acco unts Ren'i vahlc \ ..'iOO
(To record collection \Vithin 2/10. nn O di sco unt Cash Flows
+ .<..uo
period from Sauk Stereo)

Like Sales R e turns and Allnwarll'es. Sales Discounts is a contra t·evenue account tn
Sales Re ve nue . lh nnrmal balance is a debit. PW A uditl Supply u ses thi s an·punt. in s lL'ad
of d eb iting Sales Re ve nu e. to di sL' Ill SL' the <l!lllll!nt nr C!Sh di sl'l lllllls tah:L'll hy U! St\l!ll ers .
II' Sauk Stereo docs not tah: c the di sco unt. PW A udio Suppl y tnnL·a scs <dehtt s) C a s h fl,r
€3. 500 a nd dene a scs (c redit s) An·p unt s Recei vable fm th e sa me anlllu!lt ~ tt thL' dat e ol
co ll ec t ion .
5-14 CHAPTER 5 Accounting for Merchandise Operations

At the end of the accounting period, if the amount of potential di scounts is mat e rial. th e
company should make an adjusting entry to estimate the di scounts. Thi s wou ld not us uall y b e
the case for sales discounts but might be necessary for other types of di sc o unt s such as volume
discounts , which are addressed in more advanced accounting courses .
The following T-accounts summarize the three sales-relate d tran sacti o ns and show th e ir
combined effect on net sales.

Sales Revenue Sales Returns and Allowances Sales Discounts

3,800 300 1

•
Net Sales
€3,430

DO IT! 3 I Sales Transactions ACTION PL A N

• Selle•· rec01·ds hoth the sale
On Septembe r 5 , Zhu Company buys merchandi se on account from Gao Company. The sell-
and the cost of goods sold
ing price of the goods is ¥ 15 ,000, and the cost to Gao Company was ¥8,000 . On September 8,
at the time of the sale.
Z hu re turn s defecti ve good s with a selling price of ¥2,000 and a fair value of ¥300 . Record the
transactions on the books of Gao Company. • When goods m·c •·etm·ned.
the seller reco•·ds the
retun1 in a contra account.
Solution Sales Retm·ns and
Se pt. 5 Accounts Receivabl e 15 ,000 Allowances, and •·educes
Sal es Reve nu e 15,000 Accounts Receivable.
(To record credi t sale)
• Any goods 1·etun1ed
5 Cost of Goo ds So ld 8,000 increase Invento•·:v and
In ventory 8,000 reduce Cost of Goods So ld.
(To record cost of goods sold on acco unt ) I Defective o1· damaged
8 Sa les Re turn s and A llowances 2,000 inventory is reco1·ded at
Acco unts Rece ivabl e 2,000 fai•· value (scrap value).
(To record credit gra nted for receipt of
returned goods)
8 In ve nto ry 300
Cost o f Goods So ld 300
(To reco rd fa ir value of goods return ed) I
Re lated exe rc ise m a te ri a l: BE5.2, B E 5.3, DO IT! 5.3, E5 .3, ES.4, ES.S, and ES.ll.

The Accountin g Cycle for a Merchandising Company

LEARNING OBJECTI V E 4
Apply the steps in the accounting cycle to a merchandising company.

Up to thi s point, we have illustrated the basic entries fo r transaction s re lating to rurchLt s ~..·:-- <~ltd
sales in a perpetu al in ventory system. Now we consider th e remainin g ste p" in ~he <tculunt -
in g cyc le fo r a merchandi sin g co mpany. Each of the required ste ps descrihe d 111 ( ha ptcr-+ lur
 Th e Acco un ti n g Cycle for a l ercha nd ising Com pan 5-15

service co m pa ni e s app ly tu m e rc ha ndis in g co m pa ni es. Appc nd i:-; 5 A to thi s c h ap te r s h m \·s th e

use o f a wo rk s he e t by a m erc ha ndi se r (a n l1pt io na l ste p ).

Adjusting Entries
A m e rc h a n d is in g co mp a n y g en e ra ll y h as the sa m e ty p es of adjuqin g e ntri es as a serY tct>
co mp a ny. 1-l m\·eYe r. a mL'rc hand is LT u s in g a per pe tual sy s tL' m \\·ill re quire o n e' ad d iti o n al
adju stm e nt tu m ake th e r eco rd ~ :tg ree \\·ith th L' ac tu a l im·ent n r y o n h a nd . Here·~ \\·h y: .--\t
th e e nd o f eac h peri m l. fo r co nt ro l pur po se s . a m e rc handi s in g co mpan y th a t u ~ c s a pe r-
pe tu a l sys te m \\·ill t a kL' a ph y s ic :tl co unt of it ~ gl1l1 d s l) n hand . Tl1L' co mp a n y · ~ un a dju s te d
ba lan ce in In vent o r y u s u a ll y d oc s no t a g ree \\ ith th e ac !ll a l am o unt o f inYent o r y o n h and .
Th e p c r pe t u a l i n vc n to r y rL'co rd s may b e in co rrec t due to rec ord in g erro rs. the ft. o r \\ ·aste.
Thu s. th e co mp ~tn y ne e d s to a dju ~ t th e p e rpe tual reco rd s t\1 make th e re co rded itwe nt o r y
a m o unt ag ree w ith the in ve nt ory on han d. This inYoiYes adju s ting lnY e ntor·y a nd C os t
of Goods S old.
Fo r exa m p le . s upp ose that P 'vV A ud io S u pp ly ha s a n un adju s te d b alan c e of € -l-0.5 0 0 in

..+•.,.
In ve nt o r y. Through a ph y s ic al L·o unt. P\:-.· r\ udi o S uppl y de te rmine s that it s aL·tu a l merc h a n -
d ise in ve ntor y at Dece mber ·' 1 i ~ €-W. OOO. The co m pan y \\ o uld m a ke a n a dju s tin g emr y a~
fo ll ows .

Dec. 3 1 Cos t o f (lo\llls Sold .) ()0 -.:' 00

.'iOll
lment o ry (€ -IO ..'i l)(l- € -10. 000 )
(To adju st im·e nt nry tn phys ica l L·n unt l Cash Flows
Ill' c rtix t

Closing Entries
A m e rc handi s in g c o mpan y. lik e a scn·icc company. cl oses to Incnmc S umm a r y all acco unts
th at a ffec t ne t incom e. In journal iz in g. the com pa ny credits allte mpnrar y acco unts \\·ith d e bit
ba la nces. a nd d e bit s a ll tempo ra ry acc o unt s w ith c red it balances. as th e foll ow in g s h ows fo r
PW A udio S uppl y (se c H elpl'ul H in t) . Not e that PW A ud io S u ppl y cl ose s Cos t o f Good s So ld
to Inco m e Summary.

Dec . 3 1 Sales Revenue -1:) 0.000 HELPFL L HI:\T

In n lllle S un1mary -1 :)0 .000
T h e easiest way to prepat·e
(To cl ose income stat e ment accoun ts t ht• first two closing ent.-i t•s
w ith credit balan ces) is to id e ntify the temponu ·y
31 -150.000 a cco u nts by the ir balances
In co me S umm ary
Cos t o f Goods Sn!d .11 6.000 a n d the n prepa re one ent ··~
6-1 .000 fo t· the n ·edits a nd one fot·
Salari es a nd Wages Expen se
I 7.000 th e debits.
Utiliti es Expe nse
Ad ve rti sin g Ex pe nse 16. 000
Sal es Re turn s and All owa nce' I 2. 000
Sa le s D iscount s X. OOO
De prec iatinn Ex pense X.OOO
Fre ight -Out 7.000
In surance Expense 2.000
(To close in co me stat eme nt accoun ts
w ith debit bal a nces)
31 Incom e Summary 30 .000
O w ne r's C apit <t! 30.!Hl0
tT<l c l<>.'> l' ll L' t in L.<llll L' l<l uw nL' r" ' L·apital l
0\ 1 ( ) v, 11 cr· , l'a pit ;t\ I .'\ .000
() 11 Il L'(' !) r;l\1 111 )2' I .'\ .l HHl
tTn L·J<,,c. "'' li LT' dra\\ ill )2 .' 10 <l\\ lll' r·,
L·api t;il
5-16 CHAPTER 5 Accounting for Merchandise Operatio ns

After PW Audio Supply has posted the closing e ntri es, all te mpo ra ry acco unt s ha ve zero
balances. Also, Owner's Capital has a balance th at is carri ed over to th e nex t pe ri o d .

Summary of Merchandising Entries

Illustration 5.8 summarizes the entri es for the merch a ndi sing acco unt s us in g a perpe tu a l
inventory system .

ILLUSTRATION 5.8 Daily recurring and adjusting and closing entries

Transactions Da ily Recurring E ntries DI·. C r.

Se llin g merchandi se to custo mers. Cash o r Accounts Rece ivabl e XX
Sales Revenu e XX
Cost of Goods Sold XX
Inventory XX
Granting sales returns or all owances Sales Re turn s and A ll owa nces XX
to customers. Cas h or Acco unts Rece ivabl e XX
Sales
In ventory XX
T ransactions
Cost of Goods So ld XX
Paying freight costs on sales; FOB Freight -O ut XX
destination. Cash XX
Receiv ing pay ment fro m customers Cas h XX
within discount period Sales Di sco unts XX
Accounts Rece ivable XX
Purchasing merchand ise for resale. Invento ry XX
Cash or Accounts Paya bl e XX
Pay ing freight costs on merchandise Invento ry XX
purchased ; FOB shjpping point. Cash XX
Purchase
Rece iving pu rchase returns or Cash or Accoun ts Payab le XX
Transactions
all owances from suppli ers. Inventory XX
Pay in g supp lie rs within di sco unt pe ri od. Accounts Payabl e XX
Inventory XX
Cash XX

Events Adjusting a nd C losi ng E ntri es Dr. CI·.

Adj ust because book amount is hi gher than Cost of Goods Sold XX
the inventory amoun t determined Inve ntory XX
to be on hand .
C losin g te mporary accounts with credit Sales Revenue XX
balances. Income Summary I I XX
C losin g temporary accoun ts with deb it Income Summ ary XX
balances. Sales Return s and All owa nces XX
Sales Di scoun ts XX
Cost of Goods Sold XX
Freight-O ut XX
Ex penses XX
 Fin a nc i a l Statement fo r a l e rc h a n d iser 5-17

DO IT! 4 I Closing Entries .-\C TI O ~ P L-\~

• C los e all tempora r~

The tri a l balan ce ll f C ci i n..:· ~ S ports \\ .car S ho p at Ot• ccmbcr 31 shO\\·s lnw nt o ry € 25. 000.
accounts with credit
Sal es Re venu e € 16 2.-HlO. Sale s Retu rns and .-\l lo\\·anccs € -L 800. Sales DisL· o unt s €3 .600. Cost
balances to lncom t•
o f Good s Sold € I 10 .000. Rent Rc\ c nu c €6.000 . Fre ight- O ut € 1.800. Rent E:-; pcn se €8.8 0 0 . ~md
S ummar~ by debi t ing
Sa lari es and \Vagcs E:-; pcnse € 22.000. Pre pare the c los ing e ntri es for the ab nYe accnunt s .
th es e acc o unts .
• C lose a ll temporary
Solution
acc o unts with debit
The two clo s ing L' ntri L·~ arL· : b a lances . exc ept d r awings .
D e c. :I I S ak , Re ' e m1 e I (1 ~ . ..\00 to Income S ummar~ by
Re nt Rc' \ e m1 c 6.000 crediting th es e a cco unb .
lnC<Hll L' S llllllll ; ll· ~
( Tu c·I< '> L' ;lc· c·<llllll ' 1\ ith nnlit b;ti a ncc·, )
_; I ln c nm e S umn1 an 15 1.0()!)
C< » t " r c;'" ''b s ,, Jd ll! l. IHHl
S ;li e' Rc·t urn , an d :\ ll<l\\ ;Hl <.:e' -U~ !l !l

Sak' Di ,c· nunt ' 3.600

frc i)2111 -0ut I -~ (](l
Rc·nt l c'J ll' ll ,L' ~ - ~ () ()

S alaric·, and \Ya )2e ' 1-:::-. pe n'e ~ ~ .llll()

!T<l cl<l> c' ac·c·<lullt ' 1\ ith d e bit bal a nc·c·,)

Relat e d c xc·rci sc material : BE5.5. BE5 .6. DO IT! 5.-t. E5.6. E5.7. and E5.S.

Financial Statement for a Merchandiser

LEARNING OBJECTIVE 5
Prepare financial statements for a merchandising company.

Merchandising companies widel y use the class ifi ed state ment or financial position introduce d
in Chapter 4. This section explains an income stateme nt used by me rchandi se rs and provides
additional information relate d to the state ment of financial position.

Income Statement
The income stateme nt is a primary source of inlixmation lor evaluating a company 's pe rformance.
The format is designed to differentiate betvveen the various sources or income and expense.

Income Statement Presentation of Sales

The income statement begins by presenting sales revenue. It then deducts contra re venue
accounts-sales returns and allowances and sales discount s-from sales revenue to arrive at
net sales. Illust.-ation 5.9 presents the sales section hx PW Audio Supply. usin g as sumed data.

ILLUSTRAn()N -5~9 :
PW Audio Supply - . -
Income Statement (partial) Computation of nl'l salt'S

Sa les
Sal es re venu e € -I XO.!HJO
L ess : S;ll c~ r L· turn ~ and alloll · anLT~ € 12.0()()
Sale > di~nllllll ~ X. 00() ::' 0 .01 )(I

Net sa les €.t6U.IHHI

5-18 CHAPTER 5 Accounting for Merchandise Operations

This presentation di scloses the key data about the company ' s principal reve nu c-p rmlucing
activities.

A LTERNATIVE
TER M I N OLOGY
Gross profit is sometimes
referred to as gross margin.
Gross Profit
From Illustration 5.1 , you learned that companies d educt cost o f goods sold from sa le s
revenue in order to determine g r oss p ro fit (see Alternative Terminolog y) . Fo r thi s Cl111l-
putation , companies use net sales (which takes into consideration Sales Return s and A l-
lowances and Sales Di scounts) as the amount of sa les re ve nu e. On the ba s is of the sa les
data in Illustration 5.9 (net sales of €460,000) and cost of goo d s so ld under the perpet-
ual inventory system (assume €316,000) , PW Audio Supply 's g ros s profit is € 1-J...J..OOO.
computed as shown in Ill u stration 5.10.

ILLUSTRATION 5.10
Net sales €460,000
Computation of gross profit Cost of goods so ld 316,000
Gross profit €144,000

We also can ex press a company's gross profit as a percentage, called th e 1p ·o ss pr·ofit

rate. To do so, we divide the amount of gross profit by net sales. For PW A udio Suppl y . the
gross profit rate is 31.3 %, computed as shown in Illustration 5.11 .

I I'LLI!JSTR:ATION 5 . 11
Gross Profit Net Sales = Gross Profit Rate
Gross profit rate formula and
computation €144,000 €460,000 3 1.3':1

Analy sts generally consider the gross profit rate to be more useful than the gross
profit amount. The rate expresses a more meaningful (qualitative) relationship between
net sale s and gross profit. For example, a gross profit of € I ,000 ,000 may so und impres-
s ive. But if it is th e result of a gro ss profit rate of only 7 % when others in th e industr y get
20%, it is not so impress ive. The gross profit rate tells how much of each euro of sales go
to gross profit.
Gross profit represents the merchandising profit of a company. It is not a measure or the
overall profitability, because operating expenses are not yet deducted. But managers and other
interested parti es closely watch the amount and trend of g ro ss profit. Th ey compare current
g ross profit with amounts reported in past periods. They also compare the company's gross
profit rate with rates of co mpetitors and with industry averages. Such co mparisons providL'
information about the effectiveness of a company' s purchas in g function anu the soundness or
its pricing policies.

Operating Expenses
Operating expenses are the nex t component in the income statem e nt of a m e rchandising
co mpany. Th ey are the ex penses incurred in the process of earning sa les revenue. M_an~ 1 lf
these ex pense. are simil ar in merchand is in g and ser vice compani e s. At PW A udJ\) Supp".
111 1
operatin g ex penses were € 1 14,000. Thi s € 114,000 includes costs th a t we rL' u rrL' d 1\)r
sa Ian·es, Uti.,.Jtl·es, a d vertl·s1ng,
· d e prec ·Jat ·Jon, fre ight-out. and in s ura nc e . The prc"enLlt1u
· 11 1 ) 1.
operatin g ex penses is shown in lllustration 5.12 .
 Fin ancial Statement for a terchand iser 5-19

Ope rating e x pen ~ e ~ ILLUSTRATION 5.12

Sa la ries and ,,·ages expen ::.c € 6-+.000 Operating exp en ses
tiliti es e x p e n se 17.000
A dve rt is in g ex pen se 16.000
D e prcciatiun cxpcn SL' R.OOO
F reigh t- o ut 7.000
In s uran ce expe nse 2.000
Total ope rating c'\pcn sc s € 1 1-+.000

Illu strati o n 5.12 pnl\·idt.· s an opportunity to di sc uss !\Yo ditTcrcnt presentation formats
allowed by ! F R S: pn~se ntation by nature and prese ntation by function. Pre se ntati o n by
nature prov ides ve r y detailed infurm a ti o n. ,,·ith numerou s line item s . that re h :al the nature of
costs incurre d b y th e company. In Illu s tration 5.12. the detailed information re garding co s ts
inc urre d for salaries and ,,·ages. utilitie s. adn~nising. depreciation. freight- o ut. and in s uranc e
demonstrates prese ntation b y nature .
Prese ntation h y function aggregates cos ts into grnupings based on the primary func-
ti o na l activities in which the cumpany engage s. For example. at P\V Audio Supply. ope ratin g
expe nses arc those co s ts incurred tn pcrti.mn the operating functinn s of a m e rchandi s ing bu s i-
ness . Ir PW A udio Suppl y chose to present striL·tl y by runcti u n. it \HHiid prese nt it s operating
ex pe nse s as a s ingle line item nf € 11-UlOO. Hmn~ n~r. if a presentation by function is used.
!FRS requires di sc lo s ure uf additional details regarding thL' nature uf L'ertain e'\pe nse s that
we re included in th e functional grnuping . Fnr e'\ampk. deprL·ciation and salary and ,,·age cost:,;
are ite m s specihcall y required to be disclosed.
Illustration 5.12 combines both a pre se ntati o n by functiun and by nature to pre sent oper-
ating expenses. It uses a fun c tional grouping of uperating e'\pe nscs but also prese nts in d e ta il
the nature or the co s ts included in that runctiunal grnuptng. In \ D l/r 11011 1£' \n ll-k. \'011 sh o uld
use this Of JJn·oocli .

Other Income and Expense

Other inc o m e and e x pense cons ish or Yariou s re\ cnues and gains and e'\pe nses and losses that
a re unre late d to the COI11[Xtny's main line or ope ration s. Illustt·ation 5.13 li sts example s of each .

Othe1· Income ILLUSTRATION 5.13

Interest revenue from not es receivabl e and marketabl e securitie s. Examples of other income
and expense
Dividend revenue from in ves tments in ordinary shares.
Rent revenue f1·om subl eas in g a porti o n or th e store .
Gain fro m the sale of property. plant. and equipme nt.

Other Expense
Casualty losses from s uc h causes as vandali s m and accide nt s.
Loss from th e sa le or abandonment of property. plant. a nd equi p me nt.
Loss from strikes by emp loyee s and suppliers .

