Professional Documents
Culture Documents
Objectives:
1.
2.
3.
To distinguish a service company from a merchandising company. To learn how to account for inventory purchase and inventory sale under a perpetual inventory system. To learn how to account for inventory purchase, inventory sale under a periodic inventory system.
Accounting for Merchandising operations 2
Defining Inventory
1. Assets held for resale purpose in a normal course of business. 2. Assets used to produce products for resale purpose. Examples of Inventory: Merchandising Firms: merchandise or goods Manufacturing Firms: raw materials work-in-process finished Goods Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit
Service Companies
Providing services (i.e., transportation companies, banks, etc.) Main Revenues: service revenues. Income measurement: Service Revenues - Operating Expenses Operating Income Operating cycle: Cash Providing Service Accounts receivables Cash
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 4
Merchandising Companies
Buy and sell goods (i.e., retail companies such as Wal-Mart, Macys, etc.). Main revenues: Sales revenues. Income measurement:
Sales Revenues - Cost of Goods Sold (cost of total merchandise sold during the period) Gross Profit - Operating Expenses Operating Income Operating cycle: Cash Buy Inventory Sell Inventory Accounts Receivable Cash
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 5
1,000
500
CGS 250
Sales 500
The inventory account is used for the purchase and sale of inventory. The balances of inventory is available at all time. A physical count of inventory is needed at the end of a period. Any discrepancy of inventory book balance with physical count should be adjusted to a loss or gain account.
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 9
The cost of goods sold (CGS) account is used to record the CGS of a sale. Therefore, the CGS is known at all time. The CGS is determined by selecting a cost flow assumption (will be discussed in Chapter 6).
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 10
200
200 800
784 16
11
12
Any purchase should be supported by a purchase invoice. Companies usually record purchases when receiving goods from the seller. A purchaser uses the sales invoice of the seller as its purchase invoice. In addition to the names of the seller and the buyer, the goods sold and the total amount, credit terms and freight terms are also included in the sales invoice.
Accounting for Merchandising Operations 14
Mar. 2
A/R
500
Sales
CGS 250
500 250
Inventory
Mar. 5
Sales Return and Allowance 50 A/R 50 Inventory 25 CGS 25 (To record sales return)
15
450
(To record collection of A/R within discount period) If the discount is not taken (i.e., collection after discount period:
Cash A/R
450 450
Accounting for Merchandising Operations 16
Net Sales
17
Closing Entries
Sale Revenue Income Summary Income Summary Cost of Goods Sold Sales ret. and Allow. Sales Discount Freight-out 500 500
314
225 50 9 30
19
Multiple -Step Income Statement (see illustration 5-11 of textbook for an Example) :
$150,000 (80,000) 70,000 (40,000) 30,000 $2,000 (9,000) 3,000
Net sales revenue Cost of good sold Gross margin Operating expenses Selling, Administration and Depreciation Income form operations Other icome (expense): Interest revenue Interest expense Gain on sale of equipment Income before income tax Income tax expense Net income
Revenues: Net sales Interest revenue Gain on sale of equipment Total revenue Expenses: Cost of goods sold Selling, administrative and depr. Interest expense Income tax expense Total expenses Net Income
22
500
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 23
Periodic Inv. System: Purchase, Purchase Returns and Allowance and Purchase Discounts
On Feb. 10, $1,000 inventory was purchased on credit. $200 inv. was returned on Feb. 15. The payment was made on Feb, 17. The buyer paid freight charge $100 on 2/10.
2/10 Purchases 1,000 Accounts Payable 2/10 Freight-in 100 Cash 2/15 A/P 200 Purchase R&A 2/17 A/P 800 Cash Purchase Discounts
Accounting for Merchandising Operations
1,000
100
200 784 16
24
Net purchases = Purchases Purchases Returns and Allowances Purchases Returns + Freight-in
25
Periodic Inv. System: Sales, Sales Returns and Allowances and Sales Discounts
On March 2, Inventory costing $250 was sold for $500 on credit with terms, 2/10, n/30 and FOB destination. Shipping cost is $30. On March 5, $50 of inventory sold was returned and the remaining bal. of A/R was collected on March 7.
3/2
A/R
500
Sales 500 Freight-out 30 Cash 30 3/5 Sales Ret. and Allow. 50 A/R 50 3/7 Cash 441 Sales Discount 9 A/R 450 Accounting for Merchandising Operations
26
Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 27
441 9 450
Freight-out
Cash
30
30
28