BUS 142 - Slides Chap 5. Merchandising Operations

Chapter 5
Merchandising
Operations
© 2016 Pearson Education, Ltd.

Learning Objectives
1. Describe merchandising
operations and the two types of
merchandise inventory systems
2. Account for the purchase of
merchandise inventory using a
perpetual inventory system
3. Account for the sale of
© 2016 Pearson Education, Ltd. 5-2

Learning Objectives
4. Adjust and close the accounts of

a merchandising business
5. Prepare a merchandiser’s
financial statements
6. Use the gross profit percentage
to evaluate business performance
7. Account for the purchase and
sale of merchandise inventory
using a periodic inventory system
(Appendix 5A)

Learning Objective 1
Describe merchandising
operations and the two types
of merchandise inventory
systems

What Are Merchandising Operations?
• A merchandiser is a business that sells

merchandise, or goods, to customers.
– The merchandise that this type of business
sells is called merchandise inventory.
• A wholesaler buys goods from a
manufacturer and sells them to retailers.
• A retailer buys merchandise from
manufacturers or a wholesaler and then
sells the goods to consumers.

The Operating Cycle of a
Merchandising Business
• The operating cycle begins when the
company purchases inventory from a
vendor.
• The company then sells the inventory to
customers.
• The company collects cash from
customers.


• The income statement of a merchandiser
reports:
• Sales Revenue rather than Service Revenue
• The cost of merchandise sold to customers,
called Cost of Goods Sold (COGS)
• Gross profit, which is net Sales Revenue minus
Cost of Goods Sold
• Operating expenses, which re expenses other
than Cost of Goods Sold



Merchandise Inventory Systems: Perpetual
and Periodic Inventory Systems
• Businesses need to determine the value

on merchandise inventory on hand and
the value sold.
• The two inventory accounting systems:
• A periodic inventory system requires a physical
count of inventory to determine inventory on
hand.
• A perpetual inventory system offers continuous
computerized record of merchandise inventory.

Account for the purchase of


Purchase of Merchandise Inventory
Assume that Smart Touch Learning receives

the goods on June 3 and makes a payment
on that date.

Purchase of Merchandise Inventory
Now assume that on June 3, instead of

paying cash, Smart Touch Learning receives
the merchandise inventory on account.

Purchase Discounts
If Smart Touch Learning pays on June 15,

which is within the discount period, the cash
payment entry would be:

Purchase Returns and Allowances
• Sellers allow purchasers to return

merchandise that is defective, damaged,
or unsuitable.
• Purchase returns exist when sellers allow
purchasers to return merchandise.
• Purchase allowances are granted to
purchasers as an incentive to keep goods
that are not as ordered.

Purchase Returns and Allowances
Assume Smart Touch Learning returns

$7,000 of the June 3 purchase on June 4.

Transportation Costs
While goods are in transit, rules are necessary

to determine who bears the risk of loss.

Freight In
With FOB shipping point, the freight cost is

paid by the buyer and is part of the
inventory cost. Assume Smart Touch
Learning pays a $60 freight charge on the
June 3 purchase.

Freight In Within Discount Period
If Smart Touch Learning pays within the

15-day period, it gets a 3% discount.

Cost of Inventory Purchased
• Knowing the net cost of inventory allows a

business to determine the actual cost of
the merchandise purchased.
• Net cost of inventory is calculated as
follows:

Account for the sale of

merchandise inventory using
a perpetual inventory system

How Are Sales of Merchandise Inventory
Recorded in a Perpetual Inventory System?
• The amount a business earns from selling

merchandise inventory is called Sales
Revenue.
• Two entries are required to record sale
transactions:
– The first entry records Sales Revenue and Cash
or Accounts Receivable.
– The second entry records Cost of Goods Sold
and Merchandise Inventory.

Sale of Merchandise Inventory

Smart Touch Learning sold 2 tablets for

$1,000 cash. The cost of those tablets was
$700.

