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Chapter Five -Accounting for a Merchandising Operation Chapter Objectives - See Previous Page Lesson One -Merchandise Operations

1. Explain to students the difference between a service company and a merchandise business.

In a service business the primary source of revenue is from the selling of a skill (service revenue. In a merchandise business the main source of revenue is derived from the sale of goods (Sales Revenue). Cost of Goods So d is the total cost of merchandise sold during the period.

Operating !"penses are those expenses incurred in the process of earning sales revenue. Gross Profit
is the difference between Sales Revenue and ost of !oods Sold .

Operating C#c e is the average time it takes to go from cash to cash. "sk students why it take longer for the operating cycle to be completed in a #erchandise business rather than a Service $usiness ? 2. $. %nventor# S#ste&s

%ith students read pages &'( and &''. )erpetual and )eriodic Inventory Systems. Perpetua S#ste& ! "ccounting records continuously show the inventory that should should be on hand and the ost of !oods Sold* at any time. ! %hen an item of inventory is sold * its cost is transferred from the
#erchandise Inventory asset account to the ost of !oods Sold expense account.

! Records are kept of the +uantity and the cost of each item as it is bought* held in inventory and sold. ! #anagement is able to respond to customer,s +uestions about merchandise availability* maintain inventory levels and to avoid running out of stock. ! " physical inventory is taken periodically to determine the accuracy .

Periodic S#ste&
! -etermine the ending inventory and calculates the costb of goods sold at the end of each

period.
! " physical inventory count is done to determine the +uantity and the cost of goods on

hand at the end of the accounting period.


! .his amount is deducted from the goods available for sale to determine the cost of goods

sold. 2. '. Cost of Goods Purchased

2.

! )urchases of inventory should be supported by business documents. /arger companies use a Purchase Order to place an order with a supplier. " Purchase %nvoice -ocuments the actual +uantities and prices for the goods purchased. ! )urchases of merchandise for resale are debited to the #erchandise Inventory. ! )urchases of items not for resale are debited to other accounts. (. Subsidiar# %nventor# )ecords

.he #erchandise Inventory account in the !eneral /edger is a contro account for all subsidiary or individual inventory accounts. "t all time the controll account balance must e+ual the total of all of the subsidiary balances. 5. *. Freight Costs

"ny freight paid by the purchaser is part of the cost of the merchandise purchased.
FO+ ,Free on +oard- Shipping Point means the goods are placed free on board by the carrier (truck* boat* train) by the seller* and the buyer must pay the freight costs.

FO+ ,Free on +oard- .estination means the goods are placed free on board by the carrier (truck* boat* train) by the seller* and the seller must pay the freight costs.

Lesson 1 Seatwork - BE 5-1

Lesson /0o- )ecording Purchases and Sa es of Merchandise


1. A. A. A. A. A. A. A.
1. 0sing the Illustrations on overhead describe the entries for the following transactions1

A. B. C. D. E. F. G.

)urchase Entries ()erpetual System) 2reight .erms (23$ -estination4 buyer pays freight) )urchase -iscounts ()erpetual System) Revenue Entries 2reight .erms (23$ -estinations 4 seller pays the freight) Recording 5uantity -iscounts Recording Sales -iscounts

SeatworkHomework

E 5-1, 5-2, 5-3, 5-4,and 5-5

Lesson /hree - Co&p eting the Accounting C#c e


1. Adjusting entries are the same between a merchandise company and a service company. But a merchandise company using the perpetual inventory system may need an additional adjusting entry to make the recorded inventory agree with the actual inventory on hand. A physical count is taken at the end of the accounting period to record differences due to errors, theft or damage. The entry to record inventory shortages is a s follows ost of !oods "old #erchandise $nventory
dr. ost cr. ost

%. losing &ntries are the same as those made for a service company. All temporary accounts are closed to the 'wner(s apital. Refer to pages 221 and 222 for examples of Closing Entries and Post Closing Trial Balance. 3. 3. )sing *age %%% as a reference, students are asked to learn the "ummary of #erchandising &ntries for a perpetual inventory system. 3. 4. 4. "&AT+',- . /'#&+',-

5. 6. 7.

