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201Lec05.pptx

• Accrual& Accounting
Merchandising Concepts
Multi-Step Income Statement

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 33basic
basictypes
typesof companies: SERVICE
of companies: SERVICE


Service
Service Businesses
Businesses
Make
Make money
money byby providing
providing aa service
service
Services
Services can’t
can’t be
be created
created and
and stockpiled
stockpiled for
for later
later
sale.
sale. (no
(no MERCHANDISE
MERCHANDISE INVENTORY!)
INVENTORY!)
Usually
Usually less
less working
working capital
capital needed
needed to
to start
start and
and
operate
operate business.
business.
Simpler
Simpler accounting
accounting system
system

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 33basic
basictypes
typesof companies: MERCHANDISER
of companies: MERCHANDISER


Merchandiser
Merchandiser
Make
Make money
money by by selling
selling aa product.
product.
Usually
Usually more
more working
working capital
capital needed
needed because
because
inventory
inventory must
must bebe available
available for
for sale.
sale.
Bigger
Bigger risk
risk also
also due
due to
to obsolescence,
obsolescence, theft,
theft,
competition
competition onon price.
price.
Inventory
Inventory is
is manufactured
manufactured by by another
another company.
company.
Merchandiser
Merchandiser doesn’t
doesn’t “add
“add value”
value” to
to product.
product.

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33basic
basictypes
typesof companies: MANUFACTURER
of companies: MANUFACTURER


Manufacturer
Manufacturer
Convert
Convert aa raw
raw material
material to
to aa finished
finished good.
good.
Direct
Direct labor
labor and
and manufacturing
manufacturing processes
processes used
used in
in
conversion.
conversion.
33 types
types of
of inventories:
inventories: Raw
Raw materials
materials
Work
Work in
in process
process
Finished
Finished goods
goods

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Income Statement: MULTIPLE
Income Statement: MULTIPLE STEP
STEP FORMAT
FORMAT
SERVICE MERCHANDISING
Revenues Sales
- Contra Sales
Net Sales
- Cost of Goods Sold (CGS or COGS)
Gross Profit
- Operating Expenses
Income from operations
+ other revenues and gains
- other expenses and losses
Income before taxes
- Expenses
Net Income - Income tax expense
========= Net Income
=================

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Flow
Flow of
of Inventory
Inventory Costs
Costs
Beginning Cost of Goods
Inventory Purchased

Cost of Goods
Available for Sale

Cost of Goods Ending

Sold Inventory

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 Inventory
Inventory Methods
Methods -- 22 options
options
 Periodic method or Perpetual method
Both methods end up with same balances in
inventory and CGS.
GAAP allows either one

1 - PERPETUAL records CGS at the time of each sale.

2 - PERIODIC doesn’t record CGS at all!

It gets calculated at the End of Period!

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EXAMPLE : You are in USB drive business.
Say sell for $3, cost is $1.

To
Torecord
recordrevenues:
revenues: Sales
Sales Cash
Cash
Start 10 units, cost = $1 each
Sell 2 units 6 6
Sell 5 units 15 15
Purchase 10 units 10
Sell 8 units 24 24 .
Balances 45 35

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1 - Use PERPUTUAL METHOD :

Inventory
Inventory CC GG SS
Start 10 units, cost = $1 each 10
Sell 2 units 2 2
Sell 5 units 5 5
Purchase 10 units 10
Sell 8 units 8 8 .
Balances 5 15

Gross profit = sales of $45 - CGS of $15 = $30

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2 - Use PERIODIC METHOD :
Inventory Purchases CGS
Start 10 units 10
Sell some No recording Inv/CGS
(record revenue but not CGS)
Sell some more No recording Inv/CGS
Purchase 10 units 10 (must
record purchase)
Sell some more No recording Inv/CGS

What is needed to compute amount CGS?

Beginning 10 + Purchases 10 – Ending 5 = 15

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Comparison
Comparison of
of Systems
Systems
PERPETUAL
- On-Line Inventory Info
- Control over theft amount,
errors.
- Lots of record keeping.
PERIODIC
- Ease of use. Much less records.
Count inventory once per year and Record
inventory purchases only.
- No clue of inventory balances in accounting
records.
Physical count suggested for Perpetual to verify
balance. Absolutely required for Periodic.
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 Computers and electronic scanning
equipment make perpetual inventory
cost effective!
Scans be used to create
automated journal entries
with no human accounting.

