chapter 4: merchandising
merchandise available for sale equation
Merchandise Available for Sale = Ending Inventory + Cost Of Goods Sold which can be rewritten as: Merchandise Available Sale − Ending Inventory = Cost Of Goods Sold or Merchandise Available for Sale − Cost Of Goods Sold = Ending Inventory or beginning inventory + net purchases = merchandise available for sale
fob destination means
ownership transfers from the seller to the buyer when the goods ARRIVE AT THE BUYER'S PLACE OF BUSINESS. The goods are included in the sellers' inventory while in transit because ownership has not yet transferred to the buyer.
fob shipping point means
ownership transfers from the seller to the buyer when the goods are SHIPPED. The goods are included in the buyer's inventory when the goods are shipped because ownership has then transferred to the buyer.
net income for a merchandiser
revenues - both cost of merchandise sold and expenses
multi-step income statement of a merchandiser:
sales cost of good sold gross profit operating expenses income from operations other revenues and expenses
net sales
sales less: sales returns and allowances less: sales discounts
gross profit section includes:
sales, sales discounts, cost of goods sold, sales returns and allowances
consignee
seller of the goods
which of the following costs are included in merchandise inventory?
shipping fees charged by vendor, purchase costs, taxes assessed on the merchandise, costs necessary to ready the merchandise for sale
Companies try to keep their operating cycles: long or short?
short because assets tied up in inventory and receivables are not productive. cash sales shorten operating cycles
who is responsible to pay during FOB shipping point?
the buyer is responsible
The consignor retains title to the item at all times and items on consignment are included in the inventory of who?
the consignor. The consignee never includes consigned goods in inventory.
consignor
owner of the goods
Walmart uses perpetual inventory system to account for its merchandise. On May 1 it sold 1400 of merchandise on credit with terms 2/10, n/40. Demonstrate the required journal entry to record the receipt of the payment on May 25.
(on may 1st, the date of the sale, you would debit accounts receivable) debit cash 1,400 credit accounts receivable 1400
merchandise inventory
-asset account -increase with a debit -debit balance -goes on the balance sheet of a merchandiser -not closed, carried over from year to year -products that a company owns and intends to sell
FOB destination
-buyers place of business -SELLERS responsibility to pay for shipping charges -less risk of the transporter -revenue for the sale will be recorded after the goods reach their destination
sales returns and allowances
-contra-revenue -normal debit balance -go on the financial statements -closed in the 2nd step
cost of goods sold
-expense account reported on the income statement -is used to figure out gross profit -is also called cost of sales -includes the expenses of buying and preparing an item for sale -the expense of buying and preparing merchandise
sales
-revenue account -credit balance (dea loR) -on the income statement -close it on the first step of closing entries -when you earn revenue, you credit sales
FOB shipping point
-sellers place of business -BUYERS responsibility to pay for shipping charges -when the shipping costs are the responsibility of the buyer, then the merchandise inventory account is DEBITED for freight charges. -the most common -e.g. (online shopping, buyer has to pay the shipping)
perpetual inventory
-we keep up with the level of inventory all the time -technology
periodic inventory
-we keep up with the level of inventory occasionally -used historically -least costly
cost
-what you pay for the product itself -freight charges
merchandisers operating cycle
1. cash purchases of merchandise 2. inventory for sale 3. credit sales 4. accounts receivable 5. cash collection
non-operating activities section includes:
loss from sale of equipment, interest expense, gain from sale of building, interest revenue
gross profit or gross margin formula
net sales - cost of goods sold
net income formula
net sales - cost of goods sold = gross profit - expenses =
Walmart uses the perpetual inventory system. on may 1, it purchased $400 of merchandise on account with terms 2/15, n/40. On May 3, Walmart returned $50 of merchandise due to defect. Assume that the purchase was PAID WITHIN THE DISCOUNT PERIOD:
Debit Accounts payable 350 (400-50) -Credit Merchandise Inventory 7 (350 x 2%) -Credit Cash 343
Sally Beauty Warehouse uses the perpetual inventory system to account for it's merchandise. On Nov. 2, it sold $700 of merchandise on credit with terms of 2/15, n/30. Demonstrate the required journal entry to record the receipt of payment from the customer on Nov 13
Debit Cash 686 Debit Sales Discounts 14 Credit Accounts Receivable 700 (sales discounts is a contra revenue account so it should be increased with a debit)
Jerry's Flowers sold and shipped merchandise across the country to a buyer. The terms were FOB destination. Assuming it paid the bill immediately, demonstrate the journal entry required by Jerry's Flowers under the perpetual inventory system to record the freight charges
Debit Delivery Expense Credit Cash (since the terms are FOB destination, the seller will assume responsibility for the shipping costs, so they are debited delivery expense)
PetsSmart uses perpetual inventory system to account for its merchandise. A customer returned merchandise. Assuming the purchase was originally bought on credit for $400 with a cost to PetsSmart of 100, demonstrate required journal entry
Debit Sales Returns and Allowances 400 Credit Accounts Receivable 400 Debit Merchandise Inventory 100 Credit cost of goods sold 100
joes market sold $1000 of goods on credit with terms 2/10, n/30. The original cost of the goods was $400. The required journal entry to record the sale and cost of the sale would be
Debit accounts receivable 1000 credit sales 1000 Debit Cost of goods sold 400 credit merchandise inv. 400
Net realizable value
Expected selling price (value/sales price) of an item minus the cost of making the sale.
Goods in transit shipped by Abbey company (seller) FOB destination
Include in inventory count
Goods in transit shipped to Abbey company (purchaser) FOB shipping point
Include in inventory count
in the 2nd step of closing entries what types of accounts do you close?
nominal accounts that have debit balances e.g. expenses & sales returns and allowances
merchandise inventory T chart:
on the t chart: DR -goods for resale -account for inventory at cost CR -
income from operations section includes:
advertising expense, depreciation expense-office equipment, store supplies expense, insurance expense
merchandisers cost flow for a single time period
beginning inventory + net purchases = goods available for sale the goods available is either sold (cost of goods sold) or kept for future sales (ending inventory)
debit memorandum example: when a buyer returns or takes and allowance on merchandise, the ___ issues a debit memorandum to inform the ___ of a debit made to the sellers account in the buyers records
buyer, seller
examples of good cash management practices involving inventory purchases:
buyers should take advantages of early payment discounts invoices should be paid on the last day of the discount period
wholesaler
buys products from manufacturers and sells them to retailers
retailer
buys products from manufacturers or wholesalers and sells them to consumers
to encourage people to pay promptly we sometimes grant them a ____ ____
cash discount
sales discount
contra sales contra revenue reduction in sales from the sellers point of view so it is increased with a debit
gross profit/gross margin
cost of goods sold less: expenses
merchandiser
earns net income by buying and selling merchandise
Goods in transit shipped to Abbey company (purchaser) FOB Destination
exclude from inventory count
Goods on consignment (Abbey company is consignee)
exclude from inventory count
Damaged and obsolete goods