Merchandising Operations and the Accounting Cycle Chapter 5 Service Co. Income Statement Year ended June 30, 20xx Service revenue $xxx Expenses: Salary expense x Depreciation expense x Income tax expense x Net income $ xx Service Co. Income Statement Year ended June 30, 20xx Service revenue $xxx Expenses: Salary expense x Depreciation expense x Income tax expense x Net income $ xx Merchandising Co. Income Statement Year ended June 30, 20xx Sales revenue $xxx Cost of goods sold x Gross profit xx Operating expenses: Salary expense x Depreciation expense x Net income $ xx Merchandising Co. Income Statement Year ended June 30, 20xx Sales revenue $xxx Cost of goods sold x Gross profit xx Operating expenses: Salary expense x Depreciation expense x Net income $ xx Income Statements Account for the purchase of inventory. Objective 1 Purchase of Inventory Merchant prepares purchase order Suppliers send merchandise and a bill Compares Purchase of Inventory Example ✔ On May 1, the Sporting Store acquired on account $2,000 of various items for resale. ✔ The supplier sent the merchandise along with a bill stating the quantity, price, and terms of sale. ✔ What is the journal entry? May 1 Inventory $2,000 Accounts Payable $2,000 Purchased inventory on account Inventory Accounts Payable 2,000 2,000 Purchase of Inventory Example Recording Purchase Returns and Allowances Example ✔ Assume that on May 4 a $100 item was returned prior to payment of the invoice. ✔ What is the journal entry? May 4 Accounts Payable 100 Inventory 100 Merchandise was returned Recording Purchase Returns and Allowances Example ✔ Assume that one of the items of merchandise is slightly damaged, and the store was given a $10 allowance. ✔ What is the journal entry? May 4 Accounts Payable 10 Inventory 10 Received a purchase allowance Recording Purchase Returns and Allowances Example Inventory 2,000 100 10 Bal. 1,890 Accounts Payable 100 2,000 10 Bal. 1,890 Purchase Discounts ✔ Credit terms are stated in expressions such as: ✔ 2/10, N/30, meaning that a discount of 2% is allowed if the invoice is paid within 10 days; otherwise the full (net) amount is due within 30 days. [...]...Purchase Discounts Example Assume the Sporting Store purchased merchandise for $1,000 with terms of 2/10, N/30 The store paid within the discount period The 2% discount ($20) is deducted from the amount due ($1,000) and $980 is remitted Purchase Discounts Example What is the journal entry? Accounts Payable 1,000 Cash 980 Inventory 20 To record payment of invoice within the discount period Recording Transportation... Transportation Costs Transportation costs are the cost of moving inventory from seller to buyer FOB stands for Free on Board and governs the passing of title of the goods Selling/buying agreements usually specify FOB terms Recording Transportation Costs FOB Shipping Point FOB Destination Freight Charges Example Assume that on May 9 the Sporting Store paid $60 for freight What is the journal entry? May 9 Inventory... inventory since the goods were not returned Sales Discounts and Sales Returns and Allowances On May 20, Example the store received a check from Maria Gym for the balance due What is the balance due? Accounts Receivable May 15 = $5,000 Less May 17 returns and allowances $1,600 Equals May 20 balance due of $3,400 Sales Discounts and Sales Returns and Allowances Maria took Exampleadvantage of the sales terms... 60 Paid a freight bill 60 Objective 2 Account for the sale of inventory Sale of inventory The amount a business earns from selling merchandise is called sales revenue Inventory that has been sold to customers is called cost of goods sold Sporting Store Example Assume that on May 11 the store sold merchandise costing $1,800 for $2,600 in cash What are the journal entries? Sporting Store Example May 11... expense 393 Other expenses, net 302 Total operating expenses Net earnings (same as Net income) Millions $33,212 23,029 10,183 9,039 $ 1,144 Operating Cycle of a Merchandising Business Purchase and Cash Sale Purchase and Sale on Account Cash Cash Cash Cash Accounts Accounts Receivable Receivable Inventory Inventory Inventory Inventory Inventory Systems Perpetual Periodic Objective 4 Adjust and close the accounts... Periodic Objective 4 Adjust and close the accounts of a merchandising business Adjustments to Inventory Example Book Inventory Balance $255,000 Physical Count $252,500 $2,500 difference Adjustments to Inventory Example What is the journal entry? December 31 Cost of Goods Sold 2,500 Inventory 2,500 To adjust inventory to physical count Closing Entries for a Merchandising Business Revenues Income Summary 2,760,000... Revenues Income Summary 2,760,000 7,348 C.G.S Sales Discount 1,490,400 1,884,348 2,767,348 883,000 22,824 Returns and A 32,605 Other Exp 338,519 Capital Account 883,000 Objective 5 Prepare a merchandiser’s financial statements Income Statement Formats There are two basic formats for the income statement: 1 Multi-step 2 Single-step ... the journal entries? Sporting Store Example May 11 Cash 2,600 Sales Revenue 2,600 To record sale of merchandise May 11 Cost of Goods Sold 1,800 Inventory 1,800 To record the cost of merchandise sold Sporting Store Example On May 15, the store sold to Maria Gym $5,000 worth of merchandise with a cost of $3,000 Terms are 2/10, N/30 Maria Gym Total Invoice Terms 2/10, N/30 $5,000 Sales Discounts and Sales... the journal entries? Sales Discounts and Sales Returns and Allowances Example May 17 Sales Returns and Allowance 1,500 Accounts Receivable 1,500 Received returned merchandise May 17 Inventory Cost of Goods Sold Returned goods to inventory 900 900 Sales Discounts and Sales Returns and Allowances Example May 17 Sales Returns and Allowance 100 Accounts Receivable 100 Credit granted for damaged goods There... $3,400 Sales Discounts and Sales Returns and Allowances Maria took Exampleadvantage of the sales terms – 2/10, N/30 May 20 Cash 3,332 Sales Discounts 68 Accounts Receivable 3,400 Cash collected within the discount period Objective 3 Use sales and gross profit to evaluate a company Sales Revenue Net sales = Sales Revenue less Sales Returns and Sales Discounts Gross Profit or Gross Margin Target Corporation . 2/10, N/30. ✔ The store paid within the discount period. ✔ The 2% discount ($20) is deducted from the amount due ($1,000) and $980 is remitted. Purchase Discounts Example ✔ What is the journal. account $2,000 of various items for resale. ✔ The supplier sent the merchandise along with a bill stating the quantity, price, and terms of sale. ✔ What is the journal entry? May 1 Inventory $2,000. discount of 2% is allowed if the invoice is paid within 10 days; otherwise the full (net) amount is due within 30 days. Purchase Discounts Example ✔ Assume the Sporting Store purchased merchandise