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Sales
Sales &
& Cost
Cost of
of Goods
Goods Sold
Sold (CGS)
(CGS)
Revenue Recognition Principle requires revenue be
recorded at point of sale.
- That is, record when “legal ownership” changes from
seller to buyer.
- Goods must be transferred to buyer (shipped).
Matching Principle also requires the expense of the sale
be recorded in the same reporting period as revenue.

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 Recording
Recording aa Sale
Sale
Things needed to be recorded for each sale:
1. Revenue
Dr. Cash (or A/R) xxxx
Cr. Sales
xxxx
2. Expense (Perpetual method only) Not for periodic
Dr. Cost of Goods Sold (or CGS) xxxx
Cr. Inventory xxxx

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 Merchandise
Merchandise Inventory
Inventory Cost
Cost
Components of Full inventory cost:
• Purchase price from supplier-vendor
• plus Freight-In cost if paid by purchasing company
(Freight-Out paid by seller in their operating expense.)
• less Discounts allowed by vendor (Often based on credit
terms)
Invoice from vendor

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Example: Recording a sale
Konk Co. Sold 10 units of inventory for $100 each.
The units were purchased last month for $60 each.
- Freight charges on the purchase were $5 each.
- Discounts granted on the purchase were $2 each.
Journal entry to record the sale?

Cash
Cash (or
(orA/R)
A/R) 1000
1000
Sales
Sales 1000
1000
For
For perpetual
perpetual method also: Not
method also: Not for
for periodic
periodic
Cost
Cost of
of Goods
Goods Sold
Sold 630
630
Inventory
Inventory 630
630
cost
cost == [10
[10 xx (60+5-2)]
(60+5-2)]

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 Sales
Sales Discounts
Discounts also
also see
see purchase
purchase discounts
discounts
• Many sales are on account.
(competition, business practice,
etc)
- Credit terms are listed on invoice
• Seller’s often provide an
incentive for buyers to pay
before the normal due date.
Why would they do this?
- Called a “cash discount”
- Usually a % reduction in payment

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 Example: Sales Discounts
Konk Co. had a sale of $1000, terms 2 / 10, n / 30.
This means :
Buyer gets 2 % price reduction IF buyer pays
within 10 days of the sale, OTHERWISE the entire
net (full price) is due within 30 days of the sale.

Record
Record sale
sale as
as before.
before. See
See previous
previous example.
example.
If
If payment
payment received
received within
within 10
10 days
days of
of sale:
sale:
Cash
Cash 980
980
Sales
Sales Discounts
Discounts 20
20
Accounts
Accounts Receivable
Receivable 1000
1000

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Sales
Sales Returns
Returns &
& Allowances
Allowances
Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not
meet specifications.
Sale Return Sale Allowance
Return goods for credit May choose to keep the
if the sale was made on merchandise if the seller
credit, or for a cash will grant an allowance
refund if the purchase (deduction) from the
was for cash. purchase price.

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 Sales
Sales Returns
Returns &
& Allowances
Allowances
Dr. Sales R & A xxxx
Cr. A/R (or Cash)
xxxx
Note: If inventory is returned (not just an
allowance), also record (perpetual only):
Dr. Inventory xxxx
Cr. Cost of Goods Sold
xxxx

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 Income
Income Statement
Statement Presentation
Presentation
SALES 1,000
Less: Sales Discounts 20
Sales Returns & Allowances 90
-110
Net Sales 890
Less: Cost of Goods Sold -630
Gross Profit 260

These sales accounts are called CONTRA-REVENUE

accounts (not EXPENSES).

