Chapter 5

ACCOUNTING FOR
MERCHANDISING OPERATIONS

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA

McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
 5-2

C1

SERVICE COMPANIES
Service
Service organizations
organizations sell
sell time
time to
to earn
earn revenue.
revenue.
Examples:
Examples: Accounting
Accounting firms,
firms, law
law firms
firms and
and plumbing
plumbing services
services
 5-3

C1

MERCHANDISER
Merchandising Companies

Manufacturer Wholesaler Retailer Consumers

 5-4

C1 REPORTING INCOME FOR A

MERCHANDISER
Merchandising companies sell products
to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
 5-5

C2 OPERATING CYCLE FOR A

MERCHANDISER
Begins with the purchase of merchandise and ends
with the collection of cash from the sale of merchandise.
 5-6

C2

INVENTORY SYSTEMS
 5-7

C2

INVENTORY SYSTEMS

Perpetual systems Periodic systems

continually update accounting records
accounting records for relating to merchandise
merchandising transactions are
transactions updated only at the end
of the accounting period
 5-8

P1

MERCHANDISE PURCHASES
On November 2, Z-Mart purchased $1,200 of
merchandise inventory for cash.
 5-9

P1

TRADE DISCOUNTS
Used by manufacturers and wholesalers to
offer better prices for greater quantities
purchased.

Example
Example
Z-Mart
Z-Mart offers
offers aa 30%
30% trade
trade
discount
discount for
for orders
orders of of 1,000
1,000
units
units or
or more
more on on its
its popular
popular
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price ofof $5.25.
$5.25.
 5 - 10

P1 ACCOUNTING FOR MERCHANDISE

PURCHASES
 5 - 11

PURCHASE DISCOUNTS
P1

A deduction from the invoice price granted to

induce early payment of the amount due.
 5 - 12

PURCHASE DISCOUNTS
P1

2/10,n/30
Number
Number ofof
Days
Days Otherwise,
Otherwise,
Discount
Discount Discount
Discount Is
Is Net
Net (or
(or All)
All) Credit
Credit
Percent
Percent Available
Available Is
Is Due
Due in
in 30
30 Period
Period
Days
Days
 5 - 13

PURCHASE DISCOUNTS
P1

On November 2, Z-Mart purchased $1,200 of

merchandise inventory on account, credit
terms are 2/10, n/30.
 5 - 14

PURCHASE DISCOUNTS
P1

On November 12, Z-Mart paid the amount

due on the purchase of November 2.
 5 - 15

PURCHASE DISCOUNTS
P1

After we post these entries, the accounts involved

look like these:
 5 - 16

P1 PURCHASE RETURNS AND

ALLOWANCES

Purchase
Purchase Return
Return .. .. ..
Merchandise
Merchandise returned
returned byby the
the purchaser
purchaser toto
the
the supplier.
supplier.
Purchase
Purchase Allowance
Allowance .. .. ..
A
A reduction
reduction inin the
the cost
cost of
of defective
defective or
or
unacceptable
unacceptable merchandise
merchandise received
received by
by aa
purchaser
purchaser from
from aa supplier.
supplier.
 5 - 17

P1 PURCHASE RETURNS AND

ALLOWANCES

On November 15, Z-Mart (buyer) issues a

$300 debit memorandum for an allowance
from Trex for defective merchandise.
 5 - 18

P1 PURCHASE RETURNS AND

ALLOWANCES
Z-Mart purchases $1,000 of merchandise on June 1 with
terms 2/10, n/60. Two days later, Z-Mart returns $100 of
goods before paying the invoice. When Z-Mart later pays on
June 11, it takes the 2% discount only on the $900
remaining balance.
 5 - 19

P1 TRANSPORTATION COSTS AND

OWNERSHIP TRANSFER
 5 - 20

TRANSPORTATION COSTS
P1

Z-Mart purchased merchandise on terms of FOB

shipping point. The transportation charge is
$75.
 5 - 21

P1 ACCOUNTING FOR
MERCHANDISE
 5 - 22

P2 ACCOUNTING FOR
MERCHANDISE SALES
 5 - 23

SALES OF MERCHANDISE
P2

Each sales transaction for a seller of

merchandise involves two parts:

