Chapter 5

Accounting for
Merchandising
Operations
Chapter
5-1 Accounting Principles, Ninth Edition
 Freight Costs – Terms of Sale
Illustration 5-6

Seller places goods Free

On Board the carrier, and
buyer pays freight costs.

Seller places goods Free

On Board to the buyer’s
place of business, and
seller pays freight costs.

Chapter
5-2
Freight costs incurred by the seller are an operating expense.
 Recording
Recording Purchases
Purchases of
of Merchandise
Merchandise

Purchase Returns and Allowances

Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not
meet specifications.

Purchase Return Purchase Allowance

Return goods for credit
if the sale was made on
credit, or for a cash
refund if the purchase
was for cash.
May choose to keep the
merchandise if the seller
will grant an allowance
(deduction) from the
purchase price.

Chapter
5-3 SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording
Recording Purchases
Purchases of
of Merchandise
Merchandise

Purchase Discounts
Credit terms may permit buyer to claim a cash
discount for prompt payment.
Advantages:
Purchaser saves money.
Seller shortens the operating cycle.

Example: Credit terms of 2/10, n/30, is read “two-ten, net

thirty.” 2% cash discount if payment is made within 10 days.

Chapter
5-4 SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording
Recording Purchases
Purchases of
of Merchandise
Merchandise

Purchase Discounts Terms

2/10, n/30 1/10 EOM n/10 EOM

2% discount if 1% discount if Net amount due

paid within 10 paid within within the first
days, otherwise first 10 days of 10 days of the
net amount due next month. next month.
within 30 days.

EOM = End of Month

Chapter
5-5 SO 2 Explain the recording of purchases under a perpetual inventory system.
 Recording
Recording Purchases
Purchases of
of Merchandise
Merchandise

Purchase Discounts
Should discounts be taken when offered?
Discount of 2% on $3,500 $ 70.00
$3,500 invested at 10% for 20 days 19.18
Savings by taking the discount $ 50.82

Passing up the discount offered equates to paying an

interest rate of 2% on the use of $3,500 for 20 days.
Example: 2% for 20 days = Annual rate of 36.5%
(365/20 = 18.25 twenty-day periods x 2% = 36.5%)
Chapter
5-6 SO 2 Explain the recording of purchases under a perpetual inventory system.
 Forms
Forms of
of Financial
Financial Statements
Statements

Multiple-Step Income Statement

Shows several steps in determining net income.
Two steps relate to principal operating
activities.
Distinguishes between operating and non-
operating activities.

Chapter
5-7 SO 5 Distinguish between a multiple-step and a single-step income statement.
 Merchandising
Merchandising Operations
Operations

Income Measurement
Not used in a
Sales Less
Service business.
Revenue
Illustration 5-1

Cost of Equals Gross Less

Goods Sold Profit

Operating Equals Net

Cost of goods sold is the total Income
cost of merchandise sold Expenses
(Loss)
during the period.

Chapter
5-8 SO 1 Identify the differences between service and merchandising companies.
 Calculation
Calculation of
of Gross
Gross Profit
Profit
Illustration 5-13

Key Items:
Net sales
Gross profit
Gross profit
rate

Illustration 5-10

Chapter
5-9 SO 6 Explain the computation and importance of gross profit.
 Illustration 5-13

Forms
Forms of
of
Financial
Financial
Statements
Statements

Multiple-
Step

Key Items:
Net sales
Gross profit
Operating
expenses: expenses incurred in the process of earning sales revenue.

Chapter
5-10 SO 5 Distinguish between a multiple-step and a single-step income statement.
 Illustration 5-13

Forms
Forms of
of
Financial
Financial
Statements
Statements
Key Items:
Net sales
Gross profit
Operating
expenses
Nonoperating
activities
Net income

Chapter
5-11 SO 5 Distinguish between a multiple-step and a single-step income statement.
 Forms
Forms of
of Financial
Financial Statements
Statements

Review Question
The multiple-step income statement for a
merchandiser shows each of the following
features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.

Chapter
5-12 SO 5 Distinguish between a multiple-step and a single-step income statement.
 Forms
Forms of
of Financial
Financial Statements
Statements

Single-Step Income Statement

Subtract total expenses from total revenues
Two reasons for using the single-step format:
1) Company does not realize any type of profit
until total revenues exceed total expenses.
2) Format is simpler and easier to read.

Chapter
5-13 SO 5 Distinguish between a multiple-step and a single-step income statement.
 Forms
Forms of
of Financial
Financial Statements
Statements
Illustration 5-14

Single-
Step

Chapter
5-14 SO 5 Distinguish between a multiple-step and a single-step income statement.
 Forms
Forms of
of Financial
Financial Statements
Statements
Classified Balance Sheet Illustration 5-15

Chapter
5-15 SO 5 Distinguish between a multiple-step and a single-step income statement.
 Periodic
Periodic Inventory
Inventory System
System

Calculation of Cost of Goods Sold Illustration 5A-1

$316,000

Chapter SO 7 Explain the recording of purchases and sales of

5-16
inventory under a periodic inventory system.
 Flow of Costs

Beginning Costs of Goods

Inventory Purchased

Costs of Goods
Available for sale

Cost of Goods Ending

Sold Inventory
Chapter
5-17