Chapter 5

MERCHANDISING OPERATIONS

PowerPoint Authors:
Winston Kwok, Ph.D., MBA, CA
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

Copyright © 2016 by McGraw-Hill Education (Asia). All rights reserved.

 5-2

C1

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

C1

MERCHANDISER

Merchandising Companies

Manufacturer Wholesaler Retailer Consumers

 5-4

C1 REPORTING PROFIT 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.

Quantity sold 1,000

Example
Example Price per unit $ 5.25
Z-Mart
Z-Mart offers
offers aa 30%
30% trade
trade
discount
discount for
for orders
orders of of 1,000
1,000 Total 5,250
units
units or
or more
more on on its
its popular
popular Less 30% discount (1,575)
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price ofof $5.25.
$5.25.
Invoice price $ 3,675
 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

(1) 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

(2) 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

(3) 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
(4) Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10,
n/60. (5) Two days later, Z-Mart returns $100 of goods before paying
the invoice. (6) 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

(7) 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:

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

SALES OF MERCHANDISE
P2

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

merchandise on credit. (9) 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

(10) Z-Mart completes a $1,000 credit sale with terms of 2/10,

n/60.

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

(12) 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-Mart’s sale for $2,400 that had a cost of
$1,600. Assume the customer returns part of the
merchandise. (13) The returned items sell for $800
(14) 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
(15) $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 Statement of
Beginning Net Financial Position
inventory purchases
Period 2

Merchandise
available for sale

Ending Cost of
inventory goods sold To Income Statement
To Statement of
Financial Position
 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.

(16) Z-Mart’s 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

END OF CHAPTER 5