Merchandising compani es report other innHne and expense in the income statement
imm ediate ly afte r th e company's prim ary ope ratin g activities . Illustration 5.14 s h ows thi s
prese ntation for PW Audio Supply.

Interest Expense
F inancin g acti v iti e-.. w hid1 result in intere st L' Xpen se . reprL' se nt di stinl'll y different ty pes ur
cost to a hu s ine -.-.. In ev aluatin g the performanc e ur a bu s in ess. it is important Ill lllOJlitor
it s int e res t expense . A -. a L'llll SL'LJlll'IlL·e. intere s t c x pen-. e . if materi a l. must be di sclo sed on
th e race or th e In C() f1l e '- la lL' Ill e llt. PW A udio Suppl y inl'LIITed lll!LTL'Sl eX (1L'Il SL' ()r € I. XOO .
Illu stra tion ). 14 pre-.L' Ill \ a L'() IllpklL' inn line stat e illcill li1r PW A udiu Suppl y [ 1,1' IIi/\ fi ,,mur
H'IU:'/1 errpuriu g 1·uur 11!11111' \t·ork. .
5-20 CHAPTER 5 Accounting for Merchandise Operations

ILLUSTRATION 5.14
PW Audio Supply
Income statement Income Statement
For the Year Ended December 31, 2020

Sales
Sales revenue €4S O.OOO
Less : Sales returns and allowances €12 ,000
Sales di scounts 8.000 20.000
Net sales 46( ).000
Cost of goods sold .~ I 6.000
Gross profit I 44.000
Operating expenses
Salaries and wages expense 64.000
Utilities expense 17.000
Advertising expense 16.000
Depreciation expense 8.000
Freight-out 7 ,000
In surance expense 2,000
Total operating expenses I I 4 . 000
Income from operations 30.000
Other income and expense
Interest revenue 3,000
Gain on sale of equipment 600
Casualty loss from vandalism (200) -~. 4()()

Interest expense I .SOO

Net income € 3 1.600

Comprehensive Income
Chapter 1 disc ussed the fair value principle. IFRS requires companies to adjust the recorded
values of certain types of assets and liabilities to their fair values at the end of each reporting
period. In so me instances, the unrealized gains or losses that result from adjusting recorded
amounts to fair value are included in net income. However, in other cases, these unreal izcd
gai ns and losses are not included in net income. Instead , these excluded items arc
reported as part of a more inclusive earnings measure, called comprehensive income .
Examples of such items include certain adjustments to pen sion plan assets, gains and losses
on foreign currency tran slation, and unrealized gains and losses on certain types of invest-
ments. Items that are exc luded from net income but included in comprehensive incom e are
e ither reported in a combined statement of net income and comprehensive income. or in a
se parate schedule that reports only comprehensive income . Illustration 5.15 shows how
co mprehe nsive income is presented in a se parate comprehensive income statement. assum-
ing that PW Audio Supply had other comprehensive income of €2 ,300. Us e thi.1 for/11(// 11 ·hcn
preparing yo ur homework.

Sepa•·ate statement of net

PW Audio Supply
Comprehensive Income Statement
income and comprehensive
income For the Year Ended December 31, 2020

Net income € .\ I .600

Other comprehensive inco me
Unrea li zed holding gain on in vestment securiti es 2. ~( )()

Co mprehensive income € l, ~.l) ( )()


... {ft,'", .. ~.-,.-.
Accounting Across the Organization Flipkart
Online Sales Stall
in India
Indi a i ~ m : ll Kllll\\·n fo r it ~ lar~L'
pno( nf C\Cclknl ~ nft\\ · arc cn~i­
n cc r~ . Thcrdurc. it ma' n 1mc
:1 ~ a ~ urpri ~ c that nnlinL' mcr-
c handi ~c ~ ak ~ \\ CrL' ~ In\\ · tn
take' huld in thi ~ l'llUlllry. The
rL'a,;un for the delay n1mparcd
111 man,· nthc r cuunlric,; \\·a,;
!hal. Until rCCL'Illiy. L'tlll S i ~ l l' nl
lmcrnct aCL'L'"" \\·a,; limited tu
a ~ mall pun iun uf the Indian
pnpulatiun. Htm·l'\L'L current
c,;timatc,; arc that -160 milliun
lnd ian ,; " ·iII ha,·c Interne! accc ~~
~ nnn . Tn take' ad, · anta~c uf thi ~.
Classified Statement of Financial Position
In the statement of linancial position. merd1andising Ulmpanies report inventory as a
current ass e t immediatel y above accounts rec e i' able. Recall from Chapt e r ..J. that cum-
panics gen e rally list current asset items in the re ve rse order or their clos e ne~~ to cash
(liquidity). Inventory is less close to cash than accounts recei vable b e cause th e gomis
must first be sold and then collection made from the custome r. Illu s tration 5.16 pres e nts
the as sets se c tion of a classified statement of linancial position for PW A udin Supply
(see Helpful H int).
PW Audio Supply
Statement of Financial Position (Partial)
December 31, 2020
Assets
Property , plant. and equipment
Equipment
Less: Accumulat ed depreciation- equipment
Curre nt assets
Prepaid insurance
Inventory
Accounts receivable
Cash
Total assets
Fin a nci al State men t fo r a l e rc handi ser 5-21
twu ,;ofl\\~lrc cn~inc c r~ ~tancd thL' llil linc m c n.: handi ,; in ~ ~· l l111p~m ~
F lipkm·t (IN D ). The ir ~n al i,; w he the ··.-\ 111~1/tl n . ·omtlf Ind ia .·· ~al ·,;
haYc incrca~cd drama tic!l ly in the b,;t ft.· " ~ L'ar,; :1l!hou ~ h th · '-· ump~m y
faced many barrier,; lu bo th ~nm · th a m i p n.l l1tat"l ilit y in it ,; c:1rli ·r ~ ·:u;; .
Fir,;!. k"· Ind ian s had LTL' dit '-·ard,;. ,;uma n ~ tr:.m ,; ac tiln,; ha ltl he Jnn ·
in ca,;h ..-\nd " ·hik lhL' cn mp~m y h ~1d a bonk L· ataln ~ uf o \· ·r 100 m il -
litlnlilk ~ . it \\·a,; Ycry difl icu ltto JL'l i,cr thc:'c hl 1k :' (11r an yt hin ~ ·b ·)
m ·cr India· ,; pnnrly maint a ined ro ad ,; ..-\ ,; !Ill -rncl acY ·,;,; im1 n.l\ · !.
nnlinc mcrchandi,;c r,; in India ,;a\\ their ,;ale,; ta1.c t tr. d c.' r it · th • n
for the bank in~ and lran,;pnrt alilln ,;y ,;tL'n b ltl im 1 1\)\ • .
Som-ee: .-\n1<>i Sh:trn u ... D o t· C <>m~ Bc" in t<> B lt>:':'<H 1 in lnJ i:.1.·· I I (: .": Su re:
./ou n w/ ( .-\pril 12. 20 l l ).
\\"hat implications do the lack of cu s tomer cre dit cards a nd t h e
limited t1·ansportation systt'Ill han· for Flipk a rt·s protit ab il-
ity'? (Go to the book ·s companion website fo r this answe r a n d
additional questions.)
ILLUSTRATION 5.16
Assets section of a classified
statement of financial position
€XO.OOO
2-1.000 € 56.000
HELPFLL HI!\'T
I . XOO
-10.000 T he €-10.000 is tht' cost o f t h e
16.100 inY e ntm·~· on ha n d. n ot it s
l) .500 6 7.400 expected Sl' llin g p.-ic e.
€ I 2.1 .400
5-22 cHAPTER 5 Accounting for Merchandise Operations

DO IT! 5 I Financial Statement Classifications ACTION PL AN

• Review the majot- sc<.:tions
You are presented with the following list of accounts from the adjusted trial balance for merch an- of the income s tatement:
diser Gorman Company. Indicate in which financial statement (income statement, IS ; statement of sales , cost of goods sold.
financial pos ition , SFP; or owner's equity statement, OES) and under what classification each of the operating expenses. othct·
following would be reported. income and expense. and
Accounts Payable Interest Payable interes t expense.
A ccounts Receivable Inventory • Add net income to
Acc umulated Depreciation-Buildings Land beginning ownct·'s capital
Accumulated Depreciation-Equipment Notes Payable (due in 3 years) and deduct owner's
Adverti sing Expense Owner's Capital drawings to a.-rive at
Buildings Owner's Drawings ending owner ' s capital
C ash Property Taxes Payable in the ownet·'s equity
Depreciation Expe nse Salaries and Wages Expense statement.
Equipme nt Salaries and Wages Payable • Review the n1ajot· sections
Fre ight-Out Sales Returns and Allowances of the s tatement of
Gain on Di sposal of Plant Assets Sales Revenue financial position, income
Ins ura nce E xpen se Utilities Expense statement, and O\\ ncr's
Inte rest E xpe nse
equity statement.

Solution
Account Financial Statement Classification
Acco unts Payabl e SFP Current liabilities
Acco unts Rece ivabl e SFP Current assets
Accumul ated Depreci ation- SFP Property, plant, and
Buildings equipment
Accumul a ted D e prec iation- SFP Property, plant, and
Equipm e nt equipment
Ad verti s in g E xpe nse IS Operating expenses
B uilding s SFP Property, plant, and
equipment
Cas h SFP Current assets
De prec ia ti o n E xpe nse IS Operating expen ses
Equipme nt SFP Property, plant, and
equipment
Fre ig ht- O ut IS Operating expenses
Ga in o n Di sposa l o f IS Other income and
P la nt A ssets expense
In s ura nce E x pense IS Operating expenses
Inte rest Expense IS Interest expense
Inte re st Paya bl e SFP Current liabilities
In ve nto r y SFP Current assets
La nd SFP Property, plant, and
equipment
Notes Paya bl e SFP Non-current liabilities
Ow ne r· s C a pita l SFP, OES Equity
Ow ne r"s D raw in g s OES Deduction section
Pro pe rt y Taxes Paya bl e SF P Current li abilities
Sa la ri es a nd Wage s E xpe nse IS Operating expen ses
Sa la ri es a nd Wages Paya bl e SFP Current liabilities
S a les Return s a nd A ll owa nces IS Sales
Sa les Reve n ue TS Sales
U tiliti es Ex p e n ~ e IS Operatin g ex penses

Re l a1ed e xe rc i se m ater i al : BE5.7, BE5.8, BE5.9, DO IT! 5.5, E5.9, E5.10, E5.12, E5.13, and E5.14.
 A pp e ndi x SA: Worksheet f or a M erchand is ing Com pan 5-23

IAppendix SA Worksheet for a Merchandising Company

LEARNING OBJECTIVE *6
Prepare a worksheet for a merchandising company.

Using a Worksheet
As indi cat ed in C hapter -+. a ,,·nrbheet enables co mpanies to prepare tinancial statements
befo re th ey journali ze and post adjustin~ entries. The steps in preparing a \\ Orkshee t for a
merch andi sing compan y arc the same as for a scT \'i ce company. Ill ustration SA . I sho\\·s the
work sheet for P\V A udio Supply (e:\c ludin~ non- npc ratin~ items ). The unique accounts for a
merchandi se r us in~ a perpetual in\'c ntnry sys tem arc sho\\·n in capital red letters. Thi s " o rk-
sheet assumes that the compan y did not ha' e L'lHnprchcnsi \'t' inco me .

ILLUSTRATION SA.l \Ynrkshcct for mt' t'Chandising l'ompany

PW Audio Supply
~ l_!nsert P~1ge l ayo ut Formulas Data Review View

l=~
===r_=_=~~~s==--~
A~'===f=='-~I=~ -r=c --B - =~~~c==j;==~=}=-.-==_=E===r=[= F
= ==r=L==
G=--=[=H
= _=1=- - I-
J K
1
2 PW Audio Supply
3 Worksheet
For the Year Ended December 31, 2020
4
5 Adjusted Income Sta tement of
Trial Balance Adjustments
6 Trial Balance Statement Fin ancial Position
7 Accounts Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. D r. Cr.
8 Cash 9,500 9,500 9,500
9 Accounts Receivable 16,100 16,100 16,100
10 INVENTORY 40,5 00 (a) 500 40,000 4 0 ,000
11 Prepaid Insurance 3,800 (b) 2,000 1,800 1,800
12 Equipment 80,000 80,000 80,000
13 Accumulated Depreciation-
Equipment 16,000 (c) 8,000 24,000 24,000
14 Accounts Payable 20,400 20,400 20,400
15 Owner's Capital 83,000 83,000 83,000
16 Owner's Drawings 15,000 15,000 15,000
17 SALES REVENUE 480,000 480,000 4 8 0,000
18 SALES RETURNS AND
ALLOWANCES 12,000 12,000 12,000
19 SALES DISCOUNTS 8,000 8,000 8,000
20 COST OF GOODS SOLD 3 15, 500 (a) 500 3 16,000 3 16,000
21 Freight-Out 7,000 7,000 7,000
22 Advertising Expense 16,000 16,000 16,000
23 Salaries and Wages Expense 59,000 (d) 5,000 64,000 64,000
24 Utilities Expense 17,000 17,000 17,000
25 Totals 599,400 599,400
26 Insurance Expense (b) 2,000 2,000 2,000
27 Depreciation Expense (c) 8,000 8,000 8,000
28 Salaries and Wages Payable (d) 5,000 5,000 5,000
29 Totals 1 5, 500 1 5, 500 612,400 612,400 450,000 480,000 16 2,400 132 ,400
30 Net In co m e 30,000 30,000
31 Totals 480,000 4 80, 000 162,400 162,400
32
Key: (a) Adjustment to inventory on hand . (b) Insuran ce exp ired . (c) D ep re c iat ion expense .
(d) Salaries and wages accrued .
5-24 CHAPTER 5 Accounting for Merchandise Operations

Trial Balance Columns

Data for the trial balance come from the ledger bal ances of PW Audio Supply at December 31.
The amount shown for Inve ntory, €40,500, is the year-end inventory a mount from the perpetual
inventory system.

Adjustments Columns
A merchandising company generally has the same types of adjustments as a service cumpany.
As you see in the worksheet, adjustments (b), (c), and (d) are for insurance . depreciation.
and salaries and wages. Yazici Advertising, as illu strated in Chapters 3 and 4. also had the se
adjustments. Adjustment (a) was required to adjust the perpetual in ve nt o ry carrying amount
to the actual count.
After PW Audio Supply enters all adjustments data on the worksheet , it establishes th e
equality of the adjustments column totals. It then extends the balances in all accounts to the
adjusted trial balance columns.

Adjusted Trial Balance

The adjusted trial balance shows the balance of all accounts after adjustment at the end or the
accounting period.

Income Statement Columns

Next, the merchandising company transfers the accounts and balances that affect the income
statement from the adjusted trial balance columns to th e income statem e nt columns. PW Audio
Supply shows sales of €480,000 in the credit column. It shows th e contra reve nue accuunts
Sales Return s and Allowances €12,000 and Sales Discounts €8 ,000 in the debit column . The
difference of €460,000 is the net sales shown on the income statement (lllustrat ion 5 . 1-1-).
Finally, the company totals all the credits in the income statement column and cumpares
those totals to the total of the debits in the income statement column. If the credits exceed
the debits, the company has net income. PW Audio Supply has net income of €30.000. I r the
debits exceed the credits, the company would report a net loss .

Statement of Financial Position Columns

The major difference between the statements of financial position of a service company and a
merchandi ser is inventory. PW Audio Supply shows the ending inventory amount of €40.000
in the statement of financial position debit column. The information to prepare the owner's
eq uity statement is also found in these columns. That is, the owner's capital beginning balance
is €83,000. Owner's drawings are €15 ,000. Net income results when the total or the debit
column exceeds the total of the credit column in the statement of financial pos ition columns.
A net loss results when the total of the credits exceeds the total of the debit balances.

I Appe llil d ox SB Periodic Inventory System

LEARNING OBJECTIVE *7
Record purchases and sales under a periodic inventory system.

As described in thi s chapter, compani es may use one of two basic systems or accuuntin!:! fnr
in ve ntories: ( I) the perpetual inventory system or (2) the periodic inven tory sys tem. In thL'
chapter, we focu sed on the characteri stics of the perpetual inven tory sys te m. In thi s a ppL' n -
dix , we di scuss and illustrate the periodic inventory system. One key differencL' hct\\ ·cL'Il
th e two systems is the point at which the co mpany co mputes cost of goods sold hlr ~~ \ is u;tl
re minder of thi s difference, refer back to Illustration 5.5.
 Appendi x SB: Pe r iod ic Inven to r Sy st em 5-25

Determining Cost of Goods Sold Under

a Periodic System
De te rmining COS[ ur gnnds sold is dilfcrcnl \\"hen a per iodi c imentory system is used rather
than a perpe tual s y s tem . :\s yo u haYc se en. a company us ing a perpetual system makes an
e ntry to record cn s tnf gnods so ld and tn reduce inn.:ntory each time: a sa le is mad e:. r\ company
USin g a periodic System dues not determine COS! of goods S{l(d Until the end of the period ..-\1
the e nd of the period the L'O nlpany performs a cn unt to determin e: the ending baLmce o f inYen-
tory. It then calculates cost of goods sold by s ubti·acting ending inYentory from the cos t of
goods available for sale. Cos t of guods a\·ailablc for sale is the sum of beginning iment ory
plu s cost or goods purchased. a s s!Hl\\ n in Illustration 5B .l.

BL'O:! innin '=' Inn: nt\lry ILLUSTRATION 58.1

+ Cn~ t nf G\lll d ~ Purcha~cd Bas ic formula for cos t of goods
Cnst nf Goods .-\\·ailahk for Sa le s old u s ing the p e riodic sy s tem
Endin'=' Jn,·cntor y
Cost of Good s Sol d

Another di lference bet\\ ccn the t\\ o approaches is that the perpetual sys tc: m directl y
adjusts the In ventor y accnunt for an y transaction that aiTccts in\·cntory (such as freight costs.
returns. and discounts ). The: perindic system dues not do this. Inst e ad. it creatc:s dirfe re nt
account s fo r purchases. frcightL·osts . return s. and discounts. These , ·a rious acco unts are shm,·n
in Illus tration 5B .2. which presents the cakulatinn nf cost of goods sold fo r P\V A udin Sup-
ply using th e periodic approach (sec Helpful Hint).

PW Audio Supply ILLUSTRATION 58.2

Cost of Goods Sold Cost of goods sold for a
For the Year Ended December 31, 2020 merchandi se r u s ing a periodic
inYentory sy s tem
Cost of goods sold
lnvcntm·y, .Janm11·y € 36.000
Purchases 025.000
Less: Purchase re turn s and
a! lowa nccs € I 0.-HlO
HELPlTI. HI:\T
Purcha se di scounts 6.~00 17 ..200
T he fat· right column identi-
Net purchases 307.800
ties tlw pl'imary items tha t
Add: Freight-in 1.2 .200
make u p cos t of good s sold
Cost of goods purchased 320.000 of €3 16.000. The middle col -
Cost of goods available I'm· sale 356,000 umn explains cost of goods
Less: lnventm·y, Decemhet· .~I -tO.OOII pm-chased of €320.000. The
left column t-cpot·ts cont ra
Cost of goods sold 016.000
pm·chase items of € 17.2011.

