Merchandising

Business

© Copyright Doug Hillman 1999

 Merchandising Income
Statement

 Net Sales
 Cost of Goods Sold
 Gross Margin
 Operating Expenses
 Net Operating Margin

© Copyright Doug Hillman 1999

 Merchandising Income
Statement

 Other Revenues and Expenses

 Net Income before Taxes
 Income Tax Expense
 Net Income

© Copyright Doug Hillman 1999

 Net Sales

 Sales
› Total or gross sales of merchandise
 Trade discounts

› Percentage reduction from list price

 Sales returns and allowances

› Reduction of price after sale

› Return of unacceptable merchandise
© Copyright Doug Hillman 1999
 Net Sales

 Sales Discounts
› Discount for payment within a stated
period
 2/10, n/30

› 2% discount if paid within 10 days

› Gross amount due in 30 days

© Copyright Doug Hillman 1999

 Net Sales

Gross sales revenue

Deduct: Sales returns and allowances
Sales discounts
Net sales revenues

© Copyright Doug Hillman 1999

 Merchandise Inventory
Systems

 Periodic inventory system

› Determine cost of goods sold and
inventory balance only at end of each
accounting period
 Perpetual inventory system

› Determine cost of goods sold and

inventory balance after each sale.

© Copyright Doug Hillman 1999

 Cost of Goods Sold: Periodic
Merchandise inventory, beginning
Purchases
Transportation in
Gross delivered cost of purchases
Deduct: Purchases returns and allowances
Purchases discounts
Net cost of purchases
Cost of goods available for sale
Deduct: Merchandise inventory, ending
Cost of goods sold

© Copyright Doug Hillman 1999

 Purchases

 Records the cost of all merchandise

bought for resale
 Recorded at invoice cost

© Copyright Doug Hillman 1999

 Transportation In

 FOB shipping point

› Buyer is owner during transit and is
responsible for transportation costs
 FOB destination

› Seller is owner during transit and is

responsible for transportation costs

© Copyright Doug Hillman 1999 1

 Purchases Returns and
Allowances

 Contra account to purchases

 Records

› Price concessions after purchase

› Returns of merchandise

© Copyright Doug Hillman 1999 1

 Purchases Discounts

 Contra account to purchases

 Records

› Cash discounts allowed for payments

within discount period

© Copyright Doug Hillman 1999 1

 Net Cost of Purchases

Purchases
Transportation in
Gross delivered cost of purchases
Deduct: Purchases returns and allow
Purchases discounts
Net cost of purchases

© Copyright Doug Hillman 1999 1

 Merchandise Inventory

 Cost of merchandise on hand

 Amount determined by

› Physical count of units on hand

› Pricing at respective costs

© Copyright Doug Hillman 1999 1

 Cost of Goods Sold: Periodic
Merchandise inventory, beginning
Purchases
Transportation in
Gross delivered cost of purchases
Deduct: Purchases returns and allowances
Purchases discounts
Net cost of purchases
Cost of goods available for sale
Deduct: Merchandise inventory, ending
Cost of goods sold

© Copyright Doug Hillman 1999 1

 Gross Margin on Sales

 Difference between net sales and cost

of goods sold
 Gross means must still deduct expenses

© Copyright Doug Hillman 1999 1

 Operating Expenses

 Selling expenses
› Expenses incurred in advertising,
selling, and delivering
 General and administrative expenses

› Other operating expenses such as

office expenses, computer services,
and executive salaries

© Copyright Doug Hillman 1999 1

 Net Operating Margin

 Gross margin
 Less operating expenses

© Copyright Doug Hillman 1999 1

 Other Revenue and Expenses

 Revenues and expenses that do not

relate to the principal activity of the
business
 Separation permits calculation of net
operating margin without influence of
these nonoperating items

© Copyright Doug Hillman 1999 1

 Income Tax Expense

 Corporations must pay taxes on income

 Calculation prescribed by federal and
state laws

© Copyright Doug Hillman 1999 2

 Net Price Method

 Purchases discounts lost method

 Record the purchase at invoice price
less cash discount
 If paid after discount period lapses, extra
cost recorded as Purchases Discount
Lost

© Copyright Doug Hillman 1999 2

 Analyzing Information

 Are net sales increasing or decreasing?

 What is percentage change in net
sales?
 Is percentage of cost of goods sold to
net sales increasing or decreasing?

© Copyright Doug Hillman 1999 2

 Analyzing Information

 Is gross margin percent increasing or

decreasing?
 Is percentage of operating expenses to
net sales increasing or decreasing?
 Is gross margin percent increasing or
decreasing?

© Copyright Doug Hillman 1999 2