CHAPTER 9 – PROCESSING TRANSACTIONS FOR A MERCHANDISER

Merchandising business – one that buys and sells goods in order to make a profit.

Inventory – tangible property that is held for resale or will be used in producing goods or services.

– reported on the balance sheet as an asset.

Types of inventory:

1. Merchandise inventory
2. Raw materials inventory
3. Work in process inventory manufacturer
4. Finished goods inventory

Inventory Cost – cost principle requires that inventory be recorded for the price paid or the consideration given up.

– includes invoice price (minus purchase discounts), transportation in costs (also called “freight in”), inspection costs
and preparation costs.

FIFO Costing Method – assets purchased or acquired first are disposed of first. It assumes that the remaining inventory consists of
items purchased last.

Sales revenue or sales – primary source of revenues of a merchandising business. It is earned when the merchandiser transfers the
goods to the customer.

Sales
-Sales Returns and Allowances
-Sales Discounts (often given to credit customers who pay the seller quickly)
Net Sales

Sales Discounts:

1. Trade Discounts – a percentage reduction from a published list price granted to retailers or wholesalers for buying large
quantities of goods or for regularly patronizing the business. Since it is granted at the point of sale, this is immediately
deducted from the list price and only the net amount called gross invoice price will be the basis for invoicing and
recording.
Illustration: Assume that a cabinet with a list price of P5,000 was delivered to the customer less a trade discount of 2%
and 1%. The gross invoice price will be computed as follows:

List Price ₱ 5,000

P5,000 x .98 = P4,900 x .99 = P4,851
Less 2% of P5,000 100
₱ 4,900
Less 1% of P4,900 49
Gross Invoice Price ₱ 4,851
2. Cash Discounts – refer to an incentive that a seller offers to a buyer in return for paying a bill before the scheduled due
date.

Cost of Sales – calculated as the number of units sold during the period multiplied by their unit costs.

– a major expense item for most non-service businesses.

– recorded in the period the units are SOLD (REVENUE is recognized), regardless of when the units are paid for.

Total Goods Available for Sale – expresses the total cost of what has been available for sale throughout a given period.

Gross Profit – net sales minus cost of sales.

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 Merchandise Inventory, Beginning ₱ 59,700
Purchases ₱ 521,980
Less: Purchase Returns & Allowances ₱ 9,100
Purchase Discounts 2,525 11,625
Net Purchases ₱ 510,355
Add: Freight in 17,400
Net Cost of Purchases 527,755
Total Goods Available For Sale ₱ 587,455
Less: Merchandise Inventory, End 62,150
Cost of Sales ₱ 525,305
*This COS format is for periodic inventory system only

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Terms of Sales & Purchases:

1. Discount Terms

For example: 2/10, n/30

2% discount if balance will be paid in ten days, remainder to be paid within 30 days of sale

2. FOB Shipping and FOB Destination

FOB Shipping Point: Buyer pays the shipping costs because ownership “title” transfers to buyer at the point the shipment starts
on its journey.
FOB Destination: Seller pays shipping costs because title does not transfer to the buyer until the goods reach their destination
(the buyer’s place of business).

Inventory Systems

1. Perpetual Inventory System – The inventory account is continuously updated for the following events:
a. Purchases dr: invty
b. Purchase Discounts Taken cr: invty
c. Purchase Returns & Allowances cr: invty
d. Sales (remove from inventory the COST of the units sold) cr: invty
e. Sales Returns (add to inventory the COST of units returned) dr: invty

– The necessary detailed record-keeping required by the perpetual system has become much
easier with current computer technology.

– A physical count of the inventory is still required at the end of the accounting period to assure
accurate inventory records in case of errors or theft.

2. Periodic Inventory System – Inventory transactions are not recorded directly in the INVENTORY account. Instead, separate
accounts are used for:
a. Purchases
b. Purchase Returns & Allowances
c. Purchase Discounts
d. Transportation In
– Because entries are not made to the inventory account during the accounting period, the amount
of inventory is not known until the end of the period when the inventory count is done.
– Periodic inventory systems require more closing entries at the end of the period. (Purchases,
Purchase Returns and Allowances, Purchase Discounts and Transportation In are all separate
TEMPORARY accounts that must be closed out at the end of the period.)
– Purchases is an account that holds the current period’s inventory purchases (a debit balance) and
is used in the calculation of Cost of Goods Sold on the Income Statement.
– The Purchase Returns and Allowances account also is used to calculate Cost of Goods Sold on the
income statement. It is a deduction from the cost of purchases in a periodic inventory system.
– When using the periodic system, Purchase Discounts are recorded in a separate account. This
helps managers keep track of the company’s performance in taking advantage of discounts.
– The ending inventory is determined at the end of the period by taking a physical count of the
goods remaining on hand.

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(200)

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 inventory
Accounting and Inventory Management: dr cr
bb 575
The accounting system plays three roles in inventory management:
1,000
1. Provides accurate information for financial statements and tax reports.
2. Provides up-to-date information on inventory quantities and cost.
3. Provides information necessary to protect inventory from theft and misuse.

Ratios:

1. Gross Margin Percentage – gross margin as a percent of sales

Net Sales - Cost of Sales Gross Margin

or
Net Sales Net Sales

2. Return on sales

Net Income
Net Sales

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Common-size Income Statement – Each item of the income statement is expressed as a % of that year’s Net Sales. It is used for
vertical analysis, in which each line item in a financial statement is represented as a percentage of a base figure within the statement.

Question: Why did the company have a net loss when sales increased by $1,000?

Trend Analysis – shows both peso and % changes from one year to the next year for each item on the income statement.

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