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Merchandising

Operations
Chapter 5

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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 merchandise
inventory using a perpetual
inventory system
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Learning Objectives
4. Adjust and close the accounts of a
merchandising business
5. Prepare a merchandisers 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)
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Learning Objective 1
Describe
merchandising
operations and the
two types of
merchandise
inventory systems
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What Are Merchandising


Operations?
Seller of goods
Can be wholesaler
or retailer
Inventory is a very
important asset
Managing A/R is
critical to success

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Merchandiser Financial Statements


Income Statement
differs from a
service company
Cost of Goods
Sold
Gross Profit

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Merchandiser Financial Statements


Largest
expense for
merchandisers

Calculated as:
Net SalesCOGS

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Merchandiser Financial Statements


Merchandise
Inventory is
usually the only
type of inventory.
(There is no raw
materials or
work-in-progress.)

Merchandise Inventory is usually purchased


on credit, so Accounts Payable may also be
higher than a Service Company.
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Learning Objective 2
Account for the
purchase of
merchandise
inventory using a
perpetual inventory
system
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Periodic

As computer
technology takes
over more and
more accounting,
the Periodic
Method is used
less and less.

Inventory is
physically
counted
Inexpensive
inventory
Small shops without
opscan(optical
scanning) capability

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Perpetual
Every inflow and
outflow is tracked
in real time

Merchandising and
purchase systems are
integrated with the
accounting system

When items are


scanned in the
receiving dock or
at the cash
register, the
inventory is
automatically
updated on a
continuous basis.

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Purchase of Inventory
Assume that Smart Touch Learning pays
for the inventory at the point of sale.

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Purchase on Account
If we had received the inventory, but
chosen to pay later . . .

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Purchase Returns and Allowances


When all or a portion of a purchase is returned
to the seller, it is recorded as a reduction of the
merchandise inventory account.
Assume Smart Touch Learning returns $7,000 of
the June 3 purchase on June 4.

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Transportation Costs
While goods are in transit, rules are necessary
to determine who bears the risk of loss.

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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.

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Purchase Discounts
Invoices that accompany credit purchases
often indicate credit terms, which offer the
buyer discount if they pay early.

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Purchase Discounts
The amount of the discount is determined by the
credit terms indicated on the invoice.
Discount Period

Total Credit Period

Discount
Percent

3/15,
3/15, NET
NET 30
30 DAYS
DAYS
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Purchase Discounts
If Smart Touch Learning pays within the
15 day period, they get a 3% discount.

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A Look at the Merchandise Inventory


Account . . .
The
merchandise
inventory
account will
reflect the net
results of all the
transactions for
the period.
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Learning Objective 3
Account for the sale
of merchandise
inventory using a
perpetual inventory
system

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Recording a Sale
In a perpetual
system, two entries
must be made for
every sale
Record the sale
Record the
reduction of
inventory

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Recording a Cash Sale


Smart Touch Learning sold 2 tablets for $1,000
cash. The cost of those tablets was $700.

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Recording a Credit Sale


Smart Touch Learning sold 10 tablets for $500
each on account. Sales terms are 2/10, n/30.
The cost of those tablets was $3,500.

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Sales Returns
Requires an entry to Sales Returns and
Allowances and to Merchandise Inventory.
Inventory
A customer returns 3 tablets that sold for $1,500
and originally cost $1,050.

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Sales Allowances
Requires an entry to Sales Returns and
Allowances.
Smart Touch Learning grants a customer $100
for goods damaged in transit.

There is no inventory to receive or record.


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Sales Discounts
The customer pays Smart Touch Learning on
June 30, 9 days after the invoice date, and after
the return and the allowance.

Sales discounts is a contra account to Sales.


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Freight Out
The freight in is part of the inventory cost.
The freight out is a selling expense.
Smart Touch Learning pays $30 to ship the June
21 sale to the customer.

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Net Revenue
For the year, Smart Touch Learning sells
$297,500 of merchandise inventory. They
process $11,200 of sales returns and
allowances, and they award $5,600 of sales
discounts.
What is Net Sales Revenue for the year?

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Net Revenue
For the year, Smart Touch Learning sells
$297,500 of merchandise inventory. They
process $11,200 of sales returns and
allowances, and they award $5,600 of sales
discounts.
What is Net Sales Revenue for the year?

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Gross Profit
The difference between Net Sales Revenues
and Cost of Goods Sold
Indicates the amount available to cover
operating expenses

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Learning Objective 4
Adjust and close the
accounts of a
merchandising
business

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Adjusting Merchandise Inventory


Actual inventory at the end of the period
may differ from what is expected from the
accounting records
Theft
Damage
Errors

Inventory must be adjusted at the end of


the period
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Closing the Accounts of a Merchandiser


1. Close revenues to
Income Summary
2. Close expenses and
contra-revenues to
Income Summary
3. Close Income
Summary to Capital
4. Close Withdrawals
to Capital
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Closing the Accounts of a Merchandiser

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Closing the Accounts of a


Merchandiser
At this point,
the Income
Summary
account has a
$25,200 balance.
Next, we need to close Income
Summary to the Capital account.
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Learning Objective 5
Prepare a
merchandisers
financial statements

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Single-Step Income Statement


Revenues and
Expenses are
separated into
two reported
subgroupings.
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Multi-Step Income Statement


Includes
several
important
subtotals
before the
Net Income
line.
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We break
our
Operating
Expenses
into Selling
Expenses &
Admin
Expenses.
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Finally,
Net
Income
is determined by subtracting Other
Revenues and Expenses from
Operating
Income.
Most companies will use a multi-step
income statement.
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Learning Objective 6
Use the gross profit
percentage to
evaluate business
performance

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Gross Profit Percentage

Measures the profitability of each sales


dollar.
When this number is trending downward, it
can indicate a significant problem.
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Gross Profit PercentageExample

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Learning Objective 7
Account for the
purchase and sale of
merchandise
inventory using a
periodic inventory
system (Appendix 5A)
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Purchasing Merchandise Inventory in a


Periodic System
Inventory-related expenses are recorded
in separate accounts DURING the year,
and combined at the end of the period.
Purchases
Purchase Discounts
Purchase Returns and Allowances
Freight-In

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Journal Entries in a Periodic System


On June 3, Smart Touch Learning acquires
inventory on account for $35,000.

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Journal Entries in a Periodic System


On June 3, Smart Touch Learning acquires
inventory on account for $35,000.

Note that Purchases is debited instead of


Merchandise Inventory.
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Journal Entries in a Periodic System


On June 3, Smart Touch Learning paid a
freight bill related to a receipt of
inventory.

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Journal Entries in a Periodic System


On June 4, Smart Touch Learning
returned $7,000 of the inventory
purchased on June 3rd for credit.

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Journal Entries in a Periodic System


On June15, Smart Touch Learning pays the
remaining amount on the payable from
June 3, taking the purchase discount.

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Closing the Accounts


Assume the following balances on the
December 31 Adjusted Trial Balance:
Merchandise Inventory (beginning) = $0
Merchandise Inventory (ending) = $31,290
Purchases = $281,750
Purchase Returns and Allowances = $61,250
Purchase Discounts = $4,410
Freight In = $14,700
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Closing the Accounts


Close the credit balance accounts (Purchase
Returns and Allowances and Purchase
Discounts)
Discounts to Income Summary and record
ending Merchandise Inventory.

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Closing the Accounts


Close the debit balance accounts (Purchases
and Freight In)
In to Income Summary and
remove beginning Merchandise Inventory.

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Reporting Cost of Goods Sold

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End of Chapter 5

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