Note that the basic clements from Illustration 58 . 1 arc highlighted in Illustration 58.:2.
You will learn more in Chapter 6 about how to de termine cost of goods sold using the periodic
sys te m .
The usc or
the periodic in ventmy system docs not affcL'l the lill'lll or pre sentation in the
statement of linancial position. A s unde r th e perpetual sys tem . a L·ompan y report ~ in ve ntor y
in th e current assets sec tion.

Recording Merchandise Transactions

In a periodic inventm·y system . L'UillpaniL'S rL'curd rL'\ L' IlU e~ fnllll tilL' :-, ak uf m c rdl<tndi ~L'
w he n s al e~ arc made. ju ~ l a~ in <t pnpctual sys tem . Ll nlih. c tilL' pe rpe lu<tl -, y :-, lL' Jll . ho\H'\L'r.
compani es do not attl•mpt on the date of sale to recm·d the cost of the m en:handise sold .
In ste ad. they l<th. e a ph y ~ Jl' <tl 111 \'t' ntm y L'\lLJJll <tllhL· end of the pe.-iod tu dL'lLTillillL' 1 I l !IlL' L'l l.., l
5-26 CHAPTER 5 Accounting for Merchandise Operations

of the merchandise then on hand and (2) the cost of the goods sold during the period. A nd.
under a periodic system, companies record purchases of merchandise in the Pun·hases
account rather than the Inventory account. Purchase return s and allowances. purchase di s-
counts, and freight costs on purchases are recorded in separate acco unt s.
To illustrate the recording of merchandi se transactions under a periodic in ve ntory sys te m.
we will use purchase/sales transactions between PW Audio Supply and Sauk Stereo. as illus-
trated for the perpetual inventory syste m in this chapter.

Recording Purchases of Merchandise

HELPFUL HINT On the bas is of the sales invoice (Illustration 5.6) a nd receipt of the m e rchandi se
ordered from PW Audio Supply, Sauk Stereo records the €3 ,800 purchase as follo\\' s (sec
Be careful not to debit pur-
chases of equipment or sup- Helpful Hint).
plies to a Purchases account. J.XOO
May 4 Purchases
.~.:-\ ()()
Accounts Payable
(To record goods purchased on acco unt from
PW Audio Supply)

Purchases is a temporary account whose normal balance is a debit.

Freight Costs
When the purchaser directly incurs the freight costs, it debits th e account Freight-In (or Trans-
portation-In). For example, if Sauk Stereo pays Acme Freight Company € I 50 for freight charges
on its purchase from PW Audio Supply on May 6, the entry on Sauk Stereo's books is as f()llows .

May 6 Freight-In (Transportatio n-In) 150

Cash 15()
(To record payment of freight on goods
purchased)

Like Purchases, Freight-In is a temporary account whose normal balance is a debit. Ft·eight-
In is part of cost of goods purchased. The reason is that cost of goods purchased should
include any freig ht charges necessary to bring the goods to th e purchas er. Freight costs arc
not subject to a purchase discount. Purchase di scounts app ly o nly to the invoice cost or th e
merchandise.

Purchase Returns and Allowances

Sauk Stereo return s goods costing €300 to PW Audio Supply and prepares th e following entry
to recognize the return.

May 8 Accounts Payable JOO

]()()
Purchase Returns and A llowances
(To record return of goods purchased
from PW Audio Supply)

Purchase Returns and Allowances is a temporary account whose normal balance IS a cred it.

Purchase Discounts
On May 14, Sauk Stereo pays the balance due on account to PW Audio Supply. takin g the ~ r;;
cas h di sco unt all owed by PW Audio Suppl y for payment within 10 days . Sauk Stereo record s
the payment and di sco unt as follows.

May 14 Accounts Payab le (€3,800 - €300) :uno

7 ()
Purchase D iscounts (€3 ,500 x .02 )
-~. -U()
Cas h
(To record pay ment within the di scount period )

Purchase Di scounts is a temporary account whose normal balance is a c redit.

 Appendi · SB: Period ic In ento f)' S rstem 5-27

Recordo g Sales of Merchandise

The se ll er. PW Aud io S upp ly. records the sak o f €3.800 o f me rchandise to Sauk S tereo o n
May 4 (sa k s in\'oi c e No. 73 I. Illu strati on 5.6) as follows.

May 4 :\ccut 111l ~ RL'L"L'i \·ahk

Sak~ R cn~n u c 3.::WO
(Tu rL·curd LTcJ it ~ak~ per innliL·c
117 3 1 to Sauk StL'rL'll1

Sales Returns and Allowances

To reco rd th e return ed gonds recei\'ed from Sauk Stereo o n l'vlay 8. P\:..' .-\u d io Supply records
the €300 sal es re turn as fnllows.

May X Sak ~ RL· turn ~ and A ll tl\\"; tn L·c~ 300

Acco unts Rccci,·ahk 300
(To rcL·o rd credit gran ted tn Sauk S tcrcu fo r
rctu rncd guud~)

Sales Discounts
On May 14. PW A udio S uppl y rece i\'es pay ment nf €3 .-UO o n account from Sauk S teren.
PW A udio S uppl y ho nors the 2'lr cash discount and records the pay me nt of Sauk S tereo's
account receivable in full as foll ows.

May 14 Cas h 3.430

Sale s Discuu nt ~ (€3.50() x .021 70
Acc uunt s RcL·ci , ·ahk (€3 .XOO - €3 0()) 3.500
(Tu rccurd colkL·tion \\·ithin :2110. n/3 0
di sco unt period fro111 Sauk StL·rco)

Comparison of Entries-Perpetual vs. Periodic

lllustnltion SB.3 summarit.es the periodic in ve ntory entries show n in this appe ndi x and co m-
pares th e m to the perpetual-system e ntri es from the chapte r. Entries that diffe r in th e two
system s a re shown in color.

Journalizing and Posting Closing Entries

For a merchandising company. like a se rv ic e company. all accounts tha t affect the d e te rmin a-
tio n of ne t incom e are closed to In co me Summary. Data for th e preparation of c los in g e ntri es
may be ob ta ined from the income statement columns of the work s heet. In jnurnali z in g. all
debit co lumn amounts are credited . and all credit columns amount s are debit ed . To c lo se th e
merc handi se inve ntory in a periodic inve ntory system:

1. Th e beginning in ve ntory ba lance is debit ed to In co me Su mmary and cre dit e d to

In ve ntory.
2. The e ndin g inventory bal a nce is debited to In ve nt ory and credited to Income S ummary.

The two entries for PW A udio Suppl y arc as foll ows.

(I)
Dec . l l ln cu lll c Su111111 a r y \6.000
ln vc ntt1r y \ 6.0()()
(To c lose hL· g innin g inwntnry )

( 21
.\ I ltt vc nt 11ry 40.0()()
lnL·ll tii L' Sutntttary -1-0. ()0()
(T !> rcL·ord L' lld ing in\'L' lll tll) l
5-28 CHAPTER 5 Accounting for Merchandise Operations

ILLUSTRATION 58.3 Comparison of entries for perpetual and periodic inventory systems

ENTRIES ON SAUK STEREO'S BOOKS

Transaction Perpetual Inventory System Periodic Inventory System

May 4 Purchase of Inventory 3,800 Purchases 3.800
me rchandi se on credit. Accounts Payable 3,800 Accounts Paya b le ."'.r\00
6 Fre ight costs on Inventory 150 Freight-In ISO
purch ases. Cash 150 Cash I 50
8 Purch ase return s and Accounts Payable 300 Accounts Payab le 300
allowances. Inventory 300 Purchase Ret urns
and Allowances 300
14 Payment on account Accounts Payabl e 3,500 Accounts Payabl e 3 .500
w ith a discount. Cash 3,430 Cash :'\ .-l-.10
Inventory 70 Purchase Discou n ts 70
'
ENTRIES ON PW AUDIO SUPPLY'S BOOKS

Transaction Perpetual Inventory System Periodic Inventory System

May 4 Sale of merch andi se on Accounts Receivable 3,800 Accounts Rece ivable :'\.XOO
c red it. Sales Revenue 3,800 Sales Revenue .1.:-mo
Cost of Goods Sold 2,400 No entry for cost of
Inventory 2,400 goods sold
8 Return of merchandi se Sales Returns and Sales Return s a nd
sold. Allowances 300 Allowances :'\ 0()
Accounts Receivable 300 Accounts Rece ivable .1 00
Inventory 140 No entry
Cost of Goods Sold 140
14 Cash recei ved on Cash 3,430 Cash 3.-UO
account with a di scount. Sales Discounts 70 Sa les Di scounts 70
Accounts Receivable 3,500 Accounts Rece ivabl e :'\.5 0()

Illustration 5B.4 shows the Inventory and Income Summary accounts after posting.

I•LLUSTRATION S·B.4 Inventory Income S u mmm·y

Posting closing entries for l/1 Bal. 36,000 12/31 Close 36,000 12/31 Close 36,000 12/3 I C lose -W,OOO
merchandise inventory 12/3 1 C lose 40,000
12/3 1 Bal. 40,000

Often , the closing of Inventory is included with other closing entries. a s shown for
HELPFUL HINT PW Audio Supply (see Helpful Hint). (Close In ventory with other a cco unts in fwllle\t 'tn-/.;
Except for· mer-c h andise in - problems unless stated otherwise.)
vcntor·.v. the easiest way to
Dec. 3 1 Inventory (Dec. 31) 40,000
pr·epare the first two clos-
Sales Revenue 4H0.000
ing entr·ies is to identi fy the
Purchase Returns and Allowances I 0 .400
tempor· ar~' at·counts bv their
Purchase Di scounts 6.XOO
halant·es and then p.repa re
one entr·~ for· the credits and Inco me Summ ary
onl' for the dehits. (To record ending in ven tory and close
accounts with cred it balances)
 Appendi x SB: Periodic In entory S stem 5-29

31 ln nllllc SuntmarY 507.200

Inwntory (Jan. l ) 36.000
Sak" Return :-; and .-\llll\\·ancc:o; 1.2 .000
S:dc:-; Di :-; cnu nt ~ 8.000
Pun.: ha ~c~ .'.25.000
Frci 1,! ht -ln 1.2. 200
Sa lari c" and \\·a1,!L' :-; Ex pcn ~c 6-LOOO
FrL· ight -Out 7.000
.-\d\·cni sin1,! Expcn"c 16.000
L ' tilitie ~ E-.; p e n ~e 17.000
DepreL·iatiun E"\pL·n :-;e 8.000
ln :-; ur:tncc Ex pen:o;e 2.000
tTu L"lu,.,e he1,!innin1,! in\·elttnry and uth cr
illL'lllllL' statentL'nt :lL'l'OlllllS \\·ith debit ba LulL'e ~)
31 Incl )illL' Suntman· .'0.000
0\\ · ncr ·~ Capit:tl 30.000
(Tn tran ~ kr net in cu me tn 0\\·ncr':-; cap ital)
31 Owner· ~ Cap ital 15 .000
0\\·ner·" Dra\\·in 1,! ~ 15 .000
(Tn L"ln"c uwner' :-; drawin1,! ~ t Ul)\\ · ncr · ~ capi tal)

A ft er the closing entries arc posted. all temporary accounb haYc zero bal ances. In addi-
ti on, Owner's Capital ha s a ncJit balance of €98 .000 : Bt'ginning bal ance + Ne t incomt' -
Owner's Drawings (€8~ .000 + €30.000- € 15 .000) .

Using a Worksheet
As indicated in C hapter -1-. a ,,·orkshcct enables co mpanie s tu prepare llnancial statements
before j o urnalizing and postin~ adju s tin~ entrie s. The steps in preparing a ,,·orkshet't ti.)J' a
merchandi s ing compan y arc th~ s at~le as ~hey arc li.)r a sen·ice company.

Trial Balance Columns

Data fo r th e trial balance come from the ledger balances of PW Audio Suppl y at December~ I .
Th e amount shown for In ve ntory. €:16.000. is the beginning inYe ntory am o unt from th e
peri od ic inventory system.

Adjustments Columns
A merch a ndising company generall y has the same types or adjustme nt s as a se r v ice compa ny.
As you see in the wo rkshe et in Illustnttion SB.S. adjustment s (a) . (b ). and (c) are for insur-
ance , de preciation. and sa laries and wa~e s. These ad-justments we re also required for Ya;: ici
Advertising , as illustrated in C hapters _1, ;nd 4. The unique accounts for a me rchandise r us ing a
periodic inventory system arc shuwn in capital red lctt t' rs . Nntc. howe ve r. that th e worksheet
exc ludes non-operating items.
After all adjustment data arc entered on the works heet. the equ a lit y or th e adju stment
column totals is establi shed . The balances in all accnunts are then exte nded tn the adjusted
trial balance column s.

Income Statement Columns

Next. PW Audio Supply tran sfers the accounts and hal am-e-, that affect th e income stat e-
me nt from th e adjusted trial balance L·olumns tn th e income statement columns . The compan y
shows Sales Re venue or € -H\0.000 in th e creclitcnlumn. It shtlW'> the contra revenue accounh .
Sal es Return s and A llm,vancc s or € 12.0()() and Sale" Discnunt:-. nr €X. OOO. in th e de bit cnlumn
The differe nce ur € -460 .()()() i:-. till' Il l'! sa k~ show n un th e illCllllll' :-.tatL' nl e nt ( Illu stration )C)) .
Similarl y. Purcha :-.c~ or € .12."\.()()() a nd Frei g ht - In ur € 12.200 arL' ntcndcd Ill the de hit L'lliUillll
T he contra purl'lla:-.c <ll'l'lll llll :-.. Purcha se RL'lllrll:-. and f.\lln w<llll' L'~ or € I () _-4()() a nd Purch<i ~ C
Di :-.counh or € h .XOO . <II'L' L'"\IL'lld cd tll tilL' LTCdit l'l)lunm :-..
5-30 CHAPTER 5 Accounting for Merchandise Operations

ILLUSTRATION SB.S Worksheet for merchandising company-periodic inventory system

IQ ...,· C"' · ,. • PW Audio Supply
1 Home I Insert Page Layout Formulas Data Review View
-- -
P18 (- fx l
-
,;'\ A I B c I D I E F I G I H I I I J I K
1-
PW Audio Supply
t--L
3
I Worksheet
1--- For the Year Ended December 31, 2020
4
t---
5
t---- I Trial Balance Adjustments
Adjusted Income Statement of
6 Trial Balance Statement Fina ncial Position
Accounts Dr. I Cr. Dr. Cr. I Dr. Cr. Dr. Cr. Dr. Cr .
7
8 Cash I 9,500
I
l +
I 9,500
- T
--1- . 9, 500
9 Accounts Receivable I 16,100 [ 16, 100_,_ 16,100
10 IN VE NTORY I 36,ooo I I 36,000
-- 36,000 40,000 40,00 0
11 Prepai d Insurance 3,800 I (a) 2,000 1,800 1 I 1,800
12 Equipment I 8o,ooo I I 80,000 1 I ] 80,000
13 Accumulated Depreciation- '

t---- I-
Equipment I
16,000 '(b) 8.000 I 24,000 24,000
14 Accounts Payable
I

I 20,400
I
I 20,400 20,400
--
15 Owner's Cap ita l 83,000 I 83,000
- I
83 ,000
1
16
-
O wner's Drawings
--- -
1 15,ooo I 15,000
-1- .
15,000
17 SAL ES REVENU E 1480,000
I 480,000 1 4 8 0,000
r---- - ---
I - '
18 SA LES RETU RN S AND
ALLO WAN CES 12,000 I I 12,000 12,000
t

-
19 SAL ES DI SCOU NTS
- --
8,000
I
I I 8,000
-
8,000
20 PURCHASES
-
:325,ooo l I 1325,000 325,000
21 PUR CHASE RETURN S
AND ALLOWA NCES I 10,400
I 10,400 . 10,400
I-- - I -
22
-
PURCHASE D ISCO UNTS 6,800
12,200
:
12,200
I 6,800 6,800
23 FRE IG HT-IN 12,200
-- - - I -
I
-
1 I
24 Freight-Q_ut 7,ooo 7,000 7,000
- - -
25 Advertisin_2__5xpen~~ 16,000 16,000 16,000
- - I - -
26 Salaries and Wages Expense 59,000 I (c) 5,000 I I 64,ooo l 64,000
- I
27 Uti I ities Exe_e nse 17,ooo l I
17,000 I 17,000
I -·
28 Totals 616,600 616,600 .
-- ·-- -
- -
29 Insurance Expens e (a) 2,000 I 2,000 2,000
- - ---+
,(b) 8,000 - - - -~ -8,oooT
- - j
30 Depreciation Expe nse 8,000
-~

31 Salar ies and Wages Payable

- -
l (c) 5,000 I
5,000 5,000
32 Totals
t-
I 15,000 15,000 J629,600
.
629,600 1507,200
30,000
537,200 162,400 132.400
30,000
.
33 Net Income
- - - - - ......_..__. I ~-- --
34 Totals 537,200 537,200 162,400 162,40<U
. -- -- - .- ~

35 .
- -L - --·- -- - -
-----t-
j
36 - _. - ~ I

Key : (a) Insurance expired . (b) Depreciation expense . (c) Salaries and wages accrued .
-

The work sheet procedures for the Inventory acco unt merit spec ific comment:

1. The beginning balance, €36,000, is extended from the adjusted trial halancc colu111n tu
the income statement debit column. From there, it can be added in reportin g C()st ul
goods ava il able for sale in the income statement.
2. The endin g inventory, €40,000, is added to the work sheet by an income statement l't't'dit
and a statement of financial position debit. The credit makes it possihle to clcdu~,·t <..'nd -
ing inventory from the cost of goods ava il ab le for sale in the incom e statement tu d<..'l<..'r-
mine cost of goods sold . The debit mean s the endi ng inve ntory can he re ported as an d:-.:-.~,·t
on the statement of fin ancial position.
 Revi e\ and Practice 5-31

Illustrat ion 5B .6 s h m\·s th ese t\\O proced ures .

Statement of ILLUSTRATION SB.6

Incom e Stat em ent Financial Pos ition \Yorks h eet proc edures fo r
Dr. Cr. Dr. Cr. inYe nt o ri es
Inventory (I) 36.000 -tO.OOO • - (2) -· -to.ooo

The co mputati o n fur L'O St nr

~ l)l)(b :"O ld. taken from the inc o m e s ta te m e nt co lumn 111

Illu strati o n 5B. 5. is a s s hm\·n in Illustration 5B.7 (see Helpful H int) .

Debit C olumn C redit C olumn ILLUSTRATION 58.7

Beg inning in ventory € 36.000 Endin g inn::ntory €-+0.000 Co mput a tion of cos t of good s
Purchases 325 .lHlO Purchase returns and alhm·ances 10 .-J.OO sold from wo rksh eet columns
Freight -in 12.200 Purchase di scmiill s 6.800
Total debit s :n .~ . 2 oo Total credit s €57.200 H E LPfTl. Hl:\T
Less: To tal credit s 57.2 00
In a pe l'i od ic system. cost of
Cost of goods sold €316.000 goods sold is a computation-
it is n o t a separate account
wit h a balance.

Fin a ll y. PW A udio S uppl y totals all the credit s in th e income stat e ment column and c o mpares
th ese to t a ls to th e to tal o f the d e bit s in the inc o me stat e m e nt co lumn . 11· the c re dit s e xc eed
the d e bit s , th e co mp a ny ha s net income . PW A udio S uppl y has ne t inc o m e o f €.10.000 . Ir the
de bit s excee d the credit s. th e company w ould re po rt a ne t loss .

