6-1

Chapter

6 MERCHANDISING
ACTIVITIES

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Operating
Operating Cycle
Cycle of
of aa Merchandising
Merchandising
6-2

Company
Company

1. er
s he

Pu ch
Cash

m
le f t

rc an
ab o

ha di
iv on

se se
ce ti
re lec

of
C ol
3.

Accounts
Inventory
Receivable 2. Sale of merchandise
on account

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-3

Comparing
Comparing Merchandising
Merchandising Activities
Activities with
with
Manufacturing
Manufacturing Activities
Activities

Manufacture
Purchase inventory and
inventory in have a longer
ready-to-sell and more
condition. complex
operating cycle.

Merchandising Manufacturing
Company Company
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-4

Retailers
Retailers and
and Wholesalers
Wholesalers

Wholesalers buy
merchandise from
several different
manufacturers and
then sell this Retailers sell
merchandise to merchandise directly
several retailers. to the public.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Income
Income Statement
Statement of
of aa Merchandising
Merchandising
6-5

Company
Company
Computer Barn Cost of
Condensed Income Statement goods sold
For the Year Ended December 31, 2005 represents
Revenue from sales $ 900,000 the expense
Less: Cost of goods sold 540,000 of goods
Gross profit $ 360,000 that are
Less: Expenses 270,000
sold to
Net income $ 90,000
customers.
Gross profit is a useful means of measuring
the profitability of sales transactions.
© The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
 Accounting
Accounting Systems
Systems Requirements
Requirements for
for
6-6

Merchandising
Merchandising Companies
Companies
Although general ledger accounts provide
useful information, they do not provide
much of the detailed information needed in
the daily business operations.

General Ledger
Accounts Receivable Who
Date Debit Credit Balance
Who
2001
owes
owes us
us
June 1 10,000 10,000 money?
money?
15 3,000 7,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Accounting
Accounting Systems
Systems Requirements
Requirements for
for
6-7

Merchandising
Merchandising Companies
Companies
Control Account General Ledger
Accounts Receivable
Subsidiary Ledgers Date Debit Credit Balance
2001
June 1 10,000 10,000
Subsidiary Ledger 15 3,000 7,000
Jake Sparks
Date Debit Credit Balance
2001
June 1 3,000 3,000
15 1,000 2,000
Subsidiary Ledger
Heather Jacobs
Date Debit Credit Balance
2001
June 1 7,000 7,000
15
McGraw-Hill/Irwin 2,000 5,000 © The McGraw-Hill Companies, Inc., 2005
 6-8

Two
Two Approaches
Approaches Used
Used in
in Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions

Perpetual Periodic
Inventory Inventory
System System

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-9

Perpetual
Perpetual Inventory
Inventory Systems
Systems

The inventory account is continuously

updated to reflect items on hand.

Let’s look
at some
entries!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-10

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-11

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.

10  $30
10 $30 == $300
$300

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-12

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.

Retail

Cost
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-13

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-14

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-15

Taking
Taking aa Physical
Physical Inventory
Inventory

In order to ensure
the accuracy of
their perpetual
records, most
businesses take a
complete physical
count of the
merchandise on
hand at least once
a year.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-16

Taking
Taking aa Physical
Physical Inventory
Inventory
Reasonable amounts of inventory shrinkage are viewed as
a normal cost of doing business. Examples include
breakage, spoilage and theft.
On December 31, Worley Co. counts its inventory.
An inventory shortage of $2,000 is discovered.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Closing
Closing Entries
Entries in
in aa Perpetual
Perpetual Inventory
Inventory
6-17

System
System
Close Revenue accounts
(including Sales) to The closing
Income Summary. entries are the
same!
Close Expense accounts
(including Cost of
Goods Sold) to Income
Summary.

 Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings. © The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
 6-18

Next is the
periodic
inventory
system!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-19

Periodic
Periodic Inventory
Inventory Systems
Systems

No effort is made to keep up-to-date

records of either inventory or cost of
goods sold.

Let’s look
at some
entries!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-20

Periodic
Periodic Inventory
Inventory Systems
Systems
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account.

Notice
Notice that
that no
no entry
entry is
is
made
made toto Inventory.
Inventory.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-21

Periodic
Periodic Inventory
Inventory Systems
Systems
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.

