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Chapter 6

Merchandising Operations and the


Multistep Income Statement

PowerPoint Author:
Brandy Mackintosh, CA

Copyright © 2016 by McGraw-Hill Education


Learning Objective 6-1

Distinguish between service


and merchandising
operations.

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Operating Cycles

6-3
Operating Cycles

(in thousands) (in millions)

(in thousands) (in millions)

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Learning Objective 6-2

Explain the differences


between periodic and
perpetual inventory systems.

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Inventory Systems
Three accounts are particularly important to
a merchandiser:
The merchandiser’s total cost of acquiring goods
Inventory that it has not yet sold

Sales Total selling price of all goods that the merchandiser


did sell to customers
Revenue
-
Cost of Goods Total cost of all goods that the merchandiser did sell
to customers
Sold

= Gross Profit
6-6
Inventory Systems

BI + P – EI = CGS or BI + P – CGS = EI
$4,800 + 10,200 – 6,000 = $9,000 $4,800 + 10,200 – 9,000 = $6,000

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Periodic Inventory System
A periodic inventory system updates the
inventory records for merchandise purchases,
sales, and returns only at the end of the
accounting period.
To determine how much
BI + P – EI = CGS
inventory is on hand and how
much inventory has been
sold, periodic systems
require that inventory be
physically counted by the
employees at the end of the
period.
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Perpetual Inventory System

In a perpetual inventory
system, the inventory
records are updated
“perpetually,” that is, every
time inventory is bought,
sold, or returned.

Perpetual systems often are


combined with bar codes
and optical scanners.

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Inventory Control
Periodic Perpetual
Inventory Inventory
System System

No Up-to-Date Continuous
Records Tracking

Can’t Can
Estimate Estimate
Shrinkage Shrinkage

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Learning Objective 6-3

Analyze purchase transactions


under a perpetual inventory
system.

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Recording Inventory Purchases

We will now look at the accounting for


inventory purchases, as well as
transportation costs, purchase returns
and allowances, and purchase
discounts. We will record all inventory-
related transactions in the Inventory
account.

6-12
Inventory Purchases

Walmart receives $10,500 of bikes purchased on account.

1 Analyze
Assets = Liabilities + Stockholders’ Equity
Inventory +$10,500 Accounts
Payable +$10,500

2 Record
Inventory 10,500
Accounts Payable 10,500

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Transportation Cost
Walmart pays $400 cash to a trucker who delivers the
$10,500 of bikes to one of its stores.

1 Analyze
Assets = Liabilities + Stockholders’ Equity
Cash -$400
Inventory +$400

2 Record
Inventory 400
Cash 400

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Purchase Returns and
Allowances
Walmart returned some of the bikes to the
supplier and received a $500 reduction in the balance owed.
1 Analyze
Assets = Liabilities + Stockholders’ Equity
Inventory -$500 Accounts
Payable -$500

2 Record
Accounts Payable 500
Inventory 500

6-15
Purchase Discounts
Walmart’s bike purchase for $10,500 had terms of 2/10,
n/30. Recall that Walmart returned inventory costing $500
and received a $500 reduction in its Accounts Payable.
Walmart paid within the discount period.

1 Analyze
Assets = Liabilities + Stockholders’ Equity
Cash -$9,800 Accounts
Inventory -$200 Payable -$10,000

2 Record
Accounts Payable 10,000
Cash 9,800
Inventory 200

6-16
Summary of Inventory
Transactions

6-17
Learning Objective 6-4

Analyze sales transactions


under a perpetual inventory
system.

6-18
Recording Inventory Sales
Merchandisers earn revenues by transferring
control of merchandise to a customer, either for
cash or on credit.

For a merchandiser who is shipping goods to a


customer, the transfer of control occurs at one of two
possible times:
1. FOB shipping point —the sale is recorded when the
goods leave the seller’s shipping department.
2. FOB destination —the sale is recorded when the
goods reach their destination (the customer).