Statement of Financial Position Columns

Th e m aj o r diffe re nc e b e tw een th e state m e nt s of finan c ial positi o n o f a se r v ice com p an y
a nd a m e rc handising c o mpan y is in ve ntory. PW A udio Suppl y s h ows e nding in ve ntory o r
€40,000 in th e stat e ment of finan c ial pos iti o n d e bit co lumn . The info rm a ti o n to pre pare th e
o wn e r's e quit y s tat e m e nt is also found in th ese c o lumn s . That is . th e ow n e r' s c apital b eg in-
nin g balanc e is € 83 .000. O w ner 's Draw in gs are € 15.000. Ne t inc o m e res ult s w h e n th e to tal
o f th e d e bit c o lumn ex c e eds th e total of th e cre dit c o lumn in th e s tat e m e nt o f fin a nci a l p os i-
ti o n columns. A n e t lo s s result s wh e n th e total o r th e credit s ex c ee d s th e to tal o f th e d e bit
bal a nc e s .

Review and Practice

Learning Objectives Review

1 Describe merchandising operations and inventory systems. 2 Record purchases under a perpetual inventory system .

Bt.:ca u ~c o r in n· nt o r ) . a lll L'rL" h a ndi ~ ill ~ l"O lll]1<I Il) h a, ~a k ' r e\C ilLI L'. Til L' L"O !Ilpa n \ d e hit ' til L' lll YL'Ili Ur \ aL·L·<> llnt fu r a ll l' ll r,·ll a..,L'' " '
C()~ l or ~ ()( )d ., ~ old . a nd ~ r "" pro lit. Tu aL"L"<llllll r,,r ill\"L' lliUr ). a lll er - III LTL"il <llldi ..,L' a nd fr L· i ~ ht - i ll . a 11d LTL'dl t .., II !t l! l' lll·L·il a'L' dl " "t\ll ll l.., <l l hi
c h a ndi ~ in ~ co iilJ' <~ Il \ Illll ~ t L· h u <»L' h L' I \\ "Cl' ll a p erpe tual a nd a I'L'ri u di c 11ll rL·h a'L' rL' Illrll ' <IIlLi <lil t >\\ <III L"L''
in ve ntor y 'Y~ I L' IIl
5-32 CHAPTER 5 Accounting for Merchandise Operations
3 Record sales under a perpetual inventory system.
When a merchandising company sells inventory, it debits Accounts
Receivable (or Cash) and credits Sales Revenue for the selling price
of the merchandise. At the same time, it debits Cost of Goods Sold
and credits Inventory for the cost of the inventory items sold. Sales
Returns and Allowances and Sales Di scounts are debited and are con-
tra reve nue acco unts.
4 Apply the steps in the accounting cycle to a merchandising
company.
Each of the required steps in the accounting cycle for a service com-
pany applies to a merchandising company. A worksheet is again an
optional step. Under a perpetual inventory system , the company mu st
adjust the Inventory account to agree with the physical count.
5 Prepare financial statements for a merchandising company.
The income statement has the following components: sales, cost
of goods sold, gross profit, operating expenses, other income and
Glossa ry Review
Comprehensive income An income measure that includes gains and
losses that are excluded from the determination of net income. (p. 5-20).
Comprehensive income statement A statement that presents items that
are not included in the determjnation of net income, referred to as other
com pre he nsive income. (p. 5-20).
Contra revenue account An account that is offset agai nst a revenue
account on the income statement. (p. 5-13).
Cost of goods sold The total cost of merchandi se sold during the period.
( p. 5-3).
FOB destination Freight terms indicating that the seller places the
goods free on board to the buyer' s place of business, and the seller pays
the fre tght. (p . 5-8).
FOB shipping point Fre ight terms indicating that the seller places goods
free o n board the carrier, and the buyer pays the freight costs. (p. 5-8).
Gross profit The excess of net sales over the cost of goods sold. (p. 5-18).
Gross profit rate G ross · · profit e xpresse d as a percentage, by d.JVI·d·mg th e
amount of gross profit by net sales. (p. 5- 18).
Net sales Sa les revenue less sales returns and allowances and less sales
d isco unts. (p. 5-17 ).
Operating expenses· Expe nses mcurre
· d ·111 the process of earm· ng sales
reve nue. (p. 5- 18).
Pe•·indic inventory system An inventory system under wh ich the com-
pany does not keep detailed inventory records throughout the accou nting
expense, and interest expense. A comprehen s ive in co m e ~ tatemenl
adds or subtracts any ite ms of other comprehen s i vc i ncu 111c to ne t
income to arrive at other compreh ens ive in come.
*6 Prepare a worksheet for a merchandising company.
The steps in preparing a worksheet for a merchandising cum1xtny
are the same as for a ser vice company. The uniqu e accl>Unl~ fnr a
merchandi ser are Inventory, Sales Revenue. Sales Ret urn s ;md A llm\·-
ances, Sales Di scounts, and Cost of Goods Sold.
*7 Record purchases and sales under a periodic inventory
system.
In recording purchases under a periodic sys te m . companies must
m ake entries for (a) cash an d credit purchases. (hJ purchase
return s and allowances, (c) purcha se discounts. and (d) freight
costs. In recording sales , companies mu s t mak e entries for (a) cash
and credit sales, (b) sa les return s and allowances. and (c J sales
di sco unts .
period but determines the cost of goods sold only at the end or an acu>Linl-
ing period. (p. 5-5).
Perpetual inventory system An inventory system under w hich the
company keeps detailed records of the cost of each inventory purchase
and sale, and the records continuously show the inventory that should he
on hand. (p. 5-4).
Purchase allowance A deduction made to the se lling price or merch a n-
di se, granted by the seller so that the buyer will keep the merchandi se.
(p. 5-9).
Purchase d iscou nt A cash discount claimed by a buyer for prompt pay-
ment of a balance due. (p. 5-9).
P urchase invoice A document that supports eac h credit purchase .
(p. 5-7).
Purchase return A return of goods from the buyer !0 1he sc i kr for a
cash or credit refund. (p. 5-9).
Sa les discount A reduction given by a se ller for prompt pay ment or a
credit sale. (p . 5-13).
Sales invoice A document that supports eac h credit "a le. (p. 5 - I I )
Sales returns and a llowa nces Purchase return s and allowance, frum
the seller's perspective. See Purchase return and Pllrc/W.Il' u//" 11 .1/llc·c.
above . (p. 5-12).
Sales revenue (Sales) The primary so urce of reve nu e in a 11 lL'rdlan -
di sing company. (p. 5-3).
 Practice Mult iple -Choice Questions 5-33

Practice Mult iple-Choice Questions

1. (LO 1) Gross prnlit ,,·ill re sult if: c. a post-closing trial ba lance is no t fl'quill:.' I fm :1 m 't\:h:ttH.iis-
mg company.
a. ope rating expe nses arc less than net income.
d. an Inetl ll1c s tat ement is rcquirL'd for a m ' 1\'handising
b. net sales arc grcatcr than npcrating cxpcn scs.
compan y.
c. net sa lcs arc grc:a tc r than cnst ur gnnds sold.
S. (LO 5) Thc inc o mL' s tatement for a mL'rchandising L'lllllr :111~ s htlWS
d. operating cxpcn scs ~trc grL·atcr than n1s t 11r gn110s so ld.
cach of the follll\\ ing features except :
2. (LO 2) U nder a pc rpc: tual inYc ntnry systc m . ,,·hcn guods arc pur- a. gross prolit.
chased fo r resa le by a co mpan y:
b. cost of gnnds sold.
a. purchases nn accnunt arc d e bited t\l ln Yc ntur y.
c. a salcs scctinn .
b. purchascs nn aL·cuunt arc dchitL·d tn Purchasc s.
d. inYesting actiYitics section.
c. purchasc rcturn s arc d c hitcd to Purchase Returns and
A llo wa nce s. 9. (LO 5) If nct salcs are € -HlO.OOO. L'\l"t nf gntld~ sold is €..'~ I 0 .000.
and op~ rating expe nses arc €60.000. thL' gms~ pmlit is :
d. frei g ht custs arc dchitcd tn Frcight-Out.
a. 00.000.
3. (LO 3) The salcs accounts that normall y ha,·c a dchit baiaiKC arc:
b. €90.000.
a. Sa les Discuunts.
c. 040.000.
b. Sales Returns and A llowanccs .
d. €-+00.000.
c. Both (a) and (b).
" 10. (LO 6) In a \\·orbhect u sing a perpetual im cn tnr: ~yqenL I I l\ · ~·n ­
d. Neither (a) nor (b) . tory is shown in the folln\\·ing columns:
4. (LO 3) A c redit sale of NT$7.500 is madc on Junc 13. tcrms 2/10. a. adjusted trial balance debit a nd sta tem ~nt of tinancial pn~i ­
net/30. A re turn of NT$500 is granted nn.Junc 16 . The amount rcce iwcl t ion debit.
as pay mcnt in full on June :2:\ is:
b. income statement dL'bit a nd s tat t:'mcnt nf tin~uKial pn~ition
a. NT$7 .000 . c. NT$6.:'150 . debit.
b. NT$6.860. d. NT$6.500. c income statement cre dit and s tatement nf tinanci al pllSi tiun
debit.
5. (LO 2 ) Which o f the follo w ing accounts will normall y appear in
th e ledger of a m e rchandising company that uses a perpetual inve n- d. income s tate m e nt credit and adjusted trial balance debit.
tory s ystem' 1
" 11. (LO 7) In de termining cost or ~nnd s s nld in a pcritlLiiL' system :
a. Purchases . c. Cost of Goods So ld. a. purchase di scounts are deducted fmm ne t purchases .
b. Freight-ln. d. Purchase Discounts .
b. freight-out is added to net purchases.
6. (LO 3 ) To record the sale of goods for cash in a perpetual inven- c. purchase re turns and allo,~·ances are deducted from net
tory system: purchases.
a. on ly on e journal entry is ncccssary to record cost of goods d. fre ight-in is added to net purd1ases.
so ld and reduction of in ve ntory.
* 12. (LO 7) lf beg inning inve ntory is HKS600 .000. cnst nf gnods pur-
b. only one journal entry is necessary to record th e rec e ipt of
chased is HK $3. ~00.000 . and ending in ve ntnry is HK S500.000. cost
cash and the sales reve nu e .
of good s so ld is:
c. two journal entries arc necessary: one to record the rcccipt of c. HK$ 3.300.000.
a. HK$3 .900.000.
cash and sales re ve nue . ami onc to record the cost of gooJs sold
and reduction of inventory. b. H K $3. 700.000. d. H K$4.:200.000.

d. two journal e ntries <u·e necess<uy one to record the receipt of * 13. (LO 7) When goods are purchased for rc salc by a L·nmpan y u s m g
cash and reductinn of inve ntory. and one to record th e cost of a pe riodic in ventory system:
goods so ld and sales rc ve nuc . a. purchases on account arc dcbit ed t11 I n\"t' ntllr y.
7. (LO 4) The ste p s in the accounting cycle for a me rchandising b. purchases on account arc debited to Purchase s.
company arc the sa me as those in a se rv icc company except :
r. purchase re turn s arc debit e d to PurL·haSL' RL·tum s and
a. an additional adjustin~ journal entry for in ve ntory may he A ll owanLTS.
neede d in a m e rchandisin g company.
d. frc i ~ ht u1s ts arc debited tu Purchases .
b. closing journal e ntri es arc not required for a me rchandi sin g
company
5-34 CHAPTER 5 Accounting for Merchandise Operations

So lutions
1. c. Gross profit will result if net sales are greater than cost of
goods sold. The other choices are incorrect because (a) operating
expenses and net income are not used in the computation of gross
profit; (b) gross profit results when net sales are greater than cost of
good s so ld, not operating expenses; and (d) gross profit results when
net sales, not operating expenses, are greater than cost of goods sold.
2 . a. Under a perpetual inventory system, when a company pur-
chases goods for resale, purchases on account are debited to the
Inventory account, not (b) Purchases or (c) Purchase Returns and
Allowances. Choice (d) is incorrect because freight costs are also
debited to the Inventory account, not the Freight-Out account.
3. c. Both Sales Di sco unts and Sales Returns and Allowances nor-
mally have a debit balance. Choices (a) and (b) are both correct, but
(c) is the better answer. Choice (d) is incorrect as both (a) and (b) are
correct.
4. b . The full amount of NT$6,860 is paid within I 0 days of the pur-
chase (NT$7 ,500- NT$500)- [(NT$7,500- NT$500) x 2%]. The
other choices a re incorrect because (a) does not consider the discount
of NT$ 140; (c) the amount of the discou nt is based upon the amount
after the return is granted (NT$7,000 x 2%), not the amount before
the return of merchandise (NT$7,500 x 2%); and (d) does not consti-
tute payment in full on June 23.
5. c. The Cost of Goods Sold account normally appears in the ledger
of a merchandi s ing com pany using a perpetual inventory system.
The other choices are incorrect because (a) the Purchases account,
(b) the Freight-In account, and (d) the Purchase Di scounts account all
appear in the ledger of a merchandising company that uses a periodic *12. a. Beginning inventory (HK$600.000) + Cost of goods pur-
inventory system.
6 . c. Two journa l entries are necessary: one to record the receipt
o f cas h and sa les re ven ue , and one to record the cost of goods so ld (c) HK$3,300,000,
and reduction of in ventory. The other choices are incorrect because
(a ) o nly cons iders the recognition of the expense and ignores the
re venue. (b) on ly cons iders the recognition of revenue and leaves
o ut th e e x pense or cost of merchandi se sold, and (d) the receipt
o f cas h and s:1les revenu e, not red ucti on of inventory, are paired
together, and the cost of goods sold and red ucti o n or im·c11tory. not
sales revenue, are paired together.
7. a. An additional adjusting j ournal e ntry for in ve ntor) may be
needed in a merchandi si ng company to adjust for a ph y ~ ical in\·en-
tory count, but it is not needed for a se r vice company. The other
choices are incorrect beca use (b) closing j o urnal c ntric ~ and (L') a
post-closing trial balance are required for both types or u>nlp~tnics.
Choice (d) is incorrect because an inco me statement is required ti.1r
both a merchandi sing company and a service company.
8. d. An investing activities secti on appea rs on the statelllcnt of c tsh
flows, not on an income statement. Choices (a) gros s prot it. ( b l cost
of goods sold , and (c) a sa les sec tion are all features or an 1nco me
statement.
9. b. Gross profit == Net sa les (€400.000) - Cos t ur goods
sold (€3 10,000) == €90,000, not (a) €30.000. (c) €."1-HJ. ()( Hl. or
(d) €400,000.
*10. a. In a worksheet using a perpetual inventory sys tem. ln\'Cil -
tory is shown in the adjusted trial balance debit column and in the
statement of financial posi tion debit column. The other chuiL·cs arc
incorrect because the 1nventory account is not shown in the income
statement columns.
*11. d. In determining cost of goods so ld in a periodic sys tem.
freight-in is added to net purch ases. The o ther choices arc incotTcL·t
because (a) purchase discounts are deducted from purchases. not net
purchases; (b) freight-out is a cost of sales. not a cost of purL·hasc s:
and (c) purchase return s and allowances arc deducted from purd1a scs.
not net purchases.
chased (HK$3,800,000) - Ending inventory (HKS5 00.0()()J ==
Cost of goods sold (HK$3 ,900,000), not (b) HKSJ.700.000.
or (d) HK$4,200,000 .
*13. b. Purchases for resale are debited to the Purchases account.
The other choices are incorrect because (a) purchase s on acL·ount
are debited to Purchases, not Inventory ; (c) Purchase Returns ami
Allowances are always credited; and (d) freight costs arc debited tu
Freight-In, not Purchases.

Practice Brief Exercises

Compute th e missing a m o unts in 1. (LO 1) Presented below are the components in determining cost of goods sold for (a) Frazier
dete rmin ing cost of g o od s so ld. Hardware, (b) Todd Supplies, and (c) Abreu Beverages. Determine the mi ss ing a mounts.
Beginning Cost of Goods Ending Cost of
Inventory Purchases Available for Sale Inventory Goods Sold
a. £ 120,000 £ 150,000 ? ? £160.000
'I
b. £ 50,000 ? £ 125 ,000 £45 ,000
•I
c. ? £220,000 £330,000 £6 1,000

Soluti on
1. a. Cost of goods avail ab le for sale == £ 120,000 + £ 150,000 == £270.000
End ing inventory= £270,000 - £ 160,000 ==£I 10,000 .
b. Purch ases == £ 125 ,000 - £50,000 == £75 ,000
Cost of goods sold == £ 125 ,000- £45 ,000 == £80,000
c. Beg inning in ventory= £33 0,000 - £220,000 ==£ I I0,000
Cost of good s sold == £330,000 - £6 1,000 == £2o9 ,000
 Pract ice E ·ercises 5-35

2. (LO 2) Prepare the jnurnal entrie s to record th e fo ll o\\' ing transactions o n Ko\\'lonn Group's h ooks J ou n wli ::_c f>!l ·lws c 11 ns zcrions.
usin g a pe rpe tual in \·e nt ury system (anwunt s in th o usands).
a. O n March 2. Tntmn Equipme nt so ld :lr¥800.000 of m ~ rc h a ndis c to KO\\"Ioon. terms 2110.
nno.
b. O n M arc h 6. K, 1\\·lnn n return ed WI 00.000 nf the merd1andi se purchased n n March 2.
c. O n Marc h 12. Kmd <HHl paid the balance due to Tmo ro.

Solution
2. a. ln n : nt orv ~lltl.Ollll
Acco unh Payable ~00.000

b. AcT< Hlllt s Pa \'a hk I 00.000

lm·e ntory I 00.000
C. Ac count s Paya hk ( W ~ Ot).()()() - WltHl.tl()()) 700.000
lim:: ntory (W 700 .00ll X 2r; ) 1-UltlO
Cas h (W 7 0ll.OOO - W 1-UH\0\ 6~f>.OOO

3. (LO 4 ) Cab re ra E nterpri se has th e fnlllming accmtnt balances : Sales R ~n~ nu ~ €300 .000 . Sales Pn.:parc c !o.,·in ~ cnir ics.
Returns and A llowa nces € I 0 .000 . Cost nf Gnnds Sn ld € 17-LOOO. and Im·e ntor y €50.000. Prepar~ the
entries to record the clns ing nf the se item s to Income S ummary.

Solution

3. Sales Re ve nu e .-:.oo.ooo
Incom e Summar y .-:. oo.ono
Income S ummary 1 ~ -UlOO
C ost or G oods So ld 17-+.000
Sales Return s and A llo w~ ulc· c·s I 0 .000

4. (LO 5) Ass um e Yoan Company has th e fo llowing repo rted amounts: Sales reve nu e $400.000. Compll/c 11<'1 sales. gross t>n>fil.

Sales discounts $ 10.000. C ost nf goods sold $234.000. a nd Operating expenses $60 .000 . Co mpute inconre j i·o1n ope ra tion s. a nd g ross
pro/if rail' .
the foll ow in g: (a) net sa les. (b) gross profit. (c) income from operations . and (d) gros s prol1t rat e .
(Round to one d e cimal place .)

