ACCOUNTING FOR

MERCHANDISING OPERATIONS

Chapter 5

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
 SERVICE COMPANIES
Service
Service organizations
organizations sell
sell time
time to
to earn
earn revenue.
revenue.
Examples:
Examples: Accounting
Accounting firms,
firms, law
law firms
firms and
and plumbing
plumbing services
services

Minus Equals Net

Revenues Expenses
income

McGraw-Hill/Irwin Slide 2
C1

MERCHANDISING ACTIVITIES
Merchandising Companies

Manufacturer Wholesaler Retailer Customer

McGraw-Hill/Irwin Slide 3
C1 REPORTING INCOME FOR A
MERCHANDISER
Merchandising companies sell products
to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
Net Cost of
Minus Equals Gross Minus Equals Net
Sales Goods Expenses
Profit Income
Sold

McGraw-Hill/Irwin Slide 4
C2 OPERATING CYCLE FOR A
MERCHANDISER
Begins with the purchase of merchandise and ends with
the collection of cash from the sale of merchandise.

Cash
Cash Sale
Sale Credit
Credit Sale
Sale
Cash
collection Purchases
Purchases

Merchandise
Cash Account
inventory
sales receivable

Merchandise
inventory Credit sales
McGraw-Hill/Irwin Slide 5
 INVENTORY SYSTEMS
C3

Beginning Net cost of

inventory + purchases

== Merchandise
available for sale

Ending Cost of goods

inventory + sold

McGraw-Hill/Irwin Slide 6
C3 PERPETUAL AND PERIODIC
INVENTORY SYSTEMS

 Perpetual systems  Periodic systems

 continually update  accounting records
accounting records for relating to merchandise
merchandising transactions are updated
transactions only at the end of the
accounting period

McGraw-Hill/Irwin Slide 7
P1
MERCHANDISE PURCHASES

On November 2, Z-Mart purchased $1,200 of

merchandise inventory for cash.

Dr. Cr.
Nov 2 Merchandise Inventory 1,200
Cash 1,200
Purchase merchandise for cash

McGraw-Hill/Irwin Slide 8
P1

TRADE DISCOUNTS

Used by manufacturers and wholesalers to

offer better prices for greater quantities
purchased.

Example
Example
Z-Mart
Z-Mart offers
offers aa 30%30% trade
trade
discount
discount onon orders
orders ofof 1,000
1,000
units
units or
or more
more of of their
their popular
popular
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price ofof $5.25.
$5.25.

McGraw-Hill/Irwin Slide 9
P1

Invoice

Main Source, Inc. Invoice
614 Tech Avenue Date Number
Seller

Nashville, TN 37651 5/4/09 358-BI
Invoice date
S
o 
Name: Barbee, Inc. Purchaser
l
d Attn: Tom Bell
Address: One Willow Plaza Order date
T Cookeville, Tennessee
Credit terms
 
o 38501

P.O. Date Salesperson Terms


Freight Ship
Freight terms
4/25/2009 #25 2/10,n/30 FOB Destination Via FedExGoods
Item Description Quanity Price Amount
Total invoice
 AC417 250 Backup System 500 $ 54.00 $ 27,000

Sub Total 27,000

We appreciate your business! Ship Chg. -
Tax -
Total $

27,000

McGraw-Hill/Irwin Slide 10
 PURCHASE DISCOUNTS
P1

A deduction from the invoice price granted to

induce early payment of the amount due.

Credit Period
Credit Discount Period
Terms

Time

Amount Due: Invoice Due: Full Invoice Price

Due price minus
discount
Date of
Invoice
McGraw-Hill/Irwin Slide 11
 PURCHASE DISCOUNTS
P1

2/10,n/30
Number
Number ofof
Days
Days Otherwise,
Otherwise,
Discount
Discount Discount
Discount Is
Is Net
Net (or
(or All)
All) Credit
Credit
Percent
Percent Available
Available Is
Is Due
Due in
in 30
30 Period
Period
Days
Days
McGraw-Hill/Irwin Slide 12
 PURCHASE DISCOUNTS
P1

On November 2nd, Z-Mart purchased $1,200

of merchandise inventory on account, credit
terms are 2/10, n/30.

Dr. Cr.
Merchandise Inventory 1,200
Accounts Payable 1,200
Purchase merchandise on account

McGraw-Hill/Irwin Slide 13
 PURCHASE DISCOUNTS
P1

On November 12th, Z-Mart paid the amount

due on the purchase of November 2nd .

