Chapter 5- merchandising operations and inventory systems.

SALES REVENUE
In a merchandising company (推銷), the primary source of revenues is the sale of
merchandise, referred to as sales revenue or sales.
INCOME MEASUREMENT PROCESS FOR A MERCHANDISING COMPANY

OPERATING CYCLES
 INVENTORY SYSTEMS
Perpetual inventory system
Has detailed records of each inventory purchase and sale
Records cost of goods sold each time a sale occurs
Indicates the amount of inventory on hand at all times
Periodic inventory system
Does not keep detailed records of goods on hand throughout the period
Determines the cost of goods on hand and cost of goods sold only at the end of an
accounting period

COMPARING PERPETUAL AND PERIODIC INVENTORY SYSTEMS

PURCHASES OF INVENTORY
Every cash purchase should be supported by a cancelled check or a cash register
receipt indicating the items purchased and the amounts paid.
Each credit purchase should be supported by a purchase invoice, which indicates
the total purchase price and other relevant information.
Date Account Titles and Explanation Dr. Cr.

May 4 Merchandise Inventory 3,800

Accounts Payable 3,800

(To record goods purchased on account from PW Audio Supply)

 FREIGHT COSTS
The sales agreement should indicate whether the seller or the buyer is to pay the
cost of transporting the goods to the buyer's place of business.
FOB Shipping Point
Goods placed free on board the carrier by seller. Buyer pays freight costs.
FOB Destination
Goods placed free on board at buyer’s business. Seller pays freight costs.

ACCOUNTING FOR FREIGHT COSTS

Date Account Titles and Explanation Dr. Cr.

May 6 Merchandise Inventory 150

Cash 150

(To record payment of freight on goods purchased)

When the purchaser directly incurs the freight costs, the account Merchandise
Inventory is debited and Cash is credited.

PURCHASE RETURNS AND ALLOWANCES

A purchaser may be dissatisfied with merchandise received because the goods
-are damaged or defective
-of inferior quality
-not in accord with the purchaser’s specifications.
In such cases, the purchaser may return the goods to the seller, referred to as
a purchase return.
Or the purchaser may choose to keep the merchandise if the seller grants an
allowance, referred to as a purchase allowance.
Date Account Titles and Explanation Dr. Cr.

May 8 Accounts Payable 300

Merchandise Inventory 300

(To record return of goods received from Sellers Electronix)

For purchases returns and allowances, Accounts Payable is debited

and Merchandise Inventory is credited.
PURCHASE DISCOUNTS
Credit terms may permit the buyer to claim a cash discount for the prompt payment
of a balance due.
The buyer calls this discount a purchase discount.
A purchase discount is based on the invoice cost less returns and allowances, if
any.
Date Account Titles and Explanation Dr. Cr.

May 14 Accounts Payable 3,500

Cash 3,430
Merchandise Inventory 70

(To record payment within discount period)

If payment is made within the discount period, Accounts Payable is

debited, Cash is credited, and Merchandise Inventory is credited for the discount
taken.
 SALES REVENUES
Sales Revenues
are recorded when goods are transferred from the seller to the buyer. This practice
is in accordance with the revenue recognition principle.
Sales Revenues
Each sales transaction should be supported by a business document which provides
written evidence of the sale.
Cash register tapes provide evidence of cash sales.
A sales invoice provides written evidence of a credit sale.
Cash sales are recorded by increasing Cash and increasing Sales.
Sales Revenues
Credit sales are recorded by increasing Accounts Receivable and increasing Sales.
A second entry increases Cost of Goods Sold and decreases Merchandise
Inventory.
Date Account Titles and Explanation Dr. Cr.

May 4   Accounts Receivable 3,800

Sales 3,800

(To record credit sales to Sauk Stereo per invoice #731)

4   Cost of Goods Sold 2,400

Merchandise Inventory 2,400

(To record cost of merchandise sold on invoice #731 to Sauk Stereo)

 SALES RETURNS AND ALLOWANCES
Sales Returns and Allowances, a contra revenue account to Sales, may be used
to record credit for returned goods.
Date Account Titles and Explanation Dr. Cr.

May 8   Sales Returns and Allowances 300

Accounts Receivable 300

(To record credit granted to Sauk Stereo for returned goods)

8   Merchandise Inventory 140

Cost of Goods Sold 140

(To record cost of goods returned per credit memorandum)

SALES DISCOUNTS
A sales discount is recorded by increasing Cash for the amount received from the
customer, decreasing Accounts Receivable for the amount owed by the customer,
and increasing Sales Discounts by the amount of the discount.
Sales Discounts is a contra revenue account to Sales.
Date Account Titles and Explanation Dr. Cr.

May 14 Cash 3,430

Sales Discounts 70
Accounts Receivable 3,500

(To record collection within 2/10 discount period from Sauk Stereo)

When a sale on account occurs, the seller debits Accounts Receivable 

When cash discounts are taken by customers, the seller debits Sales Discounts 
When customer return goods, the seller debits Merchandise Inventory
 FORMS OF INCOME STATEMENTS
There are two forms of income statements used by companies:
Single-Step income statement
Multiple-Step income statement

SINGLE-STEP INCOME STATEMENT

Single-step income statement
one step is required in determining net income—subtract total expenses from
total revenues.

PW AUDIO SUPPLY, INC.