Solution

4. a. Net sales = $-HHJ.OOO - $ 10.000 = $ _NO.OOO

b. Gros s profit = $.\ lJO .OOO - $2.\ -+ .000 = $ 156.000
c. Incom e from operations= $ 156.000 - $60,000 = $96.000
d. Gross profit rat e = $ 156.000-:- $390.000 = 40%

Practice Exercises

1. (LO 2, 3) On Jun e I 0 . Yarce n Elec·tronics purchased ±:R.OOO of m e rchandi se on account from l'rep u r e [>tlldW S<' <111d s ui< '.' nllrin .
Ha rrah C ircuit s. FOB s hippin g point . te rms .\/1 0 . n/.1 0 . Yarce n pays the fre ig ht costs o f £400 on June
I I . Damaged good s tutalin g L\00 are return ed to Harrah for n ed it un Jun e 12. The fair valu e or th ese
good s is [70. On Jun L' 19 . Yare en pays Harrah in full. less the purchase di scount. Bnth L"l)!llpanies u s~
a pe r petu a l in ve ntur y sys te m .
5-36 CHAPTER 5 Accounting for Merchandis e Operations

Instructions
a. Prepare separate entries for each transaction on the books o f Vareen E lec tro ni c s.
b. Prepare separate entries for each transaction for Harrah Circuits. The mercha ndi se purcha ~ cd by
Vareen on June 10 had cost Harrah £4,800.

Solution
1. a.
Jun e 10 Inventory ~.000

Acco unts Payable X.OOO

11 Inventory 400
Cash -J()()

12 Accounts Payable 300

.1( )()
Inve ntory
19 Acco unts Payable (£8,000 - £300) 7 .700
Inventory (£7,700 x 3%) 2 .1 I
Cash (£7, 700 - £23 1) 7.-lhl)

b.
Jun e 10 Accounts Receivable 8.000
Sales Revenue X.000
10 Cost of Goods Sold 4 ,800
Inventory -1. XOO

12 Sales Return s an d Allowances 300

3 ()()
Accou nts Receivable
12 Inventory 70
Cost of Goods Sold 70
19 Cash (£7,700 - £231) 7 .46lJ
Sales Di scounts (£7,700 x 3%) 23 1
Accounts Receivable (£8,000 - £300) 7. 700

P repa re a n in com e statem en l. 2 . (LO 5} In its income statement for the year ended December 31, 2020, Sun Company Ltd. repo rt ed
the following condensed data.
Interest expense NT$ 70,000 Net sales NT$2.200.000
Operating expenses 725,000 Interest revenue 25.000
Cost of goods sold 1,300,000 Loss on di sposal of plant assets I 7.000

Instructions
Prepare an income statement.

Solution

2.

Sun Company Ltd.

Income Statement
For the Year Ended December 31, 2020
Net sales NT$2.200.!)()( J
Cost of goods sold I . J (HJ. 000
Gross profit L)( )( l.( )( )()

Operating expenses 7 25. ()()()

Income from operation s I 7 5 .< )( l()
Other income and expense
Interest revenue NT$25 ,000
Loss on disposal of plant assets X. ()()( l
I 7,000
7 ().( )( )()
Interest ex pense
Net in come NT'h 11 .\. f)()()
 Practice Problem 5-37

Practice Problem

(LO 5) The adju st..:J tri~d balance cn lumn s of Fa lcctto SpA' s worksheet for the year e nde d Dece mber P repare an inco m e sr rn 1011.

3 1,20 20. arc as fo lhl\\ S. (.-\11 ~lllHlun t s arc in euros. )

Debit Credit
Cash 1-L:'iOO :\ ccumulated Deprec iati on-
Acco unt s Rccci,·ablc 11.100 Equ ipment 18 .000
Inve ntory ~9.000 Note s Payab le :25.000
Pre paid In s uran ce 2.500 Acco unb Payable I 0 .600
Equipme nt 95.000 0\\·ner· s C 1pital 8 1.000
Owner's Dr<t\\·ing s 12 .000 Sa les RcYenuc 536. 800
Sales Return s and A ll m,·ances 6.700 Interest ReYenue 2.500
Sales Di scount s 5 .000 673 .900
Cost o r Goods So ld 3o., ...wo
Freight- O ut 7.600
Adve rti sing Ex pen se 12 .000
Salar ies a nd Wages E xpen se 56.000
Utiliti es Expe nse 1 ~.000
Re nt Expense 2-LOOO
Deprec iati on Ex pe nse l) .000
In surance Expe nse -L5 00
Interes t Expe nse 3.600
673.900

Instructions
Pre pare an incom e stat emen t for Fa k ettn SpA.

Solution

Falcetto SpA
Income Statement
For the Year Ended December 31, 2020

Sales
Sales reve nue €536J{00
Less : Sal es return s and allowances € 6 .700
Sales discounts 5.000 I 1.700
Net sa les 525.1 uo
Cost o f good s sold 36:1.-1-00
Gross profit 16 I . 700
Operating ex penses
Sal ari es and wages ex pe nse 56.000
Rent expe nse :2-1..000
Utilit ies ex pe nse I ~.000
Advertising ex pe nse 12 .000
De prec iation expe nse l). 000

Fre ight -o ut 7.600

In surance ex pe nsc -L500
Total operatin g ex pense s 1.\ I . I 00
In co me from ope ration s \0.600
Other in come and expe nse
lnt ereq reve nu e 2. :'\00
Int e rest ex pen sc .\.6[)()

Net in co me € 2LJ .)0()

5-38 CHAPTER 5 Accounting for Merchandise Operations

Note: Asterisked Questions, Exercises, and Problems relate to material in the appendices to the chapter.

Qu estion s

1. (a) " The steps in the accounting cycle for a merchandising com-
pany are different from the accounting cycle for a service company."
Do you agree or disagree ? (b) Is the measurement of net income for a
merchandising company conceptually the same as for a service com-
pany? Explain.
2. Why is the normal operating cycle for a merchandising company
likely to be longer than for a service company ?
3 . (a) How do the components of revenues and expenses
differ between merchandising and service companies? (b) Explain the
income measurement process in a merchandising company.
4. How does income measurement differ between a merchandising
and a service company?
5. When is cost of goods sold determined in a perpetual inventory
system?
6 . Distinguish between FOB shipping point and FOB destination.
Identify the freight term s that will result in a debit to Inventory by the
buyer and a debit to Freight-Out by the seller.
7 . Explain the meaning of the credit terms 2/10, n/30.
8. Goods costing £2,500 are purchased on account on July 15 with
c redit terms of 2/10, n/30 . On July 18, a £200 credit memo is received
from the s upplier for damaged goods. Give the journal entry on
July 24 to record payment of the balance due within the di scount
period us ing a perpetual inventory system.
9 . Karen Lloyd believes revenues from credit sales may be recorded
before they a re collected in cash. Do you agree? Explain.
10. (a) What is the primary source docume nt for recording (I) cash
sales , (2) c redit sales. (b) Using XXs for amounts, give the journal
e ntry for each of the tran sactions in part (a) .
11. A cred it sale is made on July 10 for €700, terms 2/10, n/30.
O n July 12. € I 00 of good s are returned for credit. Give the journal
entry on July 19 to record the receipt of the balance due within the
discount period.
12. Explain why the Inventory account will usuall y require adju~t­
ment at year-end.
13. Prepare the closing entries for th e Sal es Revenue account. assum-
ing a balance of € 180,000 and the Cost of Goods Sold account with a
€ 125,000 balance.
14. What merchandi sing account(s) will appear in th e po~t - closing
trial balance?
15. Regis Co. has net sa les of HK $ 1,090,000. cost or goods sold ur
HK$700,000, and operating expen ses of HK $23 0.000. What i~ its
gross profit and its gross profit rate ?
16. Kim Ho Company reports net sa les of ¥ROO.OOO. gross profit
of ¥570,000, and net income of ¥240 ,000. What arc its operating
expenses?
17. Identify the di stinguishing features or an income statement for a
merchandising company.
18. Identify the section s of an income statement that relate to
(a) operating activities, and (b) non-operatin g activities.
*19. Indicate the columns of the worksheet in which
(a) inventory and (b) cost of goods sold will be s hown using a per-
petual inventory system.
*20. Identify the accounts that are added to or deducted from Purcha~L- ~
to determine the cost of goods purchased using a periodic in,·cntory
system. For each account, indicate whether it is added or deducted.
*21. Goods costing NT$60,000 are purchased on account on .Jul y 15
with credit terms of 2/ l 0, n/30. On July 18 , a NT$o ,OOO crcd it was
received from the supplier for damaged goods. Give th e journal e ntry
on July 24 to record payment of the balance due within the discount
period, ass uming a periodic inventory system.

Brief Exercises

Comp11te missing a m ounts in BES.l (LO 1) Presented below are the components in Cl earwater Pool s' income statement. Determine
dete rminin g n e t incom e . the mi ss ing amounts.

Sales Cost of Gross Operating Net

Revenue Goods Sold Profit Expenses Income
a. £78,000 ? £30,000 ? £1<UHHl
b. £108 ,000 £55,000 ? 'l £2LJ,5()()
•)
c. ? £83 ,900 £79 ,600 £39,500

./(}f{ l"/10/ i ;:e eerpel!wl i fl\ >entnrv BE5.2 (LO 2, 3) Giovanni Leather Goods buys merchandi se on account from Gordon Tannery. The "L'II -
e ntrie.\. ing price of the goods is €780, and the cost of the goods is €560. Both companies u~c perpetual 111\L' ll -
tory systems. Journali ze the transaction on the book s of both companies.

.lr! llnlfili-: e 10 / 1'.1 trr/1/SU<"t irm s . · to record the followin g tran sacuons
BES •3 ( LO 3) Prepare the journa I entnes · o 11 Bcn,..,on l .ld .·-, h""'",.'
us ing a perpetual in ventory system .
a. On March 2, Benson sold £800,000 o f· merchand1·se on account to Ed-: ge b.1oo k Compan y. tcrnh· -.., / 1tl .
n/30. The cost of the merchandi se sold was £620,000.
 Brief Exercises 5-39

b. On March 6. EJgebruok rcturneJ .l l20.000 of th e merc handise purchased nn March 2. The cnq nf
th e returned merchandi se \\·a s ilJO.OOO.
c. On March 12. Ben~on reL·e in:d the balance due from Edgebrollk.

BE5.4 (LO 2) From the informati on in BE5 .3. prepare the jnurnal entries to record these transactions nn
Edgebrook Co mpan y ·s hnok s under~~ perpetual inYentory system.

BES.S (LO 4 ) At ye ar-end. th e pnpetual inYentory record s of Federer Spnrts sllll\\·ed merchandise Pn'{](Jrc ac_~iusTing t'IHryJ(>r
in ve ntory o f C HFWUJOU . T he ulntpany determined. howe\·er. that its actua l inYentory nn hand \\·as 1n cr ·han list · in l·c ·nro r , ·.
CHF96. l 00. Record the IIL'L·ess~ 1ry ~tdjusting entry.

BE5.6 (LO 4) O rl aida Bath Salts ha~ the fn ll owing accnunt balances: Sales ReYenue € llJ2.000. Saks
D iscounts €2.000. Cos t 11f Goods SP ILl € l 05.000. and lll\L'IItory €-W.OOO. Prepare the entries tn record
the clos ing uf these item s to ln u1me Summary.

BE5 .7 (LO 5) Yangtze Canoes pnn ide s the fPlll1\\ ing infurmatitlll for the mPnth ended Ocwber 3 1. Prepare · s ale_, .'c 'ction c~{ incolllC
2020 (amnunts in Chinese yuan): sales 11n credi t Y2SO.OOO. cash sales¥ l OO.llllO. sales discounts ¥5.000. Sitlh 'lllt. ' lli.

sales return s and al lm\·ances Y22.000. Prepare tilL' sa le s seL·ti\lll uf the incume statement based nn this
information.

l
BE5.8 (LO 5) 1ti@ta'\1 Explai n \\·here each nf tilL' follo\\·ing items \nn tld appear nn an incnme state- Lxplain prcsentcuio n in clll i llCO!llt"
me nt: (a) gain nn sale n f equ ipm ent. (h) interL'S t expense . (c) casua lt y loss from Yandalism. (d) cnst of S lcl!c'll!Cilf.

goods sold. and (c) deprL·ciation expense.

BE5 .9 (LO 5) Ass ume Jpse FPuds has the ful hm i ng repurted amnunts : Sales re\ en ue €506.000. Sales ('ollifJtlle nc1 :•;u ft_·s. grv ss pn.~fir. incolllt. .

returns and a ll owances € 13.000. Cost of gouds so ld €3-1-2.000. Operating expenses € ll 0.000. Compute J i cnn Ofll' rtaio ns. and gross f'n ~tir rate ·.

the following: (a) net sales. (hl grPss pmlit. (c) income fromuperation s. and (d) gross prolit ra te. (Round
to one decimal place.)

* BES . IO (LO 6) Presented helmv is the fnrmat nf the \\nrksheet presented in Ap pendix SA . /dcnri(Y H·orkslwn , ·o/umns j{1 r
st•lc ·c·fc 'cl clc·,·rJltlll.'.

Adjusted T.-ial Income Statement of

Trial Balance Adjustments Balance Statement Financial Position
Dr. I Cr. Dr. I Cr. Dr. I Cr. Dr. I C r. Dr. I Cr.

Indicate where the follo w ing it ems wil l appear on the \Vorksheet: (a) Cash. (h ) Inventory. (c) Sales re\-
enue, and (d) Cost of goods so ld.

Example:
Cash: Trial ba lance debit co lumn : Adjusted trial balance debit co lumn : and Statement of linancial posi-
ti on debit column.

* BES.II (LO 7 ) Assume that Kmvlnon E lectronics uses a periodic inventory system and has these account Co/JlfJUte ner tntn·huse .' t lllcl cost (~l
balances (in thousands): Purchases w-+30.000: Purchase Returns and Al lowances Wll .OOO: Purchase goods {Jttrcho sed.
Discounts W8.000: and Freight- In W 16.000. Determine net purchases and cost of goods p urchased.

* BE5.12 (LO 7 ) Assume the same information as in BE5 .11 ami also that Kowloon Electronics has begin - ( 'oll t{Jlfl l' c·ost (~{goods so lclund g rus .'
ning in ventory (in thousands) of W60.000. ending inventory of W86 .000, and ne t sales nf W680.000 . t'ro(ir .
Determin e th e amounts to be reported for cost of goods so ld and gross proht.

* BE5.13 (LO 7 ) Prepare the journal e ntri es to record these tran saction s tlll Huntington Kitd1 e n's books
usin g a pe riodic in ve ntor y system.
a. O n March 2. Huntington purchased t:YOO.OOO of merchandi se on aL·nlunt fwm Saunder Cabinet s .
terms 2/ l 0. n/30.
b. On March 6. Huntington returned l!S..J. .OOO ofthL' merL·handise purchased un Mard1 2.
c. On March 12. Huntington paid the halanCL' due til Sau nde r

* BE5.14 (LO 7 ) Ha ll Mu:-,ic ha,., the followin g ntcrd1andi se aL·L·ou 11t halanL·c,.,: SaiL' " RL'VL' IIll e $ 1SO.OOO. f>U ' f>OU ' f ·f fi\1/I ,L: (' 1/fl "lt "\ /Ill

Sa le:-, Di:-,counh $2.( Hl!l. Purc ha"c" $ 120.000. and Purchase" Retu1· n ~ and A IIP wancL'" $ .'0.000 . In 11/( "l"t -llciJ/dl\t cit t "tl /11/ / \

addition. it ha :-, a hegi nn111g ill\·cntory or $-1-0.0()() and an L'mling in ve ntor y ul $ ., 0.000 l'rL' parL' thL· L' lll ric'
{()record the clo,., ing or !hL'"L' i!L'nl ,., til ln L.OIIlL' Sllllllllal·) u,.,ing thL' J1L' I'iodiL· 111 \'Cn!or\ ,\,, IL' Ill .
5-40 CHAPTER 5 AccountingforMerchandiseOperations

Identify worksheet columns for selected * BE5.15 (LO 7) Presented below is the format of the worksheet us ing the periodic im·cn tory sys te m
accounts. presented in Appendix 5B .

Adjusted Trial Income Statement of

Trial Balance Adjustments Balance Statement Financial Pos ition
Dr. I Cr. Dr. I Cr. Dr. I Cr. Dr. I Cr. Dr. I Cr.

Indicate where the following items will appear on the worksheet: (a) Cas h. (b) Beg inning in ve ntory.
(c) Accounts payable, and (d) Endi ng inventory.

Example:
Cash: Trial balance debit column; Adj ustment trial balance debit column ; and Statement o f finan c ial
position debit column.

DO IT! Exercises

Answer gene ral questions about
merchandisers.
DO IT! 5.1 (LO 1) Indicate whether the fo llowing statements are true or fa lse. If fa lse, indicate how
to correct the statement.
1. A merchandising company reports gross profit but a service company does not.
2. Under a periodic inventory system, a company determines the cost of goods so ld each time a
sale occurs.
3. A service company is likely to use accounts receivable but a merchandising compan y is not
likely to do so.
4. Under a periodic inventory system, the cost of goods on hand at the beginning or the accounting
period plus the cost of goods purchased less the cost of goods on ha nd at the e nd or the account-
ing period equals cost of goods sold.

R eco rd transactions of purchasing
company.
Reco rd transactions of selling
company.
Prepare closing entries for a
merchandising company.
C lassify financial statem ent accounts.
DO IT ! 5 .2 (LO 2) On October 5, Lepik Flowers buys merchandi se on account from Tamm Gardens.
The selling price of the goods is €4,700, and the cost to Tamm is €3, I 00. On October 8. Lepik returns
defective goods with a selting price of €650 and a fair value of € 160. Record the transactions on the
books of Lepik.
DO IT ! 5 .3 (LO 3) Assume information similar to that in DO IT ! 5 . 2. That is: On October 5. Lepik
Flowers buys merchandise on account from Tamm Gardens. The sel lin g price of the goods is
€4,700, and the cost to Tamm is €3, 100. On October 8, Lepik returns defective go~ds wi th a
selling price of €650 and a fair value of € 160. Record the transactions on the books of Tam m .
DO IT ! 5.4 (LO 4) The trial balance of Alagoas's Boutique at December 3 1 shows l~ ventory
R$21 ,000, Sales Revenue R$156,000, Sales Returns and Allowances R$4 , 100, Sa les Discounts
R$3 ,000, Cost of Goods Sold R$92,400, Interest Revenue R$3,000, Freight-Out R$2,200. Utili-
ties Expense R$7,400, and Salaries and Wages Expense R$ 19,500. Prepare the closin g entries li.w
Alagoas for these accounts.
DO IT ! 5 .5 (LO 5) Dorothea Publications is preparing its income statement, owner's equ ity statement.
and class ified statement of financial position. Using the column headings Account. Financw/ Stwe -
ment, and Classification, indicate in which financial statement and under what c lass ification each nf
the following would be reported.

Account Financial Statement C lassificatio n

Accounts Payable
Accou nts Receivable
Accumulated Depreciation-Buildings
Cash
Casualty Loss from Vandali sm
Cost of Goods Sold
Depreciation Ex pense
Equipment
 Exercises 5-41

Account Financial Statement Classification

Fre ight-Out
Insura nce Ex pen ~ c
Interest Payable
Inventory
Land
Notes Payable (d ue in 5 yea rs)
Owner"s Cap ital
Owner" s Drawings
Property Taxes Payable
Salaries and \.Yagcs Expen~e
Salaries and Wages Payable
Sales Return s and A lhm·anccs
Sales Revenue
Unearned Re nt ReYenue
Utilities Expense

Exercises

E5. l (LO 1) Mr. Soukup has prepared the foliO\\ ing li st of statemcnts about sen·icc L'O mpani e~ and A nsH ·cr general qut·sTions ahou T
merchandisers. Jll l' rc-llllll (ii st ' rs.