Dr. Cr.
Accounts Payable 1,200
Cash 1,176
Merchandise Inventory 24
Paid accounts payable in full

$1,200 × 2% = $24 discount

McGraw-Hill/Irwin Slide 14
 PURCHASE DISCOUNTS
P1

After we post these entries, the accounts

involved look like this:

Merchandise Inventory Accounts Payable

11/2 1,200 11/12 24 11/12 1,200 11/2 1,200

Bal. 1,176 Bal. 0

McGraw-Hill/Irwin Slide 15
P1 PURCHASE RETURNS AND
ALLOWANCES

Purchase
Purchase Return
Return .. .. ..
Merchandise
Merchandise returned
returned byby the
the purchaser
purchaser to
to
the
the supplier.
supplier.
Purchase
Purchase Allowance
Allowance .. .. ..
A
A reduction
reduction in
in the
the cost
cost of
of defective
defective
merchandise
merchandise received
received byby aa purchaser
purchaser from
from
aa supplier.
supplier.

McGraw-Hill/Irwin Slide 16
P1 PURCHASE RETURNS AND
ALLOWANCES

On November 2nd, Z-Mart purchased

$1,200 of merchandise inventory on
account, credit terms are 2/10, n/30.

Dr. Cr.
Merchandise Inventory 1,200
Accounts Payable 1,200
Purchase merchandise on account

McGraw-Hill/Irwin Slide 17
P1 PURCHASE RETURNS AND
ALLOWANCES

On November 5th , Z-Mart returned $300 of

defective merchandise to the supplier.

Dr. Cr.
Accounts Payable 300
Merchandise Inventory 300
Returned defective merchandise

McGraw-Hill/Irwin Slide 18
P1 PURCHASE RETURNS AND
ALLOWANCES
On November 12th, Z-Mart paid the amount
owed for the purchase of November 2nd.
Dr. Cr.
Accounts Payable 900
Cash 882
Merchandise Inventory 18
Paid accounts payable in full

McGraw-Hill/Irwin Slide 19
 P1 TRANSPORTATION COSTS AND
OWNERSHIP TRANSFER
Seller Carrier Buyer

FOB shipping point Merchandise FOB destination

(buyer pays) (seller pays)

McGraw-Hill/Irwin Slide 20
 TRANSPORTATION COSTS
P1

On November 2nd , Z-Mart purchased $1,200 of

merchandise inventory for cash and also paid
$75 transportation costs.

Dr. Cr.
Merchandise Inventory 1,275
Cash 1,275
Paid for merchandise and transportation

McGraw-Hill/Irwin Slide 21
P1 ACCOUNTING FOR
MERCHANDISE

Invoice cost of merchandise purchases $ 235,800

Less:
Less: Purchase discounts $ (4,200)
Less: Purchase returns and allowances (1,500)
Add: Costs of transportation-in 2,300
Total cost of merchandise purchased $ 232,400

McGraw-Hill/Irwin Slide 22
P2 ACCOUNTING FOR MERCHANDISE
SALES
Z-MART
Computation of Gross Profit
For Year Ended December 31, 2009
Sales $ 321,000
Less:
Sales discounts $ 4,300
Sales returns and allowances 2,000 6,300
Net sales 314,700
Cost of goods sold 230,400
Gross profit $ 84,300

McGraw-Hill/Irwin Slide 23
 ACCOUNTING FOR MERCHANDISE
P2
SALES

On November 3rd , Z-Mart sold $2,400 of

merchandise on credit. The merchandise has a
cost basis to Z-Mart of $1,600.

Dr. Cr.
Accounts Receivable 2,400
Sales 2,400
Sold merchandise on credit

Cost of Goods Sold 1,600

Merchandise Inventory 1,600
To record the cost of merchansdise sold

McGraw-Hill/Irwin Slide 24
 SALES DISCOUNTS
P2

Z-Mart completes a credit sale for $1,000 on November 12th,

the merchandise cost $800. Terms of 2/10, n/60, and the
account was paid in full within the discount period.

Dr. Cr.
Accounts Receivable 1,000
Sales 1,000
Sold merchandise on credit

Cost of Goods Sold 800

Merchandise Inventory 800
To record cost of merchandise sold
Cash 980
Sales Discounts 20
Accounts Receivable 1,000
McGraw-Hill/Irwin
Collected cash on account Slide 25
 SALES RETURNS AND
ALLOWANCES
P2

Recall Z-Mart’s sale for $2,400 that had a cost

of $1,600. Assume the customer returns part of
the merchandise. The returned items sell for
$800 and cost $600.

Dr. Cr.
Sales Returns and Allowances 800
Accounts Receivable 800
Customer retuns merchandies of June 12 slae

Merchandise Inventory 600

Cost of Goods Sold 600
Returned goods added to inventory

McGraw-Hill/Irwin Slide 26
 SALES ALLOWANCES
P2

Recall the $800 of merchandise sold by Z-

Mart to a customer. The merchandise was
defective but the customer agreed to keep it
because Z-Mart offers a $100 price reduction.