Smart Touch Learning sold 10 tablets for

$500 each on account with terms of 2/10,
n/30 on June 21. The goods cost $3,500.

Sales Discounts
A sales discount reduces the amount of cash
received from a customer for early payment.
Sales Discounts is a contra account to Sales
Revenue. Assume the customer that purchased
the tablets on June 21 made payment on June
30, within the discount period.

Sales Returns and Allowances
• The return of goods by a customer or the

granting of an allowance is called sales
returns and allowances.
• Sales Returns and Allowances is a contra
account to Sales Revenue and has a
normal debit balance.

Sales Return
On June 25, a customer returns 3 tablets

that were sold for $1,500, with a cost of
goods sold of $1,050.

Sales Allowance
On June 28, Smart Touch Learning grants a

$100 sales allowance for goods damaged in
transit.

Sales Returns and Allowances Within
Discount Period
The discount is calculated net of the
allowances and returns. On June 30, Smart
Touch Learning receives payment on the
receivable.

Transportation Costs—Freight Out
Smart Touch Learning paid $30 to ship

goods to a customer on June 21.
Remember: Freight out is a selling expense.

Net Sales Revenue and Gross Profit
• Net Sales Revenue is the amount a

company has earned on sales of
merchandise after returns, allowances,
and discounts have been taken out.
• Net Sales Revenue is determined using the
following formula:

For the year, Smart Touch Learning sells

$297,500 of merchandise inventory,
receives $11,200 of sales returns and
allowances, and accepts $5,600 of early
payment discounts.

Gross profit is a
measure of a
business’s
success.
It indicates the amount available to cover

operating expenses.

Adjust and close the accounts

of a merchandising business

What Are the Adjusting and Closing
Entries for a Merchandiser
• Actual inventory on hand may differ from
what the books show.
– Inventory shrinkage is loss of inventory
occurring from theft, damage, and errors.
• An adjustment is made to Merchandise
Inventory based on the physical count of
goods on hand.

Closing the
Accounts of a
Merchandiser

Closing the Accounts of a Merchandiser
1. Close revenues via

the Income
Summary.
2. Close expenses and
contra revenues via
the Income
Summary.
3. Close Income
Summary via
Retained Earnings.
4. Close Dividends via
Retained Earnings.
Prepare a merchandiser’s
financial statements

How Are a Merchandiser’s Financial
Statements Prepared?
• The formats for income statements are:
– The single-step income statement presents
revenues and expenses with no subtotals.
– The multi-step income statement presents
revenues and expenses with subtotals to
highlight significant relationships.

Single-Step Income Statement

Multi-Step Income Statement

• Operating expenses are reported in two

categories:
– Selling expenses are related to marketing and
selling the company’s goods and services.
– Administrative expenses include expenses not
related to marketing the company’s goods and
services.
• Gross profit minus operating expenses
equals operating income.

• After determining operating income, the

next section of the income statement
reports other revenues and expenses.
• The last section of the income statement
reports income tax expense.

Statement of Retained Earnings and
the Balance Sheet
• The statements of retained earnings for
merchandisers and service businesses are
similar.
• The balance sheet for a merchandiser
reports Merchandise Inventory.

Use the gross profit

percentage to evaluate
business performance

How Do We Use the Gross Profit
Percentage to Evaluate Business
Performance?
• The gross profit percentage measures the

profitability of each sales dollar above the
cost of goods sold.
• A high gross profit percentage is desired.

Account for the purchase and

sale of merchandise inventory
using a periodic inventory
system (Appendix 5A)

How Are Merchandise Inventory
Transactions Recorded in a Periodic
Inventory System?
• Perpetual inventory systems are too
expensive for smaller businesses.
• Periodic inventory systems require
physical counts of inventory to determine
quantities on hand.
– Merchandise Inventory is updated at the end of
the period, during the closing process.

Purchases of Merchandise Inventory
The entry to record the receipt of goods on
account on June 3 and payment on June 15 using
the periodic inventory system is as follows:

Recording Purchase Returns and
Allowances
Prior to payment, on June 4, Smart Touch
Learning returned 20 tablets, costing
$7,000, to the vendor.

