Accounting for Merchandising

Operations

Chapter 5
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C1

Service Companies
Service organizations sell time to
earn revenue.

Examples: Accounting firms, law

firms, and plumbing services
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C1

Merchandising Companies
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C2 Operating Cycle for

a Merchandiser
Begins with the purchase of merchandise and
ends with the collection of cash from the sale
of merchandise.
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C2

Inventory Systems
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C2

Inventory Systems

 Perpetual systems  Periodic systems

 continually update  accounting records
accounting records for relating to merchandise
merchandising transactions are updated
transactions only at the end of the
accounting period
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P1

Merchandise Purchases
On November 2, Z-Mart purchased $1,200 of
merchandise inventory for cash.
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P1

Trade Discounts
Used by manufacturers and wholesalers to
offer better prices for greater quantities
purchased.

Example
Example Quantity sold 1,000
Z-Mart
Z-Mart offers
offers aa 30%
30% trade
trade Price per unit $ 5.25
Total 5,250
discount
discount for
for orders
orders of of 1,000
1,000 Less 30% discount (1,575)
units
units or
or more
more on on its
its popular
popular Invoice price $ 3,675
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price ofof $5.25.
$5.25.
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P1 Accounting for Merchandise

Purchases
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P1
Purchase Discounts

A deduction from the invoice price granted

to induce early payment of the amount due.
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P1
Purchase Discounts

2/10,n/30
Number of
Days Otherwise,
Discount Discount Is Net (or All) Credit
Percent Available Is Due in 30 Period
Days
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EXERCISES
• Exercise 5-2 (Page 213)
See your syllabus
• Exercise 5-3 (Page 214)
• Exercise 5-4 (Page 214)
• Exercise 5-5 (Page 214)
• Exercise 5-9 (Page 215) – Adjusting & Closing Entries
• Exercise 5-7 (Page 214)
Please complete on your
• Problem 5-1A (Page 217) own / with your
• Problem 5-2A (Page 217) classmates – Check
answers on Connect
• Problem 5-3A (Page 218) – includes adjusting entries
• Problem 5-4A (Page 219)
• Problem 5-5A (Page 219)
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Exercise 5-3
1. BUYER- Santa Fe Company

a) Credit Purchase
Merchandise Inventory .................................... 24,000
Accounts Payable ..................................... 24,000
Purchased merchandise on credit.

b) Cash Payment
Accounts Payable ............................................ 24,000
Merchandise Inventory* ........................... 720
Cash ........................................................... 23,280
*[24,000 x 3%]
Paid account payable within 3% discount period.

2. SELLER – Mesa Company

a) Credit Sale
Accounts Receivable ....................................... 24,000
Sales........................................................... 24,000
Sold merchandise on account.

Cost of Goods Sold ......................................... 16,000

Merchandise Inventory ............................ 16,000
To record cost of sale.

b) Cash Collection
Cash ................................................................... 23,280
Sales Discounts ................................................ 720
Accounts Receivable ................................ 24,000
Collected account receivable.

3. Net savings from borrowing to pay in discount period .............. $ 465.00

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Exercise 5-4
May 5 Accounts Receivable ....................................... 21,000
Sales ........................................................... 21,000
Sold merchandise on credit (1,500 x $14).

5 Cost of Goods Sold .......................................... 15,000

Merchandise Inventory ............................. 15,000
To record cost of sale (1,500 x $10).

a.
May 7 Sales Returns and Allowances ....................... 2,800
Accounts Receivable ................................ 2,800
Accepted a return from a customer (200 x $14).

7 Merchandise Inventory .................................... 2,000

Cost of Goods Sold .................................. 2,000
Returned merchandise to inventory (200 x $10).

b.
May 8 Sales Returns and Allowances ........................ 600
Accounts Receivable ................................. 600
Granted allowance for damaged merchandise.

c.
May 15 Sales Returns and Allowances ........................ 680
Accounts Receivable ................................. 680
Granted allowance for mis-colored merchandise
and accepted a return from a customer for the
mis-colored merchandise [$120 + (40 x $14)].

15 Merchandise Inventory ..................................... 400

Cost of Goods Sold ................................... 400
Returned merchandise to inventory (40 x $10).
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Exercise 5-5
May 5 Merchandise Inventory .................................... 21,000
Accounts Payable ..................................... 21,000
Purchased merchandise on credit (1,500 x $14).

a.
May 7 Accounts Payable ............................................ 2,800
Merchandise Inventory ............................. 2,800
Returned unwanted merchandise (200 x $14).

b.
May 8 Accounts Payable ............................................ 600
Merchandise Inventory ............................. 600
To record allowance for damaged merchandise.

c.
May 15 Accounts Payable ............................................ 680
Merchandise Inventory ............................. 680
To record allowance for mis-colored goods and
return of mis-colored merchandise
$120 + (40 x $14).
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Analysis of taking a cash

discount

• A buyer purchased inventory, invoice price $50,000,

terms 3/10, n/60. The buyer borrowed money from
the bank to take advantage of the discount at a
10% annual interest, and repaid the bank at the end
of the credit period. How much money did the buyer
save or lose by following this strategy?
[ANS = $835.62]
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Implied Interest Rate