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Recording Inventory Sales
Every merchandise sale has two components,
each of which requires an entry in a perpetual
inventory system.
Selling
Price

Cost

6-20
Recording Inventory Sales
Walmart sells two Schwinn mountain bikes at a selling price of
$200 per bike, for a total of $400 cash. The bikes had
previously been recorded in Walmart’s Inventory at a cost of
$175 per bike, for a total cost of $350.
1 Analyze
Assets = Liabilities + Stockholders’ Equity
Cash +$400 Sales Revenue +$400
Inventory -$350 Cost of Goods Sold -$350

2 Record
Cash 400
Sales Revenue 400
Cost of Goods Sold 350
Inventory 350

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Sales Returns and Allowances

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.

6-22
Sales Returns and Allowances
Suppose that after Walmart sold the two Schwinn mountain
bikes, the customer returned one to Walmart. Assuming that
the bike is still like new, Walmart would refund the $200 selling
price to the customer and take the bike back into inventory.

1 Analyze
Assets = Liabilities + Stockholders’ Equity
Cash -$200 Sales Returns and
Allowances (+xR) -$200
Inventory +$175 Cost of Goods Sold +$175

2 Record
Sales Returns & Allowances (+xR) 200
Cash 200
Inventory 175
Cost of Goods Sold 175

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Sales on Account and Sales Discounts
Suppose Walmart’s warehouse store (Sam’s Club) sells
printer paper on account to a local business for $1,000 with
payment terms of 2/10, n/30. The paper had cost Sam’s Club
$700.

1 Analyze
Assets = Liabilities + Stockholders’ Equity
Accounts Receivable+$1,000 Sales Revenue +$1,000
Inventory -$700 Cost of Goods Sold -$700

2 Record
Accounts Receivable 1,000
Sales Revenue 1,000
Cost of Goods Sold 700
Inventory 700

6-24
Sales on Account and Sales Discounts
To take advantage of this 2% discount, the customer must pay
Walmart within 10 days. If the customer does so, it will deduct
the $20 discount (2% $1,000) from the total owed ($1,000),
and then pay $980 to Walmart.

1 Analyze
Assets = Liabilities + Stockholders’ Equity
Cash +$980 Sales Discounts (+xR) -$20
Accounts Receivable -$1,000

2 Record
Cash 980
Sales Discounts (+xR) 20
Accounts Receivable 1,000

(2% × $1,000)
6-25
Summary of Sales-Related
Transactions
The sales returns and allowances and sales
discounts introduced in this section were
recorded using contra-revenue accounts.

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Learning Objective 6-5

Prepare and analyze a


merchandiser’s multistep
income statement.

6-27
Multistep Income Statement

6-28
Gross Profit Analysis

Gross Gross Profit


= × 100
Profit % Net Sales
6-29
Comparing Gross Profit
Percentages

6-30
Supplement 6A

Recording Inventory Transactions in


a Periodic System

Copyright © 2016 by McGraw-Hill Education


Learning Objective 6-S1

Record inventory transactions


in a periodic system.

6-32
Recording Inventory Transactions
in a Periodic System
An electronics retailer stocks and sells just one item
and the following events occurred:

Jan. 1 Beginning inventory: 80 units at a cost of $60.


Apr. 14 Purchased 170 additional units on account at a cost of $60.
Nov. 30 Sold 150 units on account at a unit sales price of $80.
Dec. 31 Counted 100 units at a unit cost of $60.

We will record these events assuming the company uses


a periodic inventory system and then compare the
periodic inventory system to a perpetual inventory system.

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Recording Inventory Transactions
in a Periodic System

Periodic Inventory System Perpetual Inventory System

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Recording Inventory Transactions
in a Periodic System

Periodic Inventory System

BI + P – EI = CGS

End-of-year adjustment entries are not required using a perpetual inventory system.