Retail

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-22

Periodic
Periodic Inventory
Inventory Systems
Systems
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-23

Periodic
Periodic Inventory
Inventory Systems
Systems
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-24

Computing
Computing Cost
Cost of
of Goods
Goods Sold
Sold
The
The accounting
accounting records
records of
of Party
Party
Supply
Supply show
show the
the following:
following:
Inventory,
Inventory, Jan.
Jan. 1,
1, 2005
2005 $$ 14,000
14,000
Purchases
Purchases (during
(during 2005)
2005) 130,000
130,000

At
At December
December 31,
31, 2005,
2005, Party
Party
Supply
Supply counted
counted the
the merchandise
merchandise
on
on hand
hand at
at $12,000.
$12,000.

Calculate Party Supply’s cost of goods sold

McGraw-Hill/Irwin for 2005. © The McGraw-Hill Companies, Inc., 2005
 6-25

Computing
Computing Cost
Cost of
of Goods
Goods Sold
Sold

Cost of Goods Sold can be

calculated as follows:
Inventory (beginning of the year) $ 14,000
Add: Purchases 130,000
Cost of goods available for sale 144,000
Less: Inventory (end of year) 12,000
Cost of goods sold $ 132,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-26

Creating
Creating aa Cost
Cost of
of Goods
Goods Sold
Sold Account
Account

Now, Party Supply must

create the Cost of Goods
Sold account.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-27

Creating
Creating aa Cost
Cost of
of Goods
Goods Sold
Sold Account
Account

Now, Party Supply must

record the ending inventory
amount.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-28

Completing
Completing the
the Closing
Closing Process
Process
Close Revenue accounts
(including Sales) to The closing
Income Summary. entries are the
same!
Close Expense accounts
(including Cost of
Goods Sold) to Income
Summary.

 Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings. © The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
 6-29

Selecting
Selecting an
an Inventory
Inventory System
System
Factors
FactorsSuggesting
Suggestingaa Factors
FactorsSuggesting
Suggestingaa
Perpetual
PerpetualInventory
InventorySystem
System Periodic
PeriodicInventory
InventorySystem
System
Large company
Large company withwith Small company, run
Small company, run by by
professional management.
professional management. owner.
owner.
Management
Management and employees Accountingrecords
and employees Accounting recordsofof
wanting information about
wanting information about inventories and specific
inventories and specific
items in inventory and
items in inventory and thethe product
productsales
salesnot
notneeded
neededinin
quantities of specific
quantities of specific daily operations; such
daily operations; such
products that are selling.
products that are selling. information
informationdeveloped
developed
primarily
primarily for usein
for use inannual
annual
income tax returns.
income tax returns.
Items
Items in inventory with a high Inventorywith
in inventory with a high Inventory withmany
manydifferent
different
per-unit cost.
per-unit cost. kinds of low-cost items.
kinds of low-cost items.
Low
Lowvolume
volumeof ofsales
sales High
Highvolume
volumeofofsales
sales
transactions or a
transactions or a transactions
transactions andaamanual
and manual
computerized
computerizedaccounting
accounting accounting system.
accounting system.
system.
system.
Merchandise
Merchandisestored
storedat at Lack
Lackof
offull-time
full-timeaccounting
accounting
multiple locations or in
multiple locations or in personnel.
personnel.
warehouses
warehousesseparate
separatefrom
from
sales sites.
sales sites.
All
Allmerchandise
merchandisestored
storedat
atthe
the
sales site.
sales site.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-30

Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
When manufacturers and wholesalers
sell their products on account, the
credit terms are stated in the invoice.

2/10, n/30
Read as: “Two ten, net thirty”
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-31

Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts

2/10, n/30
Percentage # of Days Otherwise, # of Days
of Discount Discount Is the Full when Full
Available Amount Is Amount Is
Due Due

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-32

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost

Purchases are
recorded at their
net amounts.
Net Purchase
Method Discounts Lost
are recorded
when payment is
made outside
the discount
period.
© The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
 6-33

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-34

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost

On July 6, Play Clothes purchased $4,000 of

merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin $4,000  98%

$4,000 98% == $3,920
$3,920 © The McGraw-Hill Companies, Inc., 2005
 6-35

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost

On July 15, Play Clothes pays the full amount

due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-36

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost

On July 15, Play Clothes pays the full amount

due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-37

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost
Now, assume that Play Clothes waited until July
20 to pay the amount due in full to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-38

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost
Now, assume that Play Clothes waited until July
20 to pay the amount due in full to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.

