5-1 CHAPTER5 Accounting for Merchandising Operations 5-2 PreviewofCHAPTER5 5-3 Merchandising Operations Merchandising Companies Buy and Sell Goods Wholesaler Retailer Consumer The primary source of revenues is referred to as sales revenue or sales 5-4 SO Identify the differences between service and merchandising companies Merchandising Operations Income Measurement Not used in a Service business Illustration 5-1 Cost of goods sold is the total cost of merchandise sold during the period 5-5 SO Identify the differences between service and merchandising companies Merchandising Operations Illustration 5-2 Operating Cycles The operating cycle of a merchandising company ordinarily is longer than that of a service company 5-6 SO Identify the differences between service and merchandising companies Merchandising Operations Flow of Costs Illustration 5-3 Companies use either a perpetual inventory system or a periodic inventory system to account for inventory 5-7 SO Identify the differences between service and merchandising companies Merchandising Operations Flow of Costs Perpetual System 5-8  Maintain detailed records of the cost of each inventory purchase and sale  Records continuously show inventory that should be on hand  Company determines cost of goods sold each time a sale occurs SO Identify the differences between service and merchandising companies Merchandising Operations Flow of Costs Periodic System  Do not keep detailed records of the goods on hand  Cost of goods sold determined by count at the end of the accounting period  Calculation of Cost of Goods Sold: Beginning inventory $ 100,000 Add: Purchases, net 5-9 800,000 Goods available for sale SO Merchandising Operations Flow of Costs Additional Consideration Perpetual System: 5-10  Traditionally used for merchandise with high unit values  Provides better control over inventories  Requires additional clerical work and additional cost to maintain inventory records SO Identify the differences between service and merchandising companies Periodic Inventory System Sales Returns and Allowances Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the $300 sales return as follows May Sales returns and allowances 300 Accounts receivable 300 5-57 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Periodic Inventory System Sales Discounts Illustration: On May 14, PW Audio Supply receives payment of $3,430 on account from Sauk Stereo PW Audio honors the 2% cash discount and records the payment of Sauk’s account receivable in full as follows May 14 Cash 3,430 Sales discounts 70 Accounts receivable 3,500 5-58 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Periodic Inventory System Comparison of Entries—Perpetual Vs Periodic Illustration 5A-3 5-59 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Periodic Inventory System Comparison of Entries—Perpetual Vs Periodic Illustration 5A-3 5-60 SO Explain the recording of purchases and sales of inventory under a periodic inventory system APPENDIX5B Illustration 5B-1 Worksheet for a Merchandising Company 5-61 SO Prepare a worksheet for a merchandising company Key Points 5-62  Under both GAAP and IFRS, a company can choose to use either a perpetual or a periodic system  Inventories are defined by IFRS as held-for-sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the providing of services  Under GAAP, companies generally classify income statement items by function Classification by function leads to descriptions like administration, distribution, and manufacturing Key Points 5-63  Under IFRS, companies must classify expenses by either nature or function Classification by nature leads to descriptions such as the following: salaries, depreciation expense, and utilities expense If a company uses the functional-expense method on the income statement, disclosure by nature is required in the notes to the financial statements  Presentation of the income statement under GAAP follows either a single-step or multiple-step format IFRS does not mention a single-step or multiple-step approach Key Points 5-64  Under IFRS, revaluation of land, buildings, and intangible assets is permitted The initial gains and losses resulting from this revaluation are reported as adjustments to equity, often referred to as other comprehensive income The effect of this difference is that the use of IFRS results in more transactions affecting equity (other comprehensive income) but not net income  IAS 1, “Presentation of Financial Statements,” provides general guidelines for the reporting of income statement information Subsequently, a number of international standards have been issued that provide additional guidance to issues related to income statement presentation Key Points 5-65  Similar to GAAP, comprehensive income under IFRS includes unrealized gains and losses (such as those on so-called “available-for-sale securities”) that are not included in the calculation of net income  IFRS requires that two years of income statement information be presented, whereas GAAP requires three years Looking to the Future The IASB and FASB are working on a project that would rework the structure of financial statements Specifically, this project will address the issue of how to classify various items in the income statement A main goal of this new approach is to provide information that better represents how businesses are run In addition, this approach draws attention away from just one number —net income It will adopt major groupings similar to those currently used by the statement of cash flows (operating, investing, and financing), so that numbers can be more readily traced across statements For example, the amount of income that is generated by operations would be traceable to the assets and 5-66 Looking to the Future liabilities used to generate the income Finally, this approach would also provide detail, beyond that currently seen in most statements (either GAAP or IFRS), by requiring that line items be presented both by function and by nature The new financial statement format was heavily influenced by suggestions from financial statement analysts 5-67 IFRS Self-Test Questions Which of the following would not be included in the definition of inventory under IFRS? a) Photocopy paper held for sale by an office-supply store b) Stereo equipment held for sale by an electronics store c) Used office equipment held for sale by the human relations department of a plastics company d) All of the above would meet the definition 5-68 IFRS Self-Test Questions Which of the following would not be a line item of a company reporting costs by nature? a) Depreciation expense b) Salaries expense c) Interest expense d) Manufacturing expense 5-69 IFRS Self-Test Questions Which of the following would not be a line item of a company reporting costs by function? a) Administration b) Manufacturing c) Utilities expense d) Distribution 5-70 Copyright “Copyright © 2011 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” 5-71 .. .CHAPTER5 Accounting for Merchandising Operations 5-2 PreviewofCHAPTER5 5-3 Merchandising Operations Merchandising Companies Buy... Do not keep detailed records of the goods on hand  Cost of goods sold determined by count at the end of the accounting period  Calculation of Cost of Goods Sold: Beginning inventory $ 100,000... Merchandise Question In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting: 5-17 a Purchases b Purchase Returns c Purchase Allowance d Inventory