Chapter 4

T.Hend Alajaji
 Nature of Businesses .

 Special terms of Merchandising businesses .

 Analysis of merchandising transactions.

 Multiple-Step Income Statement

 Merchandising
businesses

Analyze
Service
Merchandising
businesses
transactions

compute
Merchandising
Inventory Ch4 Net
income

Gross Selas
Profit Revenues

Cost of
goods Sold
  Nature of Businesses :

1. Service Businesses provide services rather than

products to customers.

2. Merchandising businesses sell products they

purchase from other business to customers.

Objective 1 . Nature of Businesses :

Service Business

Fees earned $XXX

Operating expenses –XXX

Net income $XXX

Objective 1 . Nature of Businesses:

Merchandising Business

Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX
 Compute the net income
Service business:
Fees earned – operating expenses = net income

Merchandise business:
Sales – cost of merchandise sold = gross profit
Gross profit – operating expenses = net income
 Income Statement Comparison

Service Business
$150,000 Fees earned
120,000 Operating expenses(-)
$ 30,000 Net income

Merchandising Business
$600,000 Sales revenue
450,000 Cost of mdse. Sold -
$150,000 Gross profit
120,000 Operating expenses -
$ 30,000 Net income
 Objective 2 . Special terms of Merchandising businesses

 sales revenue or sales :

 the amount that a business earns from selling merchandise

inventory is called sales revenue, or sales.

 cost of merchandise sold :

 the major expense of a merchandiser is cost of goods sold.

 Gross margin or Gross profit :

 The excess of sales over cost of sales is called gross margin.

 Merchandise inventory

 Merchandise on hand at the end of an account period

 Objective 3
Analyze Merchandising transactions
 Every merchandise sale has two components,
each of which requires an entry in a perpetual
inventory system.

Selling
Price

Cost
6-12
•On January 3, NetSolutions sold $1,800 of merchandise for cash.
Using the perpetual inventory system, the cost of merchandise sold and
the decrease in merchandise inventory are also recorded. The cost of
merchandise sold on January 3 is $1,200

Date Description Debit Credit

Jan. 3 Cash 1,800
Sales 1,800

Jan. 3 Cost of merchandise sold 1,200

Merchandise inventory 1,200
•On January 12, NetSolutions sold merchandise on account for $510. The
cost of merchandise sold was $280.

Date Description Debit Credit

Jan. 12 Account receivable 510
Sales 510

Jan. 12 Cost of merchandise sold 280

Merchandise inventory 280
 When goods sold to a customer arrive in
damaged condition or are otherwise
unsatisfactory, the customer can
(1) return them for a full refund or
(2) keep them and ask for a reduction in the
selling price, called an allowance.
•On January 13, issued Credit Memo No. 32 to Alsaud Company for
merchandise returned to NetSolutions. Selling price, $225; cost to
NetSolutions, $140.

Date Description Debit Credit

Jan. 13 Sales returns and allowances 225
Account receivable – Krier Co. 225

Jan. 13 Merchandise inventory 140

Cost of merchandise sold 140
A sales discount is a sales price reduction given to
customers for prompt payment of their account
balance.
•To encourage the buyer to pay before the end of the credit period, the seller
may offer a discount, such as 2/10, n/30. These terms indicate that a two
percent discount can be taken if the invoice is paid within ten days. After ten
days the full amount is due by the thirtieth day from the invoice date

•On January 17, NetSolutions receives the amount due within ten days, so the
buyer deducted $30 ($1,500 x 2%) from the invoice amount

Date Description Debit Credit

Jan. Cash 1,470
22 Sales discounts 30 1,500
Account receivable
The sales returns and allowances and sales
discounts introduced in this section were
recorded using contra-revenue accounts.
Purchase Transactions

•On January 3, NetSolutions purchased merchandise for cash.

•On January 4, NetSolutions purchased merchandise on account from
Thomas Corporation

Date Description Debit Credit

Jan. 3 Merchandise inventory 2,510

Cash 2,510
Jan. 4 Merchandise inventory 9,250
Account payable - Thomas Corporation 9,250
2- Purchases Discounts :
•Alpha Technologies issues an invoice for $3,000 to NetSolutions
dated March 12, with terms 2/10, n/30. NetSolutions is trying to
determine if it should pay the invoice within the discount period.
•Based on the calculation in the previous slide, NetSolutions pays the
amount due, less the discount, on March 22.

Date Description Debit Credit

Mar. 12 Merchandise inventory 3,000
Account payable - Alpha 3,000
Technologies
Mar. 22 Account payable - Alpha Technologies 3,000
Cash 2,940
Merchandise inventory 60
3- Purchases Returns and Allowances :

•NetSolutions receives a delivery from Maxim Systems and determines that

$900 of the items are not the merchandise ordered. Debit memorandum #18
is issued to Maxim Systems. NetSolutions records the return of the
merchandise as follows:

Date Description Debit Credit

Mar. 7 Account payable - Maxim Systems 900

Merchandise inventory 900
Multiple-Step Income
Statement
Revenue from sales:
Sales $720,185
Less:Sales returns and allowances $ 6,140
Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950

Continued
Operating expenses:
Selling expenses:
Sales salaries expense $56,230
Advertising expense 10,860
Depr. Expense–store equipment 3,100
Miscellaneous selling expense 630
Total selling expenses $ 70,820
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expense–office equipment 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. administrative expense 760
Total admin. expenses 34,890
Total operating expenses 105,710
Income from operations $ 77,240

Continued
Other income and expenses:
Rent revenue $ 600
Interest expense (2,440) (1,840)
Net income $75,400

Concluded
 M6-11 Calculating Shrinkage in a Perpetual Inventory System
Corey’s Campus Store has $50,000 of inventory on hand at the
beginning of the month. During the month, the company buys
$8,000 of merchandise and sells merchandise that had cost
$30,000. At the end of the month, $25,000 of inventory is on
hand. How much shrinkage occurred during the month?

Beginning inventory $50,000

Purchases +8,000
Cost of Goods Sold -30,000
Ending balance 28,000
Inventory count -25,000
Shrinkage $3,000

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