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 Other
OtherIssues
Issuesfor
forPURCHASE
PURCHASEof
of merchandise
merchandise
Purchase Discounts - Buying company that pays early
records discount effect in inventory.
Example: Buy $1000 of inventory on terms 2/10, n/30
On
On date
date of
of purchase:
purchase:
Inventory
Inventory (perpetual
(perpetual method
method only)
only) 1000
1000
Accounts
Accounts Payable
Payable 1000
1000
If
If paid
paid within
within 10
10 days
days ofof purchase
purchase
Accounts
Accounts Payable
Payable 1000
1000
Inventory
Inventory (perpetual
(perpetual method
method only)
only) 20
20
Cash
Cash 980
980

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 Other
OtherIssues
Issuesfor
forPURCHASE
PURCHASEof
of merchandise
merchandise
Purchase Returns & Allowances - Company that
returns or gets allowance reduces inventory.
Dr. A/P (or Cash) xxxx Cr.
Inventory (perpetual method only) xxxx

Freight-In on purchases - Buying company adds

freight they pay to inventory cost.
Dr. Inventory (perpetual method only) xxxx
Cr. A/P (or Cash) xxxx
If seller agrees to pay freight-Out, they record it as a shipping
expense.

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Inventory Account (Perpetual)
Beginning Balance

Purchase Inventory Purchase Discounts

Freight-In on purchase Purchase R & A

Cost of Sale Returns Cost of goods sold

Ending Balance

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 Data
Data needed
needed for
for PERIODIC
PERIODIC method
method
1 Start with beginning inventory amount – Count it!
2 Keep track of full costs of inventory bought during the
year. Don’t record in inventory, but use the following
temporary periodic accounts:
• Purchases
• Freight-In
• Purchase discounts
• Purchase returns & allowances
3 Subtract inventory left over at year end – Count it!
Note an AJE will be needed at period end to update the
inventory account to reflect the ending physical count
balance! (We won’t worry about in this class.)

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 Inventory Account (Periodic)
Beginning Balance
Year end adjustment (debit or credit) to physical count

Ending Balance
Additional periodic accounts for:
- Purchases (debit balance)
- Freight in on purchase (debit balance)
- Purchase R & A (credit balance)
- Purchase discounts (credit balance)

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CGS
CGS on
on Periodic
Periodic Income
Income Statement
Statement

Net Sales 1,000

less: COST OF GOODS SOLD:
Beginning Inventory
100
Purchases 700
Less: Purchase Discounts -50
Purchase R & A -10
Add: Freight In 30
Cost of goods purchased 670
Cost of Goods Available for Sale 770
Less: Ending Inventory -150
Cost of Goods Sold - 620
Gross Profit 380

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Operating
Operating Cycle
Cycle for
for aa company
company is
is .. .. ..

the average time it takes to go from

cash to cash in producing revenues.

TO

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 Merchandising
Merchandising Company
Company operating
operating Cycle
Cycle

Receive Cash Buy Inventory

Cash
Accounts Merchandise
Receivable Inventory

Sell Inventory

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Gross
Gross Profit
Profit Rate
Rate ==
Gross Profit
Net Sales
x (100)
Sometimes called “mark-up”.

Sometimes used to price products.

Cost plus markup = selling price.
Used in marketing to determine best
product to concentrate sales efforts
Used in breakeven calculations How
much sales do we need to cover operating
expenses?
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Profit
Profit Margin
Margin ==
Net Income
Net Sales
x (100)
Measures the percentage of each dollar of sales
that results in net income
Affected by gross profit, operating costs and non-
operating items.
Often looked at when downsizing. Reduce overhead
(operating expenses) can increase margin.

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EXAMPLE, Perpetual, then periodic
On 7/1, buy 90 items for $30 each. On 7/3 sell 50 items for $50 each.

General Journal- Perpetual

7/1 Inventory (90 units @ $30 each) 2700
A/P 2700
7/3 A/R (50 units @ $50 each) 2500
Sales 2500
CGS (50 x $30) 1500
Inventory 1500

On income statement: Sales 2500

-CGS -1500
Gross profit 1000
On balance sheet: Inventory balance =
1200 (2700 dr and 1500 cr)

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 General Journal – P E R I O D I C
7/1 Purchases 2700
A/P 2700
7/3 A/R 2500
Sales 2500

NOTE: To prepare statements, inventory must be counted

and cost calculated (40 items @ $30 = $1200).
On income statement: Sales
2500
-CGS: BI 0
Purchases 2700
Cost Available 2700
- EI - 1200 -1500
Gross profit 1000
On balance sheet: Inventory = 1200
(adj made to physical count)
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