Chapter 4

Reporting and Analyzing

Merchandising Operations

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 4-2

Conceptual Learning Objectives

C1: Describe merchandising activities and

identify income components for a
merchandising company
C2: Identify and explain the inventory asset of
a merchandising company
C3: Describe both perpetual and periodic
inventory systems
C4: Analyze and interpret cost flows and
operating activities of a merchandising
company

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 4-3

Analytical Learning Objectives

A1: Compute the acid-test ratio and

explain its use to assess liquidity
A2: Compute the gross margin ratio and
explain its use to assess profitability

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Procedural Learning Objectives

P1: Analyze and record transactions for merchandise

purchases using a perpetual system
P2: Analyze and record transactions for merchandise
sales using a perpetual system
P3: Prepare adjustments and close accounts for a
merchandising company
P4: Define and prepare multiple-step and single-step
income statements
P5: Appendix 5A: Record and compare merchandising
transactions using both periodic and perpetual
inventory systems

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C1

Merchandising Activities

Service
Service organizations
organizations sell
sell time
time to
to earn
earn revenue.
revenue.
Examples:
Examples: Accounting
Accounting firms,
firms, law
law firms
firms and
and plumbing
plumbing services
services

Minus Equals Net

Revenues Expenses
income

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Merchandising Activities
C1

Merchandising Companies

Manufacturer Wholesaler Retailer Customer

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P2 Reporting Income of a
Merchandiser
Merchandising companies sell products to earn revenue.
Examples: sporting goods, clothing, and auto parts stores

Net Minus Cost of Equals Gross Minus Equals Net

Sales Goods Sold Expenses
Profit Income

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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.

Cash Sale Credit Sale

Cash
Purchases collection Purchases

Merchandise
Cash Account
inventory
sales receivable

Merchandise
inventory Credit sales
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Inventory Systems
C3

Beginning Net cost of

inventory + purchases

= Merchandise
available for sale

Cost of goods
Ending inventory
+ sold

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 4-10
P1
Merchandise Purchases

On June 20, Jason, Inc. purchased $14,000 of

Merchandise Inventory paying cash.

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P1

Trade Discounts

Used by manufacturers and wholesalers to offer

better prices for greater quantities purchased.

Example
Example
Matrix,
Matrix, Inc.
Inc. offers
offers aa 30%
30% trade
trade
discount
discount onon orders
orders ofof 1,000
1,000
units
units or
or more
more of of their
their popular
popular
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

Seller
   Invoice date
Purchaser
Order number
 Credit terms
Freight terms
 Goods
 Invoice amount



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 4-13

Purchase Discounts
P1

A deduction from the invoice price granted to induce early

payment of the amount due.

Discount Period Credit Period

Terms

Time

Due: Invoice Due: Full Invoice Price

Due price minus
discount

Date of
Invoice
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P1
Purchase Discounts

2/10,n/30
Number
Number ofof
Days
Days Otherwise,
Otherwise,
Discount
Discount Discount
Discount Is
Is Net
Net (or
(or All)
All) Credit
Credit
Percent
Percent Available
Available Is
Is Due
Due in
in 30
30 Period
Period
Days
Days
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 4-15
P1
Purchase Discounts

On
On May
May 7,
7, Jason,
Jason, Inc.
Inc. purchased
purchased $27,000
$27,000 ofof
merchandise
merchandise inventory
inventory on
on account,
account, credit
credit
terms
terms are
are 2/10,
2/10, n/30.
n/30.

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 4-16

Purchase Discounts
P1

On
On May
May 15,
15, Jason,
Jason, Inc.
Inc. paid
paid the
the amount
amount due
due
on
on the
the purchase
purchase of
of May
May 7.
7.

*$27,000 × 2% = $540 discount

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Purchase Discounts
P1

After we post these entries, the

accounts involved look like this:

Merchandise Inventory Accounts Payable

5/7 27,000 5/15 540 5/15 27,000 5/7 27,000

Bal. 26,460 Bal. 0

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P1
When Discount is Not Taken

If we fail to take a 2/10, n/30

discount, is it really expensive?

365 days ÷ 20 days × 2% = 36.5% annual rate

Days Number
Number Percent
Percent
Days
in of
of additional
additional paid
paid to
to
in aa
year days
days before
before keep
keep
year
payment
payment money
money

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P1

Purchase Returns and Allowances

Purchase
Purchase Return
Return .. .. ..
Merchandise
Merchandise returned
returned byby the
the purchaser
purchaser to to the
the
supplier.
supplier.
Purchase
Purchase Allowance
Allowance .. .. ..
AA reduction
reduction inin thethe cost
cost of
of defective
defective merchandise
merchandise
received
received by
by aa purchaser
purchaser from
from aa supplier.
supplier.