B&012 ,B&013, & 012 * 01%A to be submitted tomorrow

Lesson Four - Mu ti-Step and Sing e Step %nco&e State&ent


'. .here are .wo forms of income statements used by merchandising companies: Mu ti-Step %nco&e State&ent ,Page $$1 % ustration *-1(6et Sales is calcula ted by deducti ng sales returns and allowa nces from sales. !ross )rofit is calcula ted by deducti ng cost of goods sold from net sales 3perati ng income is calcula

Step 1

Ste Step '

p$

ted by deducti ng operati ng expens es from gross profit. 3perating expenses are often subdivided into selling expenses and administrative expenses. Step ( 6et Income is calculated by including two operating sections1
Adding other revenues and gains .educting other e"penses and Losses

Sing e-Step %nco&e State&ent ,Page $$2 % ustration *-1*"ll data are classified under two categories1 )evenues* which include both operating revenues and other revenues and gains. !"penses* which includes cost of goods sold * operating expenses* and other expenses and losses. &. Students are responsible for the following terms1 3et Sa es ............................ Sales less sale returns and allowances Gross Profit........................ .he excess of net sales over the cost of goods sold Gross Profit Margin........... !ross )rofit expressed as a percentage of net sales. It is calculated by dividing gross profit by the net sales
Merchandising Profit........ !ross )rofit

Operating !"penses.......... Expenses incurred in the process of earning sales revenue. .hey are deducted from the gross profit 3on-operating Activities

.hese include1 7Other

)evenues and Gains4 and 5Other !"penses and Losses4 (See Illustration 84'9) Assign6 Exercise 84'( a : b ()age &;8)

SEATWORk - HOMEWORK E 5-8, E 5- , E 5-1! a,"

Lesson Five - %nventor# /urnover and .a#s Sa es in %nventor# )atios


1. 1. 1. 1. 1. %nventor#

2. Inventory is the prime importance to a business. 3. It is usually the largest current asset on the $alance Sheet 4. ost of !oods Sold is usually the largest expense on the Income Statement. 1. 5. #anagement wants to ensure an ade+uate selection for customers * while minimi<ing carrying costs. %nventor# /urnover

Inventory ratio measures how often* on average* inventory is sold during the period

Cost of Goods So d .ivided b# Average %nventor# 7 %nventor# /urnover .oo high a ratio may mean stock is not on hand for the customers* who will then go elsewhere to purchase their products. .oo low a ratio may mean items are overstocked* which increases carrying cost. .a#s Sa es in %nventor# It is often beneficial to convert the inventory turnover ratio into a period of time. .his is done by dividing 9=8 days by the inventory turnover

ratio. %ith students complete Exercise 84'( )art

S!A/8O)9 : ;OM!8O)9 +! *-11< and ! *-11

Lesson Si" - Sa es /a"es


'. Sales .axes consist of the federal >? !S. and the provincial )S.* for which rates vary by province. In 6ova Scotia* 6ew $runswick and 6ewfoundland and /abrador* these taxes have been combined into one '8? @S. (@armoni<ed sales tax) 2. 2. .hese taxes are collected on behalf of the federal and provincial governments and are not revenue to the co&pan#. .hey are current liability until remitted to the collecting authorities (.he !overnments). 2. 3. Sa es /a"es Paid on .isburse&ents

!S. paid on purchases of merchandise is not a cost of goods purchased. It is a recoverable from the buyer when the good is later sold and is separately recorded.

.axable returns and allowances must include a credit to the !S. Recoverable account.

)S. is not paid on purchases of merchandise for resale* since it

is paid only by the end user of the product. Operating !"penses


!S. and )S. are paid on taxable operating expenses incurred by the business.

)S. is debited directly to the expense account as part of the expense cost. !S. is separately recorded as !S. Recoverable )e&ittance of Sa es /a"es
!S. Recoverable is offset against !S. )ayable and the net difference is either refunded by* or paid to* the federal government. )S. )ayable is paid to the provincial government.

Sa es /a"es
Sales .axes consist of the federal >? !S. and the provincial )S.* for which rates vary by province. In 6ova Scotia* 6ew $runswick and 6ewfoundland and /abrador* these taxes have been combined into one '8? @S. (@armoni<ed sales tax) .hese taxes are collected on behalf of the federal and provincial governments and are not revenue to the co&pan#. .hey are current liability until remitted to the collecting authorities (.he !overnments). Sa es /a"es Paid on .isburse&ents
!S. paid on purchases of merchandise is not a cost of goods purchased. It is a recoverable from the buyer when the good is later sold and is separately recorded.

.axable returns and allowances must include a credit to the !S. Recoverable account.

)S. is not paid on purchases of merchandise for resale* since it is paid only by the end user of the product.

Operating !"penses
!S. and )S. are paid on taxable operating expenses incurred by the business.

)S. is debited directly to the expense account as part of the expense cost. !S. is separately recorded as !S. Recoverable )e&ittance of Sa es /a"es
!S. Recoverable is offset against !S. )ayable and the net difference is either refunded by* or paid to* the federal government. )S. )ayable is paid to the provincial government.

SEATWORK # HOMEWORK BE 5-12, E 5-12, and $ 5- A%&eer 'arke