Dr. Cr.
Sales Returns and Allowances 100
Accounts Receivable 100
To record sales allowance

McGraw-Hill/Irwin Slide 27
 C4 MERCHANDISING COST FLOW
IN THE ACCOUNTING CYCLE
Beginning Net
inventory purchases
Period 1

Merchandise
available for sale

Ending Cost of
inventory goods sold To Income Statement
To Balance Sheet
Beginning Net
inventory purchases
Period 2

Merchandise
available for sale

Ending Cost of
inventory goods sold To Income Statement
To Balance Sheet
McGraw-Hill/Irwin Slide 28
P3
ADJUSTING ENTRIES FOR
MERCHANDISERS

Z-Mart’s Merchandise Inventory account at the end

of 2009 has a balance of $21,250, but a physical
count reveals that only $21,000 of inventory exists.
Z-Mart suffered a $250 shrinkage.

Dr. Cr.
Cost of Goods Sold 250
Merchandise Inventory 250
To adjust for $250 shrinkage revealed
by a physical count of inventory

McGraw-Hill/Irwin Slide 29
P3
CLOSING ENTRIES FOR
MERCHANDISERS
Dr. Cr.
Sales 321,000
Income Summary 321,000
To close credit balances in temporary
accounts

McGraw-Hill/Irwin Slide 30
P3
CLOSING ENTRIES FOR
MERCHANDISERS
Dr. Cr.
Income Summary 308,100
Sales Discounts 4,300
Sales Returns and Allowances 2,000
Cost of Goods Sold 230,400
Depreciation Expense 3,700
Sales Salaries Expense 43,800
Insurance Expense 600
Rent Expense 9,000
Supplies Expense 3,000
Advertising Expense 11,300
To close debit balances in temporary accounts

McGraw-Hill/Irwin Slide 31
P3
CLOSING ENTRIES FOR
MERCHANDISERS
Dr. Cr.
Income Summary 12,900
K. Marty, Capital 12,900
To close Income Summary account

McGraw-Hill/Irwin Slide 32
P3
CLOSING ENTRIES FOR
MERCHANDISERS

Dr. Cr.
Dec. 31 K. Marty, Capital 4,000
K. Marty, Withdrawals 4,000
To close the withdrawals account

McGraw-Hill/Irwin Slide 33
P4
INCOME STATEMENT FORMATS

Multiple-Step

Single-Step

McGraw-Hill/Irwin Slide 34
P4
MULTIPLE-STEP INCOME
STATEMENT

McGraw-Hill/Irwin Slide 35
P4
SINGLE-STEP INCOME
STATEMENT

McGraw-Hill/Irwin Slide 36
P4
CLASSIFIED BALANCE SHEET
Z-MART
Partial Balance Sheet
December 31, 2009
Assets
Highly
Cash $ 8,200 Liquid
Accounts receivable 11,200
Merchandise inventory 21,000
Office supplies 550
Store supplies 250
Prepaid insurance 300 Less
Liquid
Total current assets $ 41,500

McGraw-Hill/Irwin Slide 37
A1
ACID-TEST RATIO

Acid-Test Quick Assets

=
Ratio Current Liabilities

Acid-Test Cash
Cash ++ S-T
S-T Investments
Investments ++ Receivables
Receivables
=
Ratio Current
Current Liabilities
Liabilities

A common rule of thumb is the acid-test ratio should have a

value of at least 1.0 to conclude a company is unlikely to
face liquidity problems in the near future.

McGraw-Hill/Irwin Slide 38
A1

ACID-TEST RATIO
($ millions) 2007 2006 2005
Total quick assets $ 3,010 $ 3,286 $ 4,923
Total current assets 6,648 6,702 8,232
Total current liabilities 3,492 2,762 3,297
Acid-test ratio 0.86 1.19 1.49
Current ratio 1.90 2.43 2.50
Industry acid-test ratio 0.56 0.61 0.66
Industry current ratio 2.43 2.55 2.67

McGraw-Hill/Irwin Slide 39
A2
GROSS MARGIN RATIO

Percentage
Percentage of of JC Penny's Gross Margin Ratio
dollar
dollar sales
sales ($ millions) 2007 2006 2005
available
available to
to Gross margin $ 7,825 $ 7,191 $ 6,792
cover
cover expenses
expenses Net sales $ 19,903 $ 18,781 $ 18,096
and
and provide
provide aa Gross margin ratio 39.3% 38.3% 37.5%
profit.
profit.

McGraw-Hill/Irwin Slide 40
 END OF CHAPTER 5

McGraw-Hill/Irwin Slide 41