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P1

Purchase Returns and Allowances

On
On May
May 9,
9, Matrix,
Matrix, Inc. purchased $20,000
$20,000
of
of merchandise
merchandise inventory
inventory on
on account,
account,
credit
credit terms
terms are
are 2/10,
2/10, n/30.
n/30.

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 4-21
P1

Purchase Returns and Allowances

On
On May
May 10,
10, Matrix,
Matrix, Inc.
Inc. returned
returned $500
$500 of
of defective
defective
merchandise
merchandise to
to the
the supplier.
supplier.

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P1

Purchase Returns and Allowances

On May 18, Matrix, Inc. paid the amount owed for
the purchase of May 9.

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 4-23

Transportation Costs
P1

Buyer
Seller

FOB destination
FOB shipping point Merchandise (seller pays)
(buyer pays)

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 4-24

Transportation Costs
P1

On May 12, Jason, Inc. purchased $8,000 of

merchandise inventory for cash and also
paid $100 transportation costs.

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 4-25

Quick Check 
P1

On
On July
July 6,
6, 2007,
2007, Seller
Seller Co.
Co. sold
sold $7,500
$7,500 of
of merchandise
merchandise toto Buyer,
Buyer,
Co.
Co. onon account;
account; terms
terms of
of 2/10,n/30.
2/10,n/30. The
The shipping
shipping terms
terms were
were FOB
FOB
shipping
shipping point.
point. The
The shipping
shipping cost
cost was
was $100.
$100. Which
Which of
of the
the following
following
will
will be
be part
part of
of Buyer’s
Buyer’s July
July 66 journal
journal entry?
entry?

a.
a. Credit
Credit Sales
Sales $7,500
$7,500
b.
b. Credit
Credit Purchase
Purchase Discounts
Discounts $150
$150
c.
c. Debit
Debit Merchandise
Merchandise Inventory
Inventory $7,600
$7,600
d.
d. Debit
Debit Accounts
Accounts Payable
Payable $7,450
$7,450
FOB shipping point indicates the buyer
ultimately pays the freight. This is recorded with
a debit to Merchandise Inventory.
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 4-26
P1

Cost of Merchandise Purchased

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P2

Accounting for Merchandise Sales

Sales
Sales discounts
discounts and
and returns
returns and
and allowances
allowances are
are Contra
Contra Revenue
Revenue accounts.
accounts.
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P2
Sales of Merchandise

On March 18, Diamond Store sold $25,000 of

merchandise on account. The merchandise was carried
in inventory at a cost of $18,000.

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P2
Sales Discounts

On
On June
June 8,
8, Barton
Barton Co.
Co. sold
sold merchandise
merchandise costing
costing $3,500
$3,500
for
for $6,000
$6,000 on
on account.
account. Credit
Credit terms
terms were
were 2/10,
2/10, n/30.
n/30. Let’s
Let’s
prepare
prepare the
the journal
journal entries.
entries.

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Sales Discounts
P2

On June 17, Barton Co. received a check for $5,880

in full payment of the June 8 sale.

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P2
Sales Returns and Allowances

On June 12, Barton Co. sold merchandise

costing $4,000 for $7,500 on account. The
credit terms were 2/10, n/30.

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P2
Sales Returns and Allowances
On June 14, merchandise with a sales price of $800 and
a cost of $470 was returned to Barton. The return is
related to the June 12 sale.

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P2
Sales Returns and Allowances

On June 20, Barton received the amount owed to it from the

sale of June 12.

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C4
Let’s complete the
accounting cycle
by preparing the
closing entries for
Barton.

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 4-35
Step 1: Close Credit Balances in
P3
Temporary Accounts to Income
Summary.

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 Step 2: Close Debit Balances in 4-36
P3
Temporary Accounts to Income
Summary.

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P3
Step 3: Close Income Summary to
Owner’s Capital

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P3 Step 4: Close Withdrawals to Owner’s
Capital

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P4
Income Statement Formats

 Multiple-Step

 Single-Step

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P4
Multiple-Step Income Statement

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Single-Step Income Statement

P4

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P4

Balance Sheet

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Acid-Test Ratio
A1

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 =
Ratio
Net Sales

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

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End of Chapter 4

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