Recording Purchase Returns and
Allowances
• A business records the cost of all
inventory bought in the Purchases
account.
• Net Purchases is the sum of Purchases
less Purchase Returns and Allowances and
Purchase Discounts.

Recording Transportation Costs
On June 3, Smart Touch Learning paid a

freight charge.

• No running record of merchandise

inventory is maintained.
• There is no need to record an entry to
Merchandise Inventory and Cost of Goods
Sold.
• Accounting for sales discount and sales
return and allowances is the same as
under the perpetual inventory system.

Adjusting and Closing Entries
• No adjustment is required for inventory

shrinkage.
• Temporary accounts are closed via the
Income Summary:
– Purchase Returns and Allowances
– Purchase Discounts
– Purchases
– Freight In

Adjusting and
Closing Entries

Adjusting and
Closing Entries

Preparing
Financial
Statements

Preparing
Financial
Statements

Preparing
Financial
Statements

Preparing Financial Statements

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Chapter 5

© 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd. 5-2

4. Adjust and close the accounts of

© 2016 Pearson Education, Ltd. 5-3

© 2016 Pearson Education, Ltd. 5-4

• A merchandiser is a business that sells

© 2016 Pearson Education, Ltd. 5-5

© 2016 Pearson Education, Ltd. 5-6

© 2016 Pearson Education, Ltd. 5-7

© 2016 Pearson Education, Ltd. 5-8

© 2016 Pearson Education, Ltd. 5-9

© 2016 Pearson Education, Ltd. 5-10

• Businesses need to determine the value

© 2016 Pearson Education, Ltd. 5-11

Account for the purchase of

© 2016 Pearson Education, Ltd. 5-12

Assume that Smart Touch Learning receives

© 2016 Pearson Education, Ltd. 5-14

Now assume that on June 3, instead of

© 2016 Pearson Education, Ltd. 5-15

If Smart Touch Learning pays on June 15,

© 2016 Pearson Education, Ltd. 5-16

• Sellers allow purchasers to return

© 2016 Pearson Education, Ltd. 5-17

Assume Smart Touch Learning returns

© 2016 Pearson Education, Ltd. 5-18

While goods are in transit, rules are necessary

© 2016 Pearson Education, Ltd. 5-19

With FOB shipping point, the freight cost is

© 2016 Pearson Education, Ltd. 5-20

If Smart Touch Learning pays within the

© 2016 Pearson Education, Ltd. 5-21

• Knowing the net cost of inventory allows a

© 2016 Pearson Education, Ltd. 5-22

Account for the sale of

© 2016 Pearson Education, Ltd. 5-23

• The amount a business earns from selling

© 2016 Pearson Education, Ltd. 5-24

© 2016 Pearson Education, Ltd. 5-25

Smart Touch Learning sold 2 tablets for

© 2016 Pearson Education, Ltd. 5-26

Smart Touch Learning sold 10 tablets for

© 2016 Pearson Education, Ltd. 5-27

© 2016 Pearson Education, Ltd. 5-28

• The return of goods by a customer or the

© 2016 Pearson Education, Ltd. 5-29

On June 25, a customer returns 3 tablets

© 2016 Pearson Education, Ltd. 5-30

On June 28, Smart Touch Learning grants a

© 2016 Pearson Education, Ltd. 5-31

© 2016 Pearson Education, Ltd. 5-32

Smart Touch Learning paid $30 to ship

Remember: Freight out is a selling expense.

© 2016 Pearson Education, Ltd. 5-33

• Net Sales Revenue is the amount a

© 2016 Pearson Education, Ltd. 5-34

For the year, Smart Touch Learning sells

© 2016 Pearson Education, Ltd. 5-35

It indicates the amount available to cover

© 2016 Pearson Education, Ltd. 5-36

Adjust and close the accounts

© 2016 Pearson Education, Ltd. 5-37