Revenue received in Recognition of the

the form of an asset cost of merchandise
from a customer. sold to a customer.
 5 - 24

SALES OF MERCHANDISE
P2

On November 3, Z-Mart sold $2,400 of

merchandise on credit. The merchandise has a
cost basis to Z-Mart of $1,600.
 5 - 25

SALES DISCOUNTS
P2

Sales discounts on credit sales can benefit a seller by

decreasing the delay in receiving cash and reducing future
collection efforts.
 5 - 26

SALES DISCOUNTS
P2

Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.

The account was paid in full within the 60-day period.

The account was paid in full within the 10-day discount period.
 5 - 27

P2 SALES RETURNS AND

ALLOWANCES

Sales returns and allowances usually involve

dissatisfied customers and the possibility of
lost future sales.

Sales returns refer Sales allowances

to merchandise that refer to reductions in
customers return to the selling price of
the seller after a merchandise sold to
sale. customers.
 5 - 28

P2
SALES RETURNS AND
ALLOWANCES

Recall Z-Marts sale for $2,400 that had a cost

of $1,600. Assume the customer returns part of
the merchandise. The returned items sell for
$800 and cost $600.
 5 - 29

SALES ALLOWANCES
P2

Assume that $800 of the merchandise Z-Mart

sold on November 3 is defective but the buyer
decides to keep it because Z-Mart offers a
$100 price reduction.
 5 - 30

P2 MERCHANDISING COST FLOW

IN THE ACCOUNTING CYCLE
Beginning Net
inventory purchases
Period 1

Merchandise
available for sale

Ending Cost of
inventory goods sold To Income Statement
To Balance Sheet
Beginning Net
inventory purchases
Period 2

Merchandise
available for sale

Ending Cost of
inventory goods sold To Income Statement
To Balance Sheet
 5 - 31

P3
ADJUSTING ENTRIES FOR
MERCHANDISERS
A merchandiser using a perpetual inventory system is
usually required to make an adjustment to update the
Merchandise Inventory account to reflect any loss of
merchandise, including theft and deterioration.

Z-Marts Merchandise Inventory account at the end of

year 2011 has a balance of $21,250, but a physical
count reveals that only $21,000 of inventory exists.
 5 - 32

P3
CLOSING ENTRIES FOR
MERCHANDISERS
 5 - 33

P4
INCOME STATEMENT

An income
statement
format shows
net sales and
other
costs and
expenses.
 5 - 34

P4
CLASSIFIED BALANCE SHEET

Highly
Liquid

Less
Liquid
 5 - 35

A1
ACID-TEST RATIO

Acid-Test Cash + S-T Investments + Receivables

=
Ratio Current Liabilities

A common rule of thumb is the acid-test ratio should have a

value of at least 1.0 to conclude a company is unlikely to
face liquidity problems in the near future.
 5 - 36

A2
GROSS MARGIN RATIO

Percentage
Percentage ofof dollar
dollar
sales
sales available
available toto
cover
cover expenses
expenses andand
provide
provide aa profit.
profit.
 5 - 37

A1/A2
Nestl
 5 - 38

P5 APPENDIX 5A:
PERIODIC INVENTORY SYSTEM
(a)

(b)

(c)

(d)

(e)

(f)

(g)

A periodic inventory system requires updating the inventory account only at the end of a
period to reflect the quantity and cost of both the goods available and the goods sold.
 5 - 39

P5 APPENDIX 5A:
PERIODIC INVENTORY SYSTEM
 5 - 40

END OF CHAPTER 5
 5 - 41

SUGGESTED QUESTIONS TO ENSURE

YOUR LECTURE UNDERSTANDING

Chapter 5
Questions 3, 4
QS5-14
Ex5-5, Ex5-15
P5-3A, P5-5A Part 1 only