1. Measuring ne t income for a merchandi ser is cnnceptually the samc as for a scn·ice company.
2. For a me rchandiser. sales less operating expenses is called gross prolit.
3. For a merchandiser. the primary source of re,·e nues is the sale of inventory.
4. Sales salaries and wagcs is an example of an operating ex pense.
5. The operating cycle of a merchandiser is thc same as that of a service company.
6. In a perpetual in vcntnry system. no detailed inventory ren1rds of goods on hand arc maintained.
7. In a periodic in ve ntor y system. the cost of gouds sold is determined onl y at the e nd of the account-
ing period.
8. A periodic inventory system providcs better control over inventories than a perpetual system .

Instructions
Ide ntify each sta tement as true or false. If fals e . indicat e how to correct the state me nt.

E5.2 (LO 2 ) Information relatcd to Dully Yachts is prese nted below. Jounwli:.<' rmn-11<1 .\ l ' Tr<III.\CTO ion s.

l. On April 5, purchased merchandi se on account from Thomas Nautical Supply lor £25.000. term s
2/ l 0, net!](), FOB shipping point.
2. On April 6 , paid freight costs of £900 on merchandise purchased from Thomas.
3. On April 7. purchased e quipment on account for {26.000.
4. On April X. re turne d damaged merchandise to Thomas and was granted a £2.600 credit for return e d
me rchandise.
5. On April 15. paid the amount due to Thomas in full.

Instructions
a. Pre pare th e journal e ntries to record these transaction s on the hook s of Dulfy under a perpe tual
inventory system.
h. Assume that Dully paid the balance due to Thomas on May -+ in stead of f\pril 15 . PrcparL' the jour-
na l e ntr y to reulrd thi, payment.
5-42 CHAPTER 5 Accounting for Merchandise Operations
Journalize perpetual inventory
entries.
Prepare purchase and sales entries.
l o urnali::e sales transactions.
Prepare sales sect ion a nd c losing
e ntnes.
fJrepore udiu sting and closing entries.
E5.3 (LO 2 , 3) On September l , Moreau Office Supply had an inve nt ory or 30 calcu Ia tor.~ at a cos t or
€22 each. The company uses a perpetual inventory system. During September. the fo ii(J\\ in ~ transac-
tions occurred.
Sept. 6 Purchased with cash 90 calculators at €20 each from Rau x E lec tronics.
9 Paid freight of € 180 on calcu lators purchased from Raux .
10 Returned 3 calculators to Raux for €66 cash (incl udin g freight) becau se they did not
meet specifications.
12 Sold 28 calcu lators costing €22 (including freight) for €33 each on accm111 t tu
Village Book Store, terms n/30.
14 Granted credit of€33 to Village Book Store for the return or one calculatur th:tt ,,·as
not ordered.
20 Sold 40 calcul ators costing €22 for €35 each on acco unt to Holiday Ca rd Sh(1p.
terms n/30.
Instructions
Journalize the September transaction s.
E 5.4 (LO 2, 3) On June 10, York Gifts purchased £7 ,600 of merchandise from Bianchi Designs. FOB
shipping point, terms 2/10, n/30. York pays the freight costs of £400 on June II. Dama~ed ~uods
totaling £300 are returned to Bianchi for credit on Jun e 12. The fair value or th ese goods is 1::70. On
June 19, York pays Bianchi in fu ll , less the purchase di scount. Both companies usc a perpe tu a l tnYcn -
tory system.
Instructions
a. Prepare separate en tries for each tran saction on the books of York.
b. Prepare separate entries for each transaction for Bianchi . The merchandise purcha sed hy York on
June 10 had cost Bianchi £4,300.
E S.S (LO 3) Presented below are transaction s related to Li Gourmet.
1. On Decem ber 3, Li sold HK$580,000 of merch andi se on account to South China Ltd· term s I I I 0 .
n/30, FOB shipping point. The cost of the merchandi se sold was HK $364.R 00.
2. On December 8, South China was granted an allowance of HK$28,000 for merchandise PLirL·h:t scd
on December 3.
3. On December 13 , Li received the balance due from South Ch in a.
Instructions
a . Prepare the journal entries to record these transactions on the books of Li, using a pe rpe tual itwcn -
tory system .
b. Assume that Li received the balance due from South China on January 2 or the following
year instead of December 13. Prepare the journal entry to record the receipt of payment nn
January 2.
E5.6 (LO 4, 5) The adjusted trial balance of Mendoza Auto Suppl y shows the fo ll owing data pertain in~ Ill
sales at the end of its fi scal year October 3 1,2020: Sales Revenue €820,000, Freight-Out € 1fl.OOo. Sales
Return and Allowances €28,000, and Sales Discounts € 13,000.
Instructions
a. Prepare the sales section of the income statement.
b. Prepare separate closing entries for (I) sa les, and (2) the contra accounts to sa les.
E5.7 (LO 4) Hezir Creations had the followin g account balances at year-e nd: C o st ~ 1 r Co()ds Sllid
t60,000, inventory t I 5,000, Operating Expen ses 1129,000, Sa les Revenu e t I 17.000. Sales Di sc( llltlt s
t I ,300, and Sa les Return s and Allowances t I,700. A physica l count of inventory detcrm i nc s t h<tt tlln-
chandi se inventory on hand is t 14,200.
Instructions
a. Prepare the adjusting entry necessary as a result of the physica l count.
b. Prepare clos in g entries.
 E. ercises 5-43

E5.8 (LO 4) Pre ~e nted heltm· i ~ inform a ti o n related to Poulsen l ndu s tri e~ for the month of J a nuary 2020.

Endin g in\·e nt or) p e r l n ~ urance expe nse € 12.000

perpetual re cu rd ~ € 2 I .flOO Rent expense 20.000
Endin g inn: nt u ry aL·tua ll) Sa laries a nd \\·ages ex pen se .) L) .000
on hand 2 I .000 Sales d isL·ounts ~. 000
Co~ ! uf guod~ :--o ld 20~.0l)l) Sak s relllrn s and allo\\·ance s 13.000
Frc ight -u ut 7.000 Sa le s re\.L' IHie 3 7 ~ .Ollll

Instructions
a. Prepare the ne ces~a r y ~1dju ~ tin g L'ntry f,ll. in\·enltll'Y.
b. Prepare the nL-ce~~ary clu ~ in g entrie s .

E5.9 (LO 5) Pre~enlL'Li bcluw is infunnatiun fur Bal'i1 C htll'l>latiers for the mnnth oft\ larch 2020.
C ust uf guud s ~ uld l2 I 2.000 RL·nt eXpL~ n s e l 3 2.000
Fre ight-uut l) .000 Sales di ~ Ullllll ~ 7 .-H>O
In surance e xpen se 7.lHHl Sales return ~ and allllwance s I 3.000
Salarie s and wage ~ ex p en~L' 5~ . ()()0 Sa les re\·L·nue 3SO.OOO
Other comprl'11en s i \ ·e i nnHn e 2.200

Instructions
a. Prepare an income statcment.
b. Prepare a comprehen ~ i\·e income statement.
c. Co mput e th e gros s prul it rate.

ES. JO (LO 5) In it s incume stateme nt for the Year e nded December 3 1. 2020. M an c ini F ilm s rcpllrted Pn. '{Jcl r l' a n incollh ' .' Tlllt '/Jlt ' llf.

th e following cunden sed data.

Operating expense s € 725.000 IntL're~l reYenu e € 33.000

C o st of good s su ld I . 256.000 Loss llll di ~p osall1f plant assets I 7.000
Inte rest expen se 70.000 Net s ale ~ 2.200.000
Other com pre hen si Yc inco me ~uoo

Instructions
a. Pre pare an income ~ tatem e nt.
b. Prepare a comprehensiYe incomL' stat e ment.

ES. ll ( LO 2, 3 ) A n in ex pe rienced accountant for Z oeng Ce rami cs made th e to llm\·ing e rrors in re L·ord- Pn 'flllrl' ( ·o iTt' c·Ti ll .':..! Cllfr i c'.' _l(u· _,edt'.'
llllllfillr<-11<1 .' <'.' ·
in g m e rc hamli s ing tran sactions.
I. A H K $ 1. 750 refund to a customer fo r fau lty merchandi se was debited to Sales Revenue H K $ I .7 50
a nd credite d to Cas h HK $ 1.75 0.
2. A HK$ 1.400 cre dit purchase or supp li es was debited to In ve ntory HK$ 1.-J.OO and credited to Cash
HK$ 1.400.
3. A HK $2. 150 sales di scuunt was debited to Sa le s Re ve nue .
4. A cash payment of HK$200 for fre i!!ht un me rc handi se purcha se ~ wa~ debited to Fre ig ht -Out
HK$2.000 and credit~:d to C as h HK $ 2~000.

Instructions
Prepa re se parate currecting e ntrie s l(n ~: al'il errur. assuming that the inL'lliTCCt entry is nut reversed . (O mit
ex p lanat io ns.)

E5. 12 (LO 5) Financial Statement 1n 2020. Endca w r Ca meras had nl:l sa le ~ of U\60.000 and eust uf
good s so ld of Ci 3 .~.200 . Opnating cx pen ~e~ wne 1:221 .000. ami interc~ t e x pe n ~c w a ~ l 7.000.

In structions
a. Comp ut ~: 1-:lllka\ · L·r ·~ g ru ~~ prulit .
h. C omputL' th ~: ~ r" " prutit ratL·. \Vh \ i ~ thi ~ ra tL· L.O lllJlll ted h: tin ~ III C ial ~l<I l L' lli L'lll u ~u<'
5-44 CHAPTER 5 Accounting for Merchandise Operations

c. What is Endeaver's income from operations and net income?

d. In what section of its classified statement of financial pos iti on sho uld End eave r report m e rc h a ndi se
inventory?

Compute m issing a m o wus and E 5.13 (LO 5) Presented below is financi al information for two diffe re nt companies (a mount s in
compute g ross profit rate. thou sands).

Natasha Shoes Boris Footwcat·

Sales revenue py694,000 (d)
Sales returns (a) py6 5 .000
Net sales 80,000 98.000
Cost of goods sold 56,000 (e)
Gross profit (b ) 37 .500
Operating expenses 12,000 (f)
Net income (c) I 5 .000

Instructions
a. Determine the missing amounts.
b. Determine the gross profit rates. (Round to one decimal place.)

Compute missin g a mounts. E 5.14 (LO 5) Financial information is presented below for three differe nt companies.

Athena Harry Panatna

Cosmetics Grocery Wholesalers
Sales revenue €90,000 € (e) € I 22. 000
Sales return s and allowances (a) 5,000 I 2.000
Net sales 86,000 95 ,000 ( i)
Cost of goods sold 56,000 (f) ( j)
Gross profit (b) 22,000 24.000
Operating expenses 15 ,000 (g) I X.000
Income from operations (c) (h) (k)
Other income and expense (4,000) (3,000 ) (I l
Net income (d) 11 ,000 5 .000

Instructions
Determine the mi ssing amounts.

Comple te H·o rks h eet.for selected '~ E 5.15 (LO 6) The following are selected accounts for Feisal Pet Supply as re ported in the worksheet at
accoun ts.
the end of May 2020.

Adjusted Income Statement of

Accounts Trial Balance Statement Financial Position
Dr. Cr. Dr. Cr. Dr. C r.
-- --
Cash 9,000
Inventory 76,000
Sales Revenue 460,000
Sales Return s and Allowances 10,000
Sales Di scou nts 9,000
Cost of Goods Sold 288,000

Instructions
Co mplete the worksheet by ex tending amounts reported in the adjusted tri a l balance to th e a ppropria!L'
column s in the work sheet. Do not total indi vidual co lumn s.
 Exe rc is e s 5 -4 5

''' ES.J 6 (LO 6) The tri a l ha la nn: cn lumns of the \\'nrks heet for Barb o~ a Appare l at June 30. 2020 . arc as
follo ws.

Barbosa Apparel
\Yorksheet
For the i\ lonth E nd ed .June JO. 2020
Trial Balance
Account Titles Debit Credit
ca~ h 2.! 20
AL-cn unt s ReL·e iYahk 2.7-W
Im·etllorY 11.6-+0
Acco unt s Payabk I. I 20
0\\' ner· s Cap it al -+.000
Sa le s Rcn: nu e -+2 .~00
Cost of Good s Sn ld 20.560
Ope ra ting Ex pen ses I O.S60
-+ 7.9 20 -+7 .920

Other da ta:

Ope ra tin g ex pen ses inntrred nn account. b ut IH11 ye t recorded . total RS 1.6-+0.

Instructions
Enter the tri a l balanc e o n a \\'ll rk sheet and complete the \\·orkshcet.

* E5. 17 (LO 7 ) The trial ba lance of B iju Medica l Supplie s at the end o f it s li~ca l year. A ugus t 3 1. 2020 .
includes these acco unt s (amo unt s in thou sand s) : In ve ntory Rp 17.200: Purchases Rp 149 .000: Sales
Reve nue Rp 190.000: Freigh t- In Rp5 .lHlO: Sales Retur ns and All o\\'ance s Rp3.000 : F reight- Out Rp 1.000:
and Purchase Rt.:turn s and A llm\·a nces Rp6.200 . The ending inYentor y is Rp 16.000.

Instructions
Prepare a co st of goods so ld se c ti o n for the year ending August 3 1 (period ic inve ntory).

'~ E5 . 18 (LO 7) On J a nu ar y 1. 2020 . Scott E nt erpr ises in\·e nt ory of ±:50.000. A t Decembe r 3 1. 2020. Scott Co lllf'llll' \·a r io u s ilh' O II ll' sraiC II ll'l lf

i fl ' / 11.\.
had the fo ll owi ng ac count balance s .

Freight-in t: -+ .000
Purchases 509.000
Purchase disco unt s 6.000
Purchase re tu rns and a ll owances 8.000
Sa les reve nue 840.000
Sa les di sco unt s 7.000
Sal es re tur ns a nd a ll owances 11 .000

At Dece mbe r 3 1. 2020. Scott dete rmine s that it s e nding in Yen tor y is £60.000 .

Instruct i ons
a. Co mpute Scott' s 20 20 gross p ro fit.
b. C ompute Scott 's 20 20 operatin g ex pen ses if net inco me i ~ £ 130.000 ami the re a rc no non-ope ratin g
ac ti v iti e s .

* E5. 19 (LO 7 ) Be low is a se ries of cost o f goods sold sect inns f(Jr companies A lpha. Beta. C hi . <Uld Decca. (.Oil i{ JIIff' flli .\ Sing U11 10 IIIll .\ f(n · 1' (1\/ f ~/
f!.oods sold 'ection
Alp ha Beta C hi Decca
Be g inn in g in ve ntor y € 165 € 70 € I .000 € Ul
Purch ases 1.620 1.060 (g) -+3 .8 10
Purchase return ~ a nd a l!llw atll' c~ -+0 (d) .?.YO (k )
Ne t purc h ase~ (al 1.0 .1 0 6.2 I 0 -+ I .OLJO
F re ig ht -in l)_'i (L' ) ( h) 2. 2-+0
Cost or good s purl'lla SL'd (h l i. .?.XO 7 .LJ-+0 (\)

Co ~ t o r g o(ld ~ ~ 1\ai l a hk fur ~aiL- I . X-+0 I ..~5 0 til _fL) , _'i I (}

End in g in ve ntor ~ .I I() ( l'l I .-l .'i O 6 .2 .\ 0
Cost o r g<Hllb ' <l id ( L') I . .2h0 7 _-+L) () -+ .l ..l t )()
5-46 CHAPTER 5 Accounting fo r Merchandise Operations

Instru ctions
Fill in the lettered bl anks to compl ete the cost of goods so ld secti o ns.

J ourna lize pu rchase Tran sa ction s.
* E 5.20 (LO 7) Thi s inform ati on relates to Ol af Decor.
1. On April 5 , purchased merchandi se on acco unt fro m De Vito Gro up fi1r € I X.OOO . t er m ~ 21 I 0. nc t/ JO .
FOB shipping point.
2. On April 6, paid fre ight costs of € 820 on merchandi se purchased fro m De V i to .
3. On A pril 7, purchased equipment on account fo r €30,000.
4. On April 8, returned some of AprilS merchandi se, whi ch cost €2 ,800. to DeV ito.
5. On April 15 , paid the amount due to DeVito in f ull.

Instructions
a. Pre pare the j ourn al entri es to record these transacti o ns o n the books of O laf us in g a pe riodi c in\·e n-
to ry syste m.
b. Ass ume th at Ol af paid the balance due to DeVito on M ay 4 in s tead o f Ap ri I I 5 . P re pare the j o urn a l
entry to record thi s pay ment.

J ourna lize purchase tra nsa ctions.
* E 5.21 (LO 7) Presented below is informati on related to C hil ean Indu stri es.
1. On April 5, purchased merchandi se on account fro m G rah am Ltd . fo r £ 17 ,400. t e rm ~ 21 I 0. nct!J O.
FOB shipping poi nt.
2. O n A pril 6, paid freight costs of £800 on merchandi se purchased from G raham .
3 . On April 7 , purchased equipment on account from Reed M a nufac turin g fo r £ 27 .000.
4. On A pril 8, returned merchandi se, which cost £4,000, to G raham .
5. On April 15, paid the amount due to Graham in full.

Instructions
a. Pre pare the journal entries to record these transactions on th e boo ks o f C hi le an lndu s t ri e s u ~ i ng a
periodi c inventory system.
b. Ass ume that C hil ean Industri es paid the balance due to G raham o n M ay 4 in s te ad o f A pri I I.'\ .
P re pare the journ al entry to record thi s pay ment.

Camp /e re worksh eer. * E5.22 (LO 7) Presented below are selected acco unts for Midl er Sto res as re porte d in th e w orks he et at th e
end of M ay 2020. End ing inventory is $75 ,000.

Adjusted Income Statement of

Accounts Trial Balance Statement Financial Position
Dr. C r. Dr. C r. Dr. C r.
-- --
Cash 9,000
Inve ntory 80,000
Purchases 240,000
Purchase Return s and Allowances 30,000
Sales Reve nue 450,000
Sa les Return s and Allowances 10,000
Sales Di sco un ts 5,000
Re nt Expense 42,000

Instructions
Com pl ete the wo rksheet by ex tend ing amounts reported in the adju s ted trial ha la nc e to th e apprllpriatc
colu m ns in the wo rks heet. The company uses the periodi c inve ntory syste m .

