Financial Accounting: A Managerial Perspective

Third Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

PHI Learning, 2008. All rights reserved.

Accounting for Merchandising Transactions

Chapter 5

PHI Learning, 2008. All rights reserved.

Chapter 5

Income Measurement for a Merchandising Company

Revenue from Sales Cost of goods sold Gross profit Operating expenses Operating profit or profit before interest and tax Interest income and interest expense Net profit
PHI Learning, 2008. All rights reserved. 3

Chapter 5

Revenue from Sales

Gross sales Net sales Conditions for revenue recognition
1. The seller has passed the legal ownership of the goods to the buyer. 2. The selling price of the goods has been established. 3. The buyer has paid the purchase price of the goods or it is certain that the buyer will pay the price.

Invoice
PHI Learning, 2008. All rights reserved. 4

Chapter 5

Revenue from Sales continued

Trade discounts Sales returns and allowances
Sales return Sales allowance

Sales discounts or cash discounts on sales

Understanding standard credit terms

PHI Learning, 2008. All rights reserved.

Chapter 5

Cost of Goods Sold

Beginning inventory or opening inventory Ending inventory or closing inventory Cost of goods available for sale Cost of goods sold The periodic inventory system Net cost of purchases Purchases Purchases returns and allowances
PHI Learning, 2008. All rights reserved. 6

Chapter 5

Cost of Goods Sold continued

Purchases discounts or cash discounts on purchases
The gross price method The net price method Deciding on discounts

Freight in
FOB shipping point FOB destination

Inventory losses
PHI Learning, 2008. All rights reserved. 7

Chapter 5

Operating Expenses
Selling expenses
Expenses of storing and preparing goods for sale promoting sales actually making sales delivering goods to customers

Administrative expenses
Expenses incurred in the overall management of a business
PHI Learning, 2008. All rights reserved. 8

Chapter 5

Work Sheet for a Merchandising Company

Trial Balance columns Adjustments columns Adjusted Trial Balance columns Profit and Loss Account and Balance Sheet columns Inventory accounts Determining net profit
PHI Learning, 2008. All rights reserved. 9

Chapter 5

Classified Profit and Loss Account

Multiple-step vs. single-step profit and loss account Key relationships:
Net sales Net purchases Net cost of purchases Cost of goods sold Gross profit Operating expenses Profit before interest and tax Net profit
PHI Learning, 2008. All rights reserved. 10

Chapter 5

Classified Balance Sheet

Shareholders funds Loan funds Fixed assets Investments Current assets, loans and advances Current liabilities and provisions Contingent liabilities
PHI Learning, 2008. All rights reserved. 11