1. A buyer failed to take advantage of the vendor's credit
terms of 2/10, n/50, but instead paid the invoice in full
at the end of 50 days. By not taking advantage of the
cash discount, the buyer lost the equivalent of __???
%___ annual interest on the amount of the purchase.
2. A buyer failed to take advantage of the vendor's credit
terms of 2.5/15, n/60, but instead paid the invoice in
full at the end of 60 days. By not taking advantage of
the cash discount, the buyer lost the equivalent of
_____ annual interest on the amount of the purchase.
[ANS = 20.28%]
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P1
Purchase Discounts

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

of merchandise inventory on account,
credit terms are 2/10, n/30.
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P1
Purchase Discounts

On November 12, Z-Mart paid the amount

due on the purchase of November 2.
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P1
Purchase Discounts

After we post these entries, the accounts

involved look like these:
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P1 Purchase Returns and

Allowances

Purchase Return . . .
Merchandise
Merchandise returned
returned by
by the
the purchaser
purchaser to
to the
the
supplier.
supplier.
Purchase Allowance . . .
AA reduction
reduction in
in 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.
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P1 Purchase Returns and

Allowances
On November 15, Z-Mart (buyer) issues a $300
debit memorandum for an allowance from
Trex for defective merchandise.
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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.
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P1 Transportation Costs and

Ownership Transfer
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P1
Transportation Costs

Z-Mart purchased merchandise on terms of

FOB shipping point. The transportation
charge is $75.
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P1
Accounting for Merchandise
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P2 Accounting for Merchandise

Sales
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P2
Sales of Merchandise

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.
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P2
Sales of Merchandise

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

merchandise on credit. The merchandise has a
cost basis to Z-Mart of $1,600.
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P2
Sales Discounts

Sales discounts on credit sales can benefit a seller by

decreasing the delay in receiving cash and reducing future
collection efforts.
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P2
Sales Discounts
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.
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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.
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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. The returned items
sell for $800 and cost $600.
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P2
Sales Allowances
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.
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P2 Merchandising Cost Flow in

the Accounting Cycle
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P3
Warm-Up
• If a company uses the perpetual inventory system,
the amount of merchandise inventory shown on the
unadjusted trial balance represents:
A. Beginning Inventory
B. Ending Inventory
• If a company uses the periodic inventory system,
the amount of merchandise inventory shown on the
unadjusted trial balance represents:
A. Beginning Inventory
B. Ending Inventory
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P3
Warm-Up
• If a company uses the perpetual inventory system,
the amount of merchandise inventory shown on the
unadjusted trial balance represents:
A. Beginning Inventory
B. Ending Inventory 
• If a company uses the periodic inventory system,
the amount of merchandise inventory shown on the
unadjusted trial balance represents:
A. Beginning Inventory 
B. Ending Inventory
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P3
Warm-Up
• If a company uses the perpetual inventory system,
the purchases account appears on the trial balance:
A. True
B. False
• If a company uses the periodic inventory system,
the purchases account appears on the trial balance:
A. True
B. False
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P3
Warm-Up
• If a company uses the perpetual inventory system,
the purchases account appears on the trial balance:
A. True
B. False 
• If a company uses the periodic inventory system,
the purchases account appears on the trial balance:
A. True 
B. False
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P3 Adjusting Entries for

Merchandisers
• Adjusting Entries are the same as those covered
under Chapter 3 (Please review Chapter 3 as
needed): See Problem 5-3A (Page 218)
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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-Mart’s Merchandise Inventory account at the end of

year 2013 has a balance of $21,250, but a physical
count reveals that only $21,000 of inventory exists.
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P3

Closing Entries for Merchandisers

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P4

A multiple-step
income
statement
format shows
detailed
computations
of net sales
and other
costs and
expenses, and
reports
subtotals for
various
classes of
items.
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P4
Single-Step Income Statement
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Classified Balance Sheet

Highly
Liquid

Less
Liquid
Problem 5-4A (Page 219)
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 Problem 5-4A (Page 219)
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Questions?
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IMPLIED INTEREST RATE

• ABC company purchases inventory on credit; terms
2/10, n/60. ABC does not take the discount. What is
the implied annual interest rate for missing this
discount?

Page 186 footnote

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Global View
Accounting for Merchandise Purchases and Sales
Both U.S. GAAP and IFRS include broad and similar guidance
for the accounting of merchandise purchases and sales.

Financial Statement Differences

1. Order of expenses
2. Separate disclosures
3. Presentation of expenses
4. Classification of operating and
nonoperating expenses
5. Alternative income
6. Order of current and noncurrent
items on the balance sheet
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A1

Acid-Test Ratio

Acid-Test Quick Assets

=
Ratio Current Liabilities

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.
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A2

Gross Margin Ratio

Gross
Net Sales - Cost of Goods Sold
Margin =
Net Sales
Ratio

Percentage of dollar
sales available to
cover expenses and
provide a profit.
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A1/A2

JCPenney
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P5 Appendix 5A:
Periodic Inventory System
(a)

(b) A periodic
inventory
(c) system requires
updating the
(d)
inventory
account only at
(e) the end of a
period to reflect
the quantity and
(f) cost of both the
goods available
and the goods
(g)
sold.
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P5 Appendix 5A:
Periodic Inventory System
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P5 Appendix 5B:
Worksheet—Perpetual System
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End of Chapter 5