Pro b[e m s

.lo 11 r nulf :- r t n t n ·hll'f' rind ' rtl e .\ P5.1 (LO 2, 3) Ready-Set-Go distributes suitcases to reta il sto res and exte nd " creuit t c r111 ~ <l i" I l l tl . 11 / <tl
t rUII\flt /tt l /1 \ undt'r u f >l"'r('t' f t utl to all of its c ustomers. At the end o f June, Read y-Set-G o' s in ve ntor y co ns i<,te d or -. u i tL·<t-. e-. u l'- 1111 _!-:
1111 ' f ' l/l u r \ ' \ \l t ' lll
£ I .200. Dur ing the month of July, th e foll ow in g merc han di sin g tran,ac tion:-, ' lcc u rrc d ·
 Problems 5-47

Jul y Purcha ~ ed ~ uitL· a ~ L· ~ on :tCL'llUlll fort: 1.620 frnm Trunk~ lanufacturer:o;. FOB d<:::-;tination .
term ~ 2110. n/3 0. T ilL' appropriate pa rty abo made a ca:-; h paymenl tlf £ 1 on
for frei~hl Oil
thi~ dat e.
3 Sl> ld ~ uilcl ~ L·~ un aL·L·uunl lll Satchel \\'urld fllr t:2 .200 . The L'\l:o;l llf :-; uitca:o;e :-; :-;n ld wa:-;
L l .400.
9 Paid T runk Ma nufaL· turer' in full.
12 Rece i, ·ed payment in full from Satchel \\'orkl.
17 So ld s uit ca ~e s llll ~IL'cuun l lll Lady G l'Gl1 for L l .400. The custof the s uitca:o;e:-; sold ,,·as
t:l .<l30.
1!) P urc h<l ~ ed ~u il L' ~I Se ' llll acnHllll fllr L l .90ll rrum Huliday ~ lanufa c turers . FOB s hippin ~
poi nl. term~ 1I 10. n/.'\ ll. The appn,pri~t l e party abl1 m adL' a cas h payment of£ 125 for frL·ight
on lhi~ dale .
20 Rece i\ed L.'OO credit ( induding freight ) fur su it L·ases retur ned to Holiday
Ma nufac ture rs.
21 Recei,·ed paytllL'lll in full fmm Lad) GuGll .
22 So ld s uil e<lse, ll ll aL'L'O Unl [(l \ '~tgahll lld fllr t:2 .4ll0. The CllSl u r "u it ca ses S\l ld \\·a,; t 1.350.
30 Paid Holiday Ma nufaL· ture r~ in fu ll.
31 Gra nt ed Vagahu nd t:200 credi t fl1r s uilctses returned Ct1 s lin~ t: 120 .

Ready-Set-Go's c han of ac coun ts inc lude s the flllltl\\· in~: l\l1. 101 Cash. No. 112 A.L·co unt s RecL' i,·abk .
No . 120 li we nlory. N u . 20 1 r\ccuunts Pa\abk. ~o. -1-(l 1 SaiL's RL' \e nue . No. -1-12 Sa k s Return :-; and
A ll owa nc es. No. 4 14 S aiL' s D isco unt :-;. and -No. 505 Cusl of GllOds Su lci .

Instructions
Jm trn a li ;.e the tra nsac tion s fur the mu nth o f Jul y 1\1r Ready-Set - Go u s in~ a perpetu a l in \e nt ury system.

P5 .2 (LO 2 , 3 , 5) Vree Distrihuturs cl1 mpkted th e fu lhl\\·ing merc handising tran sac ti o ns in the month ./OIII'IIil fi : c . f>OSi . lllld f>l'<'f'<ll't'

o f A pril. A t th e beg innin g o f Ap ril. the ledger tlf VrL'e shum.:d Cas h of €R.OOO and O,,· n er'~ Cap ital of c1 p arlial in<·olnt · STclfcnit·lil.

€8,000.

Apr. 2 Purchased me rch and ise un account fmm \), 'alker Supply € 6.200. terms 1110. n/30.
4 So ld merchandi se Oil aCL'lllllll €5 .500. FOB desl in atiu n. ter m s 1/10. nno. T ilL' COSlllf th e
m e rchandi se su ld \\'as €.\.400.
5 Pa id €240 fre ig ht o n April 4 sak.
6 Received credi t from Walker Supp ly for me rd1andise ret urn ed €500.
II Paid Wa lker Suppl y in full. kss discuunl.
13 Received co llect ion s in full. k ss di sL'\lU ll h. from c u:o; tom e rs bilkd o n Apr il -L
14 Purchased merchandise !tlr cas h €3 .ROO.
16 Received refund from su ppli er for re turned gom!s on L·as h purchase l1 f
A pri 1 14. €500 .
IR Purchased merc handi se from Benjam in G lass \\ are €-1-.500. FOB shippin g point.
te rm s 2/ 10. n/.\0.
20 Paid freight o n Apr il 1X purchase € 160 .
23 So ld m erc ha ndi se for cash €7..+00. The merdwnd ise so ld had a cost uf € 4 . 120.
26 Purchased me rc hand ise fur cas h €2 . .\00.
27 Paid Benjamin Glass wa re in full. k ss disL·ounl.
2l) Mad e refund s to cash c uslu m e rs for defective merc handi se €LJO. The re turn e d m e rc ha ndi se
h ad a fair va lu e o r €.\0 .
.\0 So ld m erc handi se o n aL·nn tnl €.\.400 . terms n/ 30. The cosl of th e me rc ha ndi se so ld wa~
€ I .LJOO
Vree' s c ha rt of account s include s the fo llmvi n~ : No . 101 C as h . No . 112 Acc\l unl s Reccivah lc. No.
120 In ve ntor y. No. 20 1 Acco unt s Payable . No . .~ II Ow ner' s Ca pital. No. 401 Sale s Revenue. No. 412
Sales Re turn s and A ll owa nces . No . 4 14 Sa le s Disn>ll lll S. No . ."iO."i Co~ ! o f Good~ Sold. and Nll . 644
Freig ht -O ut .

Instructions
a . Jou rnali ;e th e lran s al'lion ~ u ~ in g a pc rpL'!u a l in vc nl ll ry ~ ys lclll .
h. En te r !he hc ~ inni n )! l·as h and ll\\'Jl l'r·, capita l b<ilanCL''· and jlll~ l the tran , aL· tiun ~ . ( l 1 ~ L' .II fur lllL'
journ a l rekrL' nl'L' . I
c. P re pare li1L' inL'l>nlL' 'Llk lll e lll !llrllU )! h g n '' ' Jll'l l!i l ror !il L' llllln!h ur A pril 2!1 20 . c. Gro ss pro f it €6.765
 5-48 C HA PTE R 5 Accounting for Merchandise Operations

Prepare financ ia l sratem enrs and P5.3 (LO 4, 5) Starz Department Store is located near the Towne Shopping Ma ll. A t th e end of th e
adjusting and closing entries.
company 's calendar year on December 31 , 2020, the following accounts appeared in two or it s tri a l
balances.

Unadjusted Adjusted Unadjusted Adjusted

Accounts Payable £ 76,300 £ 77 ,300 Inventory £ 75.000 l 75.000
Accounts Receivable 50,300 50,300 Mortgage Payable 80.000 80 .000
Acc umul a ted Depr.-Buildings 42,100 52,500 Owner's Capital 176.600 176.600
Accumulated De pr.-Equipment 29,600 42,700 Owner's Drawings 24. 000 2-UJOO
Buildings 290,000 290,000 Prepaid Insurance 9.600 2.-100
Cash 23 ,800 23 ,800 Property Tax Expense -1. xoo
Cost of Good s Sold 412,700 412,700 Property Taxes Payable -1 .800
De preci a tion Expen se 23,500 Sal aries and Wages Expen se I 05 .000 I 05.000
Equipment 110,000 110,000 Sales Commissions Expense 10.200 1-1. 500
In sura nce Expen se 7,200 Sales Commi ssions Payable -1.300
Interes t Expense 3,000 8,100 Sales Returns and Allowances 8, 000 x.nno
Interes t Payable 5, 100 Sales Revenue 724,000 7 2-1 .000
Inte rest Revenue 4,000 4,000 Utilities Expen se I 1.000 I 2.000

Instructions
a. Net income £132 ,200 a. Prepare an income statement, an owner's equity statement, and a classified s tat e ment o r financial
Owner's Cap ital £284,800 position. £ 16,000 of the mortgage payable is due for payment next year.
Total assets £456,300
b. Journali ze the adjusting entries that were made.
c. Journali ze the closing entries that are necessary.
Journalize. post, and prepare a Lrial P5.4 (LO 2, 3, 4) J. Zheng, a former professional tenni s star, operates Zheng 's Tennis Shop at th e Yalung
balance.
River Resort. At the beginning of the current season, the ledger of Zhen g's Tenni s Shop showed C as h
¥2,200, Inventory ¥ 1,800, and Owner's Capital ¥4,000. The following tra nsac tion s we re cu rnpletecl
during April.

Apr. 4 Purchased racquets and balls from Jay-Mac Ltd. ¥760, FOB shipping point. te rm s 2/ I 0. n/.30 .
6 Paid freight on purchase from Jay-M ac ¥40.
8 Sold merchandi se to members ¥ 1, I 50, terms n/30 . The merchandise so ld had a cost
of¥790.
10 Received credit of¥60 from Jay-Mac for a racquet that was returned.
II Purchased tenni s shoes from Li Sports for cash, ¥420 .
13 Paid Jay-Mac in fu ll.
14 Purchased tennis shirts and shorts from Everett Sportswear ¥800, FOB shippin g point. te rm s
3110, n/60.
15 Rece ived cash refund of¥50 from Li Sports for damaged merchandi se that was returned.
17 Paid freight on Everett Sportswear purchase ¥30.
18 Sold merchandi se to members ¥980, term s n/30. The cost of the me rchandi se so ld
was ¥520.
20 Received ¥600 in cash from members in settlement of their accounts.
21 Paid Everett Sportswear in fu ll.
27 Granted an a ll owance of¥40 to members for tenni s clothing th at did no t fit prope rl y
30 Received cash payments on account from members, ¥820.

The chart of acco unts for the tennis shop includes the foll owing : No. 101 Cash. No. I 12 AL·c uunt~
Rece iva bl e, No . 120 In ventory, No. 20 1 Accounts Payabl e, No. 311 Owner's Ca pital. No. -101 Sales
Revenue, No. 412 Sa les Return s and Allowances, and No . 505 Cost of Good s So ld.

Instructions
a. Jou rn ali ze the April transacti ons using a perpetual inve ntory syste m .
b. Enter th e beg inning balances in th e ledger accounts and post the April tra n sac tion ~. ( u~c J I rur the
journal refe rence.)
c To ta l de bi t s ¥6,130
c. Prepare a trial balance on April 30, 2020.

( "'' 'fllelf' • lr r·ol tn ri ng , -,·r·le beginning ': ' PS.S (LO 4, 5, 6) The tr ial balance of Ros iak Fashi on Cente r co ntain ed th e follo w in g acL·( 'lin h at
II/I l l , , I I flrA IIWI'/
November 30, the end of the company 's fi scal year.
 Problems 5 -4 9

Rosiak Fashion Ce nter

Trial Balance
:\on.>mber 30. 2020
Debit C redit
Cas h t: R.700
Acco unt:-- Rccci\·ahlc 27 .700
ln\·cntory -+-UOO
Supp li e" 6 .200
Equipment I.·n.ooo
Acc umul atet.l DeprL·ciat ion- Equ ipment t: 23.000
Nutes Pay~thk :1.000
Accuun ts Payahk -18.500
0\\·ner·" Ca pital 88 .000
Ow ne r' s Dra\\'ing" X.OOO
Sales Re\·e nu e 755 .200
Sales Return s and :\llu\\';tnce s 12 .800
Cos t of Guods Su ld -ll) 7 .-100
Salaries a nd \ VagL'S Expe nse I _-,6 .000
At.lvertisi ng Exre nSL' 2-1.-100
tilitics Exrcnse 1-1.000
Maintenance and Repairs Expense 12.100
Fre ig ht -O ut 16.700
Rent Expen"e 2-1.000
Totals t:%5. 700 f%5 . 700

Adjustme nt data:
I. S up pli es o n hand totaled 1::2 . 100 .
2. Deprec iat io n is t-.: 1 1.500 on tl1L' equipment.
3. Interest of t:-1 .000 i" accrued on notes payable at Nm·cmher 30.
4. Inventory actuall y on hand is t-.:-1-+.520.

Instructions
a. E nter the trial ba la nce on a \\'tlrk sheL'l. ami complet e the \\'\lrks hec t. a . Adj . tri al balance £98 1. 200
Net loss £1.980
b. Jo urn a li ze th e adju stin g e ntri es.
c. Prepa re an in co me sta teme nt anJ a n owner's equit y statement fo r the year. and a c lass it·ied state - c. Gms s p ro fit £244 .820
ment of financial position as o f Non~ mb e r 30. 2020 . N\lles payable o f 1::6.000 arc due in January Tota l as set s £18 1. 520
202 1.
d. Journalize the clos in g entries .
e. Prepare a post- clos ing tr ial ba lance.

* P5. 6 (LO 7 )At th e e nd of Hotai Departmen t Store's fisca l yea r on Decembe r .1 1. 2020. these acc\lunt s /J ei t ' l"lllillt ' ,., _
, !of """"-' "''" 11111/
appea red in its adj usted trial balance . gr" ' ·'· flro/il under f ll'l'i"tfi , "!'!"'"'"-h.

F re ig ht - In NT$ 165.000
In ve nt ory 1.215 .000
Purchases 13 .200.000
Purchase Di,cuu rlls 360.000
Purchase Re turn " and Allm\·ances l lJ2.000
Sal e" Re\'enue 2 I .5-+0.000
Sales Return~ and A ll owances 5 I 0.000

Add iti ona l fach :

I. Me rcha ndi se in\·e nt ory \l it DecL·mhcr 3 1. 2020 . i' NT$ 1.LJ5 0 .000 .
2. Hota i De pa rllll L'Ilt Store li,L., a pe riodiL· sy,tem .

Instructions
G r 0'>'> pr o f it N l SH.LJS2 .000
5-50 C H APT E R 5 Accou ntin g for Me rchand ise Opera t ions

Calculate missing amoums and assess
profiwbility.
~' P 5.7 (LO 7)ltl@!,jj Va ler ie Fo ns o perates a re ta il c lo thin g o pe ra ti o n . S he p urc hase s a II me rc h a n -
d ise inve ntory o n c redit and uses a peri odi c in ve nto ry sys te m . Th e Acco unt s Payahk acco unt is
used fo r record in g invento ry purchases o nl y; a ll o th e r c ur re nt lia b iliti es arc ac cru e d in se p a rat e
acco unts. Yo u are provi ded w ith th e fo ll ow in g se lec ted in fo rm a ti o n fo r th e fisca l yea rs 20 I 7 th ro ug h
2020, inclu s ive .

2017 2018 20 19 2020

Inventory (ending) € 13,000 € 11 ,300 € 14.700 € I 2 .200
Accoun ts payable (end ing) 20,000
Sa les revenue 225,700 240.300 2.V i. CHHl
Purchases of merchandi se
inventory on account 14 1,000 150.0 00 , _, 2_ ()( )()
Cas h payments to suppli ers 135,000 I l'i I ,000 I 27. 000

Instructions
a . 20 19 €146,600 a . Calcul ate cost of goods so ld fo r each of the 201 8, 201 9, and 2020 fisca l years .
b. Calcul ate the gross profi t fo r each of the 201 8, 20 19, and 2020 fi sca l years .
c. 2019 En di n g accts paya b le c. Calcul ate the ending balance of acco unts paya ble fo r each of th e 20 I i:L :?.0 19. a nd 20 20 fisca l
€ 15 ,000
years.
d. Sales decl ined in fiscal 2020. Does th at mean that pro fit ability, as meas ured by th e g ro ss profit ra te .
necessarily also declined? Expl ain , calcu lating th e gross profi t rate fo r eac h fisca l yea r to hL· lp s up-
port yo ur answer. (Round to one dec im al place.)

J ournalize. post. and prepa re £rial
ba lan ce and parried income sraremenr
using periodic approach.
~' P5. 8 (LO 7) At the beginni ng of the current season, the ledger o f Vill age Te nn is S ho p s ho wed Cas h
CHF2,500, Inventory CHF1 ,700, and Owner's Capital CHF4,200. The fo ll ow in g tra nsac ti o ns w ere com -
pleted during April.

Apr. 4 Pu rchased racquets and ba ll s fro m Hing is AG C HF860, te rm s 3/ I 0 , n/30 .

6 Paid freight on Hingis purchase C HF74.
8 Sold merchandi se to members CH F900, terms n/30.
10 Received credit of CHF60 fro m Hingis for a racquet th at was return e d .
II Purchased tenni s shoes from Vo lke r Sports fo r cas h C H F3 00.
13 Paid Hi ngis in full.
14 Purchased tenni s shirts and shorts fro m Lin zey Sportswea r C H F700. te rm s 21 I 0 . n/60 .
15 Received cash refund of CHF90 from Vo lke r Sports fo r dam aged m e rc ha ndi se th at w a s
ret urned.
17 Paid freight on Linzey Sportswear purchase CH F25.
18 Sold merchandi se to me mbers CHFI ,200, term s n/30 .
20 Received CHF500 in cas h from members in settl e ment of th e ir acco unt s .
21 Paid Linzey Sportswear in full.
27 Granted an allowance of CHF25 to me mbers for tenni s cl othing th a t d id no t fit prope rl y.
30 Rece ived cash pay ments on account fro m me mbers C H F63 0 .

Th e chart of acco unts fo r th e tenni s shop inc ludes Cash, Accounts Rece iva b le, Inve ntory. Acco unt s Pay -
able, Ow ner's Capital. Sales Revenue, Sa les Return s and A ll owances. Purc hases. Pu rch ase Return s a nd
Allowances, Purchase Disco unts, and Fre ight-ln .

Instructions
a . Journ ali ze th e Apri l transacti ons usin g a peri od ic invento ry syste m .
b. Us ing T-accounts. enter the beg inning ba lances in the ledger acco unt s a nu pos t th e A pril tra n saL·-
tio ns.
c. To t . tr ia l bal a n ce CHF6 ,488 c. Prepare a tria l ba lance on April 30, 2020.
d . Gross p rofit CHF744
d. Prepare an in come statement through g ross profi t, ass uming in ve nt ory o n ha nd a t A p r il ~ () is
CHF2, 140.
 E pand Yo u r Cri t ica l Thi n kin g 5-51

Com pre hensive Accounting Cycle Review

AC RS On December I . 2020. Juroyk Di~trihuting had the fn ll owing accnunt balances.

Debit Credit
Cas h € 7 .200 .-\L·cumulated DepreL·iation-
A ccount s RL'CL'i,·able -+.600 Eq uipment € 2.20()
In ventory I 2.000 .-\L'Ctl unt s PaYable -+.500
Supplies I. 200 Sa larie s and \\ 'ages Payable 1.000
Equipment 2 2.000 011·ne r's C apital 39 ..100
€ -+ 7 .000 €-+ 7 .000

During December. the cun1pany nHnpkted the fnllo\\'ing s ummary tran s~IL'tion s.

Dec. 6 Paid € 1.600 li 11· sa lari es and ,, -~tges due e mployees. o f 11 hil'11 €600 is li.1r December and € I .000
is for N o1·ember s alariL' S and \\'ages payable.
~ Recei1·ed € 2 . 1()()cash frnm L'll St<lmers in payment tlf ~IL'ulunt ( nn di scn unt alltlll·ed).
10 So ld merchandi SL' fnr cash €6.600. The cnstnf the merchandise snld 11·as € -+.100.
13 Purcha sed merd1andi~e nn acL·nunt frnm Gt111g Cn. €9 .000. term s 2/10. n/30.
15 Purchased s upplies f,ll. L·as h €2.000.
18 Sold mcrd1andi se tln account € 12 .000. term s _,/10. ni.' O. The L'<lStof the
merchandi se so ld 11·as €~.-HlO.
20 Paid salaries and 11 age s € I .~00.
23 Paid Gong C o . in full . k ss discnunl.
27 Recei1·ed cnllections in full. less di scnunt s. fr\1111 L'USt\lmers hilled \ln DecL·mher I ~-

Adjustment data:
I. Accrued s alarie s and 11·ages payahk €~ 00.