Nonoperating
NonoperatingExpense
Expense

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-39

Price
Price

Purchases are
recorded at their
gross amounts.
Gross Purchase
Method discounts taken
are recorded
when payment is
made inside the
discount period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-40

Price
Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-41

Price
Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-42

Price
Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-43

Price
Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

Reduces
ReducesCost
Costof
Goods
of $4,000  98%
$4,000 98% == $3,920
$3,920
GoodsSold
Sold

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-44

Price
Price
Now, assume that Play Clothes waited until July
20 to pay the full amount due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-45

Price
Price
Now, assume that Play Clothes waited until July
20 to pay the full amount due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-46

Returns
Returns of
of Unsatisfactory
Unsatisfactory Merchandise
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The
purchase was originally recorded at net cost.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-47

Returns
Returns of
of Unsatisfactory
Unsatisfactory Merchandise
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The
purchase was originally recorded at net cost.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin $500  98%

$500 98% == $490
$490 © The McGraw-Hill Companies, Inc., 2005
 6-48

Transportation
Transportation Costs
Costs on
on Purchases
Purchases

Transportation
Transportation costs
costs related
related to
to the
the
acquisition
acquisition ofof assets
assets are
are part
part of
of the
the
cost
cost of
of the
the asset
asset being
being acquired.
acquired.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-49

Now, let’s talk

about sales!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-50

Transactions
Transactions Relating
Relating to
to Sales
Sales
Computer Barn
Partial Income Statement
For the Year Ended December 31, 2005
Revenue
Sales $ 912,000
Less: Sales returns and allowances $ 8,000
Sales discounts 4,000 12,000
Net sales $ 900,000

Credit terms and merchandise returns

affect the amount of revenue earned by
the seller.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-51

Sales
Sales
On August 2, Kid’s Clothes sold $2,000 of merchandise to
Play Clothes on credit terms 2/10, n/30. Kid’s Clothes
originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-52

Sales
Sales
On August 2, Kid’s Clothes sold $2,000 of merchandise to
Play Clothes on credit terms 2/10, n/30. Kid’s Clothes
originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-53

Sales
Sales Returns
Returns and
and Allowances
Allowances
On August 5, Play Clothes returned $500 of unsatisfactory
merchandise to Kid’s Clothes from the August 2 sale.
Kid’s Clothes cost for this merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

Contra-revenue
Contra-revenue

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-54

Sales
Sales Returns
Returns and
and Allowances
Allowances
On August 5, Play Clothes returned $500 of unsatisfactory
merchandise to Kid’s Clothes from the August 2 sale.
Kid’s Clothes cost for this merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-55

Sales
Sales
On July 6, Kid’s Clothes sold $4,000 of merchandise to Play
Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-56

Sales
Sales
On July 6, Kid’s Clothes sold $4,000 of merchandise to Play
Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-57

Sales
Sales Discounts
Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes from the July 6
sale.
Prepare the journal entry for Kid’s Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-58

Sales
Sales Discounts
Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes from the July 6
sale.
Prepare the journal entry for Kid’s Clothes.

Contra-revenue
Contra-revenue $4,000  98%
$4,000 98% == $3,920
$3,920

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-59

Sales
Sales Discounts
Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes from the July 6 sale.
Prepare the journal entry for Kid’s Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-60

Sales
Sales Discounts
Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes from the July 6 sale.
Prepare the journal entry for Kid’s Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-61

Delivery
Delivery Expenses
Expenses

Delivery
Delivery costs
costs incurred
incurred by
by sellers
sellers are
are
debited
debited to
to Delivery
Delivery Expense,
Expense, an
an
operating
operating expense.
expense.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-62

Accounting
Accounting for
for Sales
Sales Taxes
Taxes
Businesses collect sales tax at the point of sale.
Then, they remit the tax to the appropriate
governmental agency at times specified by law.

$1,000 sale  7%
$1,000 sale 7% tax
tax == $70
$70 sales
sales tax
tax

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-63

Modifying
Modifying an
an Accounting
Accounting System
System

Most businesses use special journals

rather than a general journal to record
routine transactions that occur
frequently.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-64

Financial
Financial Analysis
Analysis

Gross
Net Sales Profit
Margins

••Trends
Trendsover
over time
time ••Gross profit Net
Grossprofit Netsales
sales
••Comparable
Comparablestore
storesales
sales ••Overall
Overall gross
gross profit
profit
margin
margin
••Sales
Salesper
persquare
squarefoot
foot of
of
••Gross
Grossprofit
profitmargins
marginsby by
selling
sellingspace
space department
departmentand and
McGraw-Hill/Irwin
products
products
© The McGraw-Hill Companies, Inc., 2005
 6-65

End
End of
of Chapter
Chapter 66

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005