6-35
Recording Inventory Transactions
in a Periodic System

Summary of the Effects on the Accounting Equation

6-36
Chapter 6
Solved Exercises

M6-2, M6-16, E6-3, E6-5, E6-13,


E6-20

Copyright © 2016 by McGraw-Hill Education


M6-2 Calculating Shrinkage in a Perpetual Inventory System
Corey’s Campus Store has $4,000 of inventory on hand at the
beginning of the month. During the month, the company buys $41,000
of merchandise and sells merchandise that had cost $30,000. At the
end of the month, $13,000 of inventory is on hand. How much
shrinkage occurred during the month?

Beginning inventory $ 4,000


Purchases +41,000
Cost of Goods Sold -30,000
Ending balance 15,000
Inventory count -13,000
Shrinkage $ 2,000

6-38
M6-16 Interpreting Changes in Gross Profit Percentage
Luxottica Group, the Italian company that sells Ray Ban and Oakley
sunglasses, reported net sales of €7.1 billion in 2012 and €6.2 billion in
2011. Gross profit increased from €4.1 billion in 2011 to €4.7 billion in
2012. Was the increase in gross profit caused by (a) an increase in
gross profit per sale, (b) an increase in sales volume, or (c) a
combination of (a) and (b)?

(in billions of euro)


2012 2011
Net Sales 7.1 6.2
Cost of Goods Sold 2.4 2.1
Gross Profit 4.7 4.1

Gross Profit Percentage 66.2% 66.1%

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E6-3 Identifying Shrinkage and Other Missing Inventory
Information
Calculate the missing information for each of the following
independent cases:
Beg. Cost of Ending Ending
Case Inventory Purchases Goods Inventory Inventory Shrinkage
Sold (perpetual) (As Counted)
A $100 $700 $300 $500
? $420 $80
?
B 200 800 850
? 150 150 ?0
C 150 500 200 450 440
? 10
D 260 ?
600 650 210 200 ?
10

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E6-5 Inferring Missing Amounts Based on Income Statement
Relationships
Supply the missing dollar amounts for each of the following independent cases.

6-41
E6-5 Inferring Missing Amounts Based on Income Statement Relationships
Supply the missing dollar amounts for each of the following independent cases.

Sales Beginning Purchases Cost of Cost of Cost of Gross


Case Revenue Inventory Goods Goods Sold Ending Profit
Available Inventory
A $700 $100 $800 900 ? $300 600$? 400$?
B 900 200 800 1,000 ? 850 ? 150 50?
C 600 ? 100 400 ? 500 ? 200 300 400
D 800 300 ? 600 900 ? 650 250 150 ?
E 1,000 50 900 950 ? 500 ? 450? 500

6-42
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.

Jan. 6 Accounts Receivable 100


Sales Revenue 100

Cost of Goods Sold 70


Inventory 70

6-43
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.

Jan. 6 Accounts Receivable 80


Sales Revenue 80

Cost of Goods Sold 60


Inventory 60

6-44
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.

Jan. 14 Cash ($100 x 98%) 98


Sales Discounts ($100 x 2%) 2
Accounts Receivable 100

6-45
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.

Feb. 2 Cash 80
Accounts Receivable 80

6-46
E6-13 Recording Journal Entries for Net Sales with Credit Sales
and Sales Discounts
Using the information in E6-12, prepare journal entries to record the
transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The
goods cost Solitare $70.
6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The
goods cost Solitare $60.
14 Collected cash due from Wizard Inc.
Feb. 2 Collected cash due from SpyderCorp.
28 Sold goods for $50 to Bridges with terms 2/10, n/45. The
goods cost Solitare $30.

Feb. 28 Accounts Receivable 50


Sales Revenue 50

Cost of Goods Sold 30


Inventory 30

6-47
E6-20 Inferring Missing Amounts Based on Income Statement
Relationships
Supply the missing dollar amounts for the income statement of
Williamson Company for each of the following independent cases:
Case A Case B Case C

Sales Revenue $ 8,000 $ 6,000 $ 6,195


Sales Returns and Allowances 150 500 275
Net Sales 7,850 5,500 5,920
Cost of Goods Sold 5,750 4,050 5,400
Gross Profit $ 2,100 $ 1,450 $ 520

6-48
End of Chapter 6

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