2. Depreciation €200 per month.

3. Supp li es on hand € 1.700.

Instructions
a. Journali;_e the December transactitlns us in g a llL'rpctual inYentnr y system.
b. E nter the Decembe r I balances in the ledger T-accounts and post the December transact inn s. Use
Cost of Goods So ld. Depreciatiun Expense. Sa larie s and Wages Expense. Sales Re1·enue . Sales
Discount s. and Supplies Ex pense.
c. Journali;.c and post adju s ting en tri es.
d. Pre pare an adju sted trial balance. d. Tota ls €6 5,600
e. Prepare an income statement and an tm·ner' s equity statement for December and a classilied e. Net inco m e €840
statement of linancial position at December 31.

Expand Your Critical Thinking

Financial Reporting Problem: TSMC, Ltd. (TWN)

CTS. I The finan c ial s tat e ment s of TSMC arc pre se nted in A ppendi x A at the end nf thi s te x tbook . ThL·
complete annual report. inL·luding th e ntltc s lll the linancial stat e ments. is a1·ai lahk ~~t th e co1npany's
website.

Instructions
Answer the fnlln11 ·i ng quest ion .s us11tg TS M( .. ~ l·onsoi idatcd i nu lllll' s tatL' Incnt .
a. What w a.s tilL· pL'I'CL' Ilta gL' c·han gL' i11 (I 1 ~aks (llL't rL'Il'llUc'l a 11d in (::'lnc·t inc·uinc· frPlll ::'0 1) t< 1
20 I h '.'
5-52 CHAPTER 5 Accounting for Merchandise Operations

b. What was the company's gross profit rate in 2015 a nd 20 16?

c. What was the company's percentage of net income to ne t sa les in 20 15 a nd 20 I n? C< Hllnl e nt on an y
trend in this percentage.

Comparative Analysis Problem: Nestle SA (CHE) vs. Delfi Limited (SGP)

CT5.2 Nestle's financi al state ments are presented in Append ix B. Financia l stat e m e nt :- or Delli Limited
are presented in Appendix C.

Instructions
a. Based on the information contained in these fin a nci al sta te me nt s, d e termin e e ac h ()r the following
for each compa ny.
1. Gross profit for the most recent fi sca l year repo rted in the a ppe ndices .
2. Gross profit ra te for the most recent fi scal year reported in the append ice:-.
3. Operating income for the most recent fi scal year re po rted in th e appendices. (Null': Operating
income may be described wi th alternative labels.)
4. Percentage change in operating income for the most rece nt fi sca l year re port e d in the appendices .
b. What conclusions concern ing the relative profitability of the two compan ies can y ou draw from
these data?

Rea l-World Focus

CT5.3 No financial decision -maker sho uld ever re ly sole ly o n the financial informal ion re pl 1rted in the
a nnu al report to ma ke dec is ions. It is important to keep abreast of financial news . Thi s ac ti,·ity dernon -
strates how to search for financial news on the Internet.

In st ructions
Search the Internet fo r a financia l-news a rticle abo ut Nestle (CHE) or Delfi Limited (SGP) that sounds
inte resting to you and then answer the following questi ons.
a. What was the source of the articl e (e.g. , Reute rs, Businessw ire, PR Newswire)'>
b. Ass ume th at yo u are a perso nal financ ial pl a nner a nd that o ne of yo ur clients owns :- hares in the
co mpa ny. Write a brief memo to your client, summari zing the articl e and ex plaining the impliL·a -
tions of the article for hi s or her investment.

Decision -Makin g Ac ross the Organization

CT5.4 Three yea rs ago, Debbi e Sells and her brother-in-law Mike Moon ey opened Fam il y Dep<lrtlllL'Ilt
Store. For the first two years, business was good , but the followin g conden sed income re s ult s for 201 t)
were di sappointing.

Family Department Store

Income Statement
For the Year Ended December 31, 2019
Net sales £7 ()(). 000
Cost of goods so ld 55 ~. 000

Gross pro fit 14 7.000

Operating ex pe nses
Se llin g ex pe nses £ I 00,000
Ad mini strative ex penses 20,000 I 2 0 . 000
Net in co me f 27.000

De bbie be li eves the prob le m lies in the relati ve ly low g ross protit ra te (gross profit Ji v id c d h ) llL't ..,, 1k.., 1
of 2 1%. Mike beli eves the proble m is th at operating ex pe nses a re too high.
Debbie think s the g ross profi t rate can be improved by m ak in o hoth or th e followin g c ha r1 gL'" · ShL·
does not a nti cipate th at th ese changes will have any e ffec t on ope ra7in g e xpen ses.
l. In c rease ave rage se llin g pri ces by 20o/r . Thi s in crease is ex pec ted 10 lower :- a le:- volun1c '-l> th :1t '"tal
sales will increa~e o nl y So/r. .
2. Bu y me rcha ndi se in large r quantiti es and take a ll purcha~ e di sco unt:-, . Th c-;e changL''- ll' '-L' il i 11 ~ :trhl
pu rchasing prac ti ces a rc ex pected to inc rease th e g ross profit rate from 2 1'/, to 2-l. ''; ·
 Expan d Your Criti cal Thi nk ing 5 -53

M ike thin b e x pen se s ca n he L'llt h\ m;tkin!! hnth nf the fn lln,,·ing c han ge s. He tech that the se
chan ges w i II not ha,·c ;m y L'lkL'l o n net sa-k s . -

L C ut 2020 sak s ~a l ;tr i c s (selling cxpc nSL' Sl l'f t60 .000 in ha lf and gi\'e saks perso nnel a cu m mission
or 27r of net sa k ~.

2. Reduce s tore dcli,·..:: ri e s tu u ne day per week rather tha n t\\ icc a \\'t:ek : thi s c hange '" ill reduce 2020
deliver y expense s (sellin g expe nse s) uf UO.OOO by -HY ( .

Debbie and M ike co nlL' to yo u fo r he lp in deciding the best \\·ay to im prn\'e net inco me .

Instructions
With th e c lass di,·idcd into gruups . an s\\·cr the fl,llll\\·ing.
a. Prepare a U1t1Lk nscd incuntc s tatL' m c nt fnr 2020. ass uming ( l ) DL·hbic's c han ges arc implemented
and (2) M ike's ide a s arc adnptcd.
b. What is your n x·l, mmcmbtilHl to Debbie ;m d I\ like·'
c. Prepare a cnndcnscd innHllL' statement fnr 2020. assumin g huth sL'ls nf prnpnscd changL'S arc
made.

Communication Activity
CTS .S The folhl\\ing s ituatiun is in c hrnnnlngi ca l (1rdcr.
L Dexter dec ides to buy ;1 s urth1a rd .
2. He calls Bo~u·din Cu. tu inquire abuut it s s urtl1nard s.
3. Two clays late r. he reque sts Boardin Co . to make a s urtl1oard.
4. Three days later. Board in Co. send s Dexter a purchase u rd e r to fill out.
5. He se nd s back the purchasL' order.
6. Boardin Co. rccci,·cs th e completed purch;t SL' (1rdcr.
7. Boardin Co. co mplet e s th e s urtl1uard .
8. Dexter pi c ks up th e s urlh1ard .
9. Boardin Co . hill s D e x ter.
10. Boardin Co . rc cci\c s pay ment frum Dex ter.

Instructions
In a me mo to the president of Buardin Cn .. ans\\·cr the fn!Jn,,·ing.
a. Whe n s ho uld Bo~u·din Co . rcuml the sa le ''
b. Suppose that w ith his purchasL' order. Dexter is required tn make a down payment. V>'n uld that
ch a nge you r answer''

Ethics Case
CT5.6 A nita Z urhru gg w as ju s t hire d as the assistant treas urer nf York tow n S tnrc s. The company is a
specia lt y c hain store w ith nine retail stores concentrated in n ne mctrnpnlitan area. A mong other thin gs.
th e payment of all in voices is centrali;.cd in nne nf the departments A nita will manage . Her primary
responsibility is to maintain th e u 1mpany·s hi g h n cdit rating by paying all bill s w he n due and to take
adva ntage of a ll cash di sco unt s.
Chris Dadian. the former ass is tant treas urer ,,·ho ha s been prunwted to treas urer. is tra ining A nita
in he r ne w dutie s. He in s truct s Anita that s he is tucuntinuc the practice nr pre parin g all L' hecks "net of
discount'' and dating the checks th e last day of the di scount period . ·'But." Chris continues. "we always
hold th e c hecks at least -1 day s be yond th e di snlltnt pe riod before mailing th em . That way. we ge t another
4 days of interest on our mun e v. Most of uur creditors need uur business ami dun't cumplain. A nd. if th ey
scream about our mi ss in g th e :lisc( JLtnt pcrim!. ,,·e blame it un th e mailnHllll m thL' postuf!ice. we·,·e onl y
lo st one di sco unt u ut uf e\cry hundrL'd \\e tak e that \\·ay. !think e,·e ryh(1d y d uL' s 1!. By th e way. wc kllll1L'
to our tea m I"

Inst ruct ions

a. What arc th e L'thi L·;d c·un s id n ;ttiun s in thi .s L· a~L· ·_>

h. Whu arc th e ' take h u ld crs th a t arc ha rm ed ur hL' Il c litt cd itt thi s ~i tu a ti (ll t ' '
c. Should A nit a L"<llltinll L' tilL' praL·t iL·e sta rtc·d hy Chri s'.' Due s s he· h;t\c' ;til\ L·hPi L' L' ·.>
5-54 CHAPTER 5 Accounting for Merchandise Operations

A Look at U.S. GAAP

LEARNING OBJECTIVE 8
Compare the accounting for merchandising under IFRS and U.S. GAAP.

The basic accounting entries for merchandi sing are the same under bo th GAAP ami !F RS. The incom e
statement is a required statement under both sets of standards. The basic format is s imilar ~tl till 1Ugh ~omc
differences do exist.

Key Points
• !AS 1, "Presentation of Financial Statements," provides ge neral g uid e ! i nes for the rep()r! i ng ol
income statement information. Subsequently, a number of internati o nal standard s ha\·e been iss ued
that provide additional guidance to issues related to income statement prese ntation. The following
is a recent income statement for Wal-Mart Stores, Inc . (USA). The inco me statt.:ment i~ pre ~L· nted
in conformity with GAAP.

Real Wal-Mart Stores, Inc.

World Income Statement
(Amounts in millions except per share data)
Revenues:
Net sales S-47~.076
Membership and other income .'\. ~I~

..f 7f1.~l)..f
Costs and expenses:
Cost of sales J)~ _()()l)

Operating, selling, general and administrative expenses LJI.J5.~

Operating income ~6.X7~

Interest:
Debt ~-07~
Capital leases :?.6J
Interest income ( I ILJ )
Interest, net :?..:216
Income from continuing operations before income taxes ~-+ .6 56
Provision for income taxes:
Current X.6 Jl)
Deferred (5 1-t )
X. I 05
Income from continuing operations 16.55 I
Income (loss) from discontinued operations, net of tax 1-t-t
Consolidated net income 16.6l))
Less consolidated net income attributable to noncontrolling interest (67 ~)
Consolid ated net income attributable to Wai-Mart $ 16.0~~

Similarities
• Under both GAA P and IFRS , a company ca n choose to usc e ith e r a perpetual ()f ;t pni<ldic
sys te m.
'~ In vento ri es are defin ed by lFRS as he ld -for-sa le in th e ordinary c our~c of hu ;, inL· ~~ - itt tilL· J'r"
cess of production fo r such sa le, or in the form of material s or s uppli es to he Ulll\UillL'd i11 tilL·
production process or in the performing of se rvices. The de finition under Ci AA I-' i ~ L·~~L' Ilt ~; tih
the sa me .
 A Look at U.S. G P 5-55

• Similar to GA L\P. cn mpn.:hen ~ in: inco me under !FRS includ e~ unre ali zed gains and losses (~uch a~
th ose o n non - trading :-;cc uriti c:-;) th a t arc not included in the c alculati o n of net incom e.

Differences
• U nd e r GAAP. companic:-; generally cla~~ ify inco me ~ tat c m c nt ite m~ by fun ct ion. C lass ihcation by
fun c tion lead :-; totk :-;cr ipti n n ~ likL· admini ~ tratitHl. di~trihution (se lling ). and manufac turing. L" nder
!FRS. companie:-; mu :-;t c las:-; ify expense ~ hy either nature or by functi o n. C la s~ ihcati o n by nature
lead s to de scriptinn s s uch a ~ th e fnlln\\·ing : ~ alarie ~. depreciation expe n se . and utilitie s e x pe n se. If
a co mpan y u ses tilL' fun c tillnal-c x pe n se me th od o n th e incom e stateme nt. disc los ure by n a ture is
require d in the nute :-; tu the tinanci a l statc nKnt s .
• Prese ntation or the inUlllle :-; talellll'nl under G.-\ .-\ P foll o \\"S either a :-;ingle-:-;tcp or nwltipl<:- s tc p
format. !FR S due s nut mentiun a ~ ingk - ~ t c p o r multipk- stcp approach.
• Under !FRS. revaluatiun of land. buildings. a nd intangible assets is permitted. The initial gain:-; ami
losses re s ulting frnm thi :-; re\·aluation arc repmtcd as adju stment s to equit y. often ret"crrcd to as other
comprehensive income . The ctkct of thi ~ ditl"crcncc is that th e usc of !F RS in~t e ad of GAAP re sults
in m o re tran :-;action s atk c ting equity (o the r L·o mprchcns i\·c inco me ) butnotnct income.
• I FRS re quire s that t wn years of income s tat e ment in format ion be prc~cntcd. \\·hcreas G .-\ .-\ P re-
quires three ye ars.

Looking to the Future

The IASB and FASB arc \Hlrking on a project that \\ould re\\·ork the s tructure of tinan c ial s tatcmcnb .
Specifically. thi s project \\·ill address the is s ue of hll\\. to classify Yarious it e m s in the income s tate-
ment. A main goal of thi s new approach is to prm·idc information that bcl!cr rcpre~c nt ~ ho\\. bu~i­
nesses are run. In addition. thi s appwach dnt\\·s al!entinn ~m · ay from just one number- net incom e . It
will ad o pt major groupings si milar to those currently U S L~d by th e s tat e ment of cash flo\\·s (ope rating .
inves tin g. and tinancing ). so that numbe rs can he nwre readil y traced across statement s. For example.
the amount of income that is generated by operations would be trac e able to th e as sets and liabilities
used to generate the income. F inall y. thi s approa c h \\·ould also provide d e ta i I. be yond that currentl y
see n in most s tatement s (either GAAP m !FRS). by requiring that line item s be pre se nted bnth b y
fun c tion and by nature. The nC\\. tinanL·ial s talL'mcnt furmat \\·as heaYily intlucnccd by ~ ugge s tiun s
from financial analysts.

GAAP Practice

GAAP Self-Test Questions -L Which of the tdlowing s tak'mcnt s is false ·>

1. Which of the following would not he included in the detinition of a. GAAP s pc L·ihcall y require s u sc of a multiple -step Jll L"<ll11e

inventor y under GAAP"? statement.

a. Photocopy pape r held for sale by an ofticc supply store. b. U nder GAA P. u1mpanics can u se either a perpetual o r pe ri-
odic system.
b. Stereo equipment held for s ale by an electronics store.
c. The propo se d new format for tinanL· ial s tat e l11L' J1l s \\as hea\ -
c. U sed ortice e quipment held for sa le by the human rclati<ln s il y inlht e nccd b y the s ugge s tion s of tinan c ial s t ~ucme' nt
de partment of a plastics company.
anal ysts .
d. All of the abo ve would meet the dctinition. d. The ne w tncomc s tatement format will try to d e-<.' mpha s i/c
2 . Which of th e follo w ing would not he a line item of a company the focu s on the ··net income ·· lin e item .
repo rting costs by nature' 1 5. U nder the new format for tinancial s tatem e nt s bein g prupns cd
a. D e prec iation expense. under a joint IASB/FAS B project·
h. Salaries and wages e x pensc . a. all tinancial s tatement s wo uld adopt llL'adin gs s imilar to th e
l'lll'l'l'tl( fmlllat nf the S!aiCillCtll uf finalll'ial f1\1 "ttiun i haiai1L"l'
c. Inte rest e x pen;.c .
s hCL' l ).
d. Manufacturin g expen;.L'
h. tinaJll"ial s tatement s w ould be prcsL' nt e d L· on sis lL' nt w ith tilL'
3. Whi c h of the follmv ing would not he a line ilL'I11 of a L·ompan y
way Jnana g L'lllL' lll u s uall y run L'<l111panic' .
re porting cos ts by function ·•
c. L'olnpaniL''- wu uld h e rL'quircd to re p11rt in C< llll L" '-Lt lL'Ill L' Ilt lin e'
a. Admini s trati<ln .
itc' lll s h\ func·ti <Hl onl y.
h. ManufaL·turin g .
d. til l' <l lllllllllt <lf tktail s hO\\ ll ill til L· lil L'll lll L' '- t ~ ll l' lll L"llt \\ll lil t l
c. lltilitie ;, L"XI1l'nsL' . tklTL' Cl '-L' l' \llllj1arc d t(l L'UITL' nt prl''-L' llt<tll<'n s
d. Di s trihuti(ln
5-56 cHAPTER 5 Accounting for Merchandise Operations

GAAP Exercises
GAAPS.l Ex plain the di ffe rence between the " natu re-of-expe nse .. a nd ··run c ti on-<lf-ex pe nsc ..
cl assifications.
GAAP5.2 For each of the fo ll owi ng income statement line item s, state w heth e r th e it e m is a ·· hy na ture
expense item or a " by function" expense item .
_ _ _ _ Cost of goods sold. _ _ _ _ U tiliti es expe nse.
_ _ _ _ Depreciati on expense. _ _ _ _ De livery expe nse.
_ _ _ _ Salaries and wages expense. _ _ _ _ Gene ra l a nd ad mini s tr a ti n~ e..;pc nscs.
_ _ _ _ Selling expenses.

GAAP5.3 Atl anti s Company reported the foll ow ing amo unt s in 2020: ne t in co m e. S 15 lJ.( JOO : unre a l-
ized gain related to revaluation of build ings, $ 10,000; and un rea li zed loss o n no n-tr;tdin g ~L·u triti cs.
$(3 5,000). Determine Atl antis's total comprehensive in come for 2020.

GAAP Financial Reporting Problem: Apple Inc.

GAAP5.4 The fi nanc ial statements of Apple are presented in Ap pendi x D . T he co m pk tc an nual repu rt.
incl ud ing the notes to its fin ancial statements, is ava il able at the compa ny's webs it e .

Instructions
(Round to one dec im al place.)
a. W hat was the percentage change in (I ) total revenue (net sa les) a nd in (2) ne t in c Dn lc frum 201-1- to
20 15 and fro m 20 15 to 20 16?
b. W hat was the company 's gross profit marg in rate in 20 14, 20 15, a nd 20 16?
c. W hat was the company's percentage of net income to total reve nue in 20 14. 20 15. an d 20 16 '.'

Answers to GAAP Self-Test Questions

I. e 2. d 3. c 4. a S. b