Income Statement
For the Year Ended December 31, 2017
Revenues

Net sales $460,000

Interest revenue 3,000

Gain on sale of equipment 600

Total revenues 463,600

Expenses
Cost of goods sold $316,000
Selling expenses 76,000
Administrative expenses 38,000
Interest expense 1,800
Casualty loss from vandalism 200
Total expenses 432,000
Net income $31,600
MULTIPLE-STEP INCOME STATEMENT
Multiple-step income statement
Highlights the components of net income.
Distinguishes between operating and non-operating activities.
Sales Revenues
The income statement for a merchandising concern typically presents gross sales revenues for the
period, and deducts the contra revenue accounts, that is, Sales Returns and Allowances, and Sales
Discounts to arrive at Net Sales.
Gross Profit
Gross profit is determined by subtracting cost of goods sold from net sales.
It is important to understand what gross profit is and what it is not. Gross profit represents the
merchandising profit of a company. Because operating expenses have not been deducted, it is not
a measure of the overall profit of the company. Nevertheless, management and other interested
parties closely watch the amount and trend of gross profit. Comparisons of current gross profit
with past amounts and rates, and with those in the industry, indicate the effectiveness of a
company’s purchasing and pricing policies.
Operating Expenses
Operating expenses are subtracted from gross profit to determine income from operations.
Operating expenses include selling expenses, which are all of the expenses associated with
selling the merchandise, from the solicitation of the sale, until the product is in the hands of the
buyer, and administrative expenses, which are general expenses relating to general operating
activities, human resources, accounting, clerical, security, etc.
Non-Operating Activities
Non-operating activities are unrelated to the company’s primary line of operation.
They are presented after income from operations, and shown as other revenues and gains, and
other expenses and losses.
PERIODIC INVENTORY SYSTEM
Under a periodic system, separate accounts are used to record purchases, freight costs,
returns, and discounts.
A running account of changes in inventory is not maintained. Instead, the balance in ending
inventory, as well as the cost of goods sold for the period, is calculated at the end of the
period.

BASIC FORMULA FOR COST OF GOODS SOLD USING THE PERIODIC SYSTEM

\
GROSS PROFIT RATE
Gross profit rate
A company's gross profit may be expressed as a percentage by dividing the amount
of gross profit by net sales.

QUALITY OF EARNINGS
Earnings have a high quality if they provide a full and transparent depiction of how
a company performed

In general, a measure significantly less than 1 suggests that a company may be

using more aggressive techniques to accelerate income recognition.
A measure significantly greater than 1 suggests that a company is using more
conservative accounting techniques.
May Purchased merchandise on account from Black Wholesale Supply for $7,350, terms 1/10,
1 n/30.
2 Sold merchandise on account for $4,100, terms 2/10, n/30. The cost of the merchandise
sold was $3,075.
5 Received credit from Black Wholesale Supply for merchandise returned $550.
9 Received collections in full, less discounts, from customers billed on May 2.
10 Paid Black Wholesale Supply in full, less discount.
11 Purchased supplies for cash $1,170.
12 Purchased merchandise for cash $4,030.
15 Received $299 refund for return of poor-quality merchandise from supplier on cash
purchase.
17 Purchased merchandise from Wilhelm Distributors for $2,750, terms 2/10, n/30.
19 Paid freight on May 17 purchase $325.
24 Sold merchandise for cash $7,150. The cost of the merchandise sold was $5,330.
25 Purchased merchandise from Clasps Inc. for $1,040, terms 3/10, n/30.
27 Paid Wilhelm Distributors in full, less discount.
29 Made refunds to cash customers for returned merchandise $135. The returned
merchandise had cost $90.
31 Sold merchandise on account for $1,664, terms n/30. The cost of the merchandise sold
was $1,079.
 Net purchases= Purchases- Purchase returns and allowances- Purchase discounts
Cost of goods purchased= Net purchase+ Freight-in

PW AUDIO SUPPLY, INC.

Cost of Goods Sold
For the Year Ended December 31, 2017
Cost of goods sold

Inventory, January 1 $36,000

Purchases $325,000

Less: Purchase returns and allowances $10,400

Purchase discounts 6,800 17,200

Net purchases 307,800

Add: Freight-in 12,200
Cost of goods purchased
Cost of goods available for sale
1
On April 5, purchased merchandise from Blossom Company for $25,700, terms 2/10, n/30.
.
2
On April 6, paid freight costs of $1,700 on merchandise purchased from Blossom Company.
.
3
On April 7, purchased equipment on account for $36,700.
.
4 On April 8, returned some of the April 5 merchandise to Blossom Company, which cost
. $5,300.
5
On April 15, paid the amount due to Blossom Company in full.
.

Assume that Sunland Co. paid the balance due to Blossom Company on May 4 instead of April 15.
Prepare the journal entry to record this payment. 
Date Account Titles and Explanation Debit Credit
2040
May 0
Account payable
4

cash 20400
Apr. Purchased golf bags, clubs, and balls on account from Arnie Co. $1,620, terms 3/10,
5 n/60.
7 Paid freight on Arnie Co. purchases $86.
9 Received credit from Arnie Co. for merchandise returned $320.
10 Sold merchandise on account to members $1,447, terms n/30.
Purchased golf shoes, sweaters, and other accessories on account from Woods
12
Sportswear $896, terms 1/10, n/30.
14 Paid Arnie Co. in full.
17 Received credit from Woods Sportswear for merchandise returned $96.
20 Made sales on account to members $875, terms n/30.
21 Paid Woods Sportswear in full.
27 Granted credit to members for clothing that did not fit properly $86.
30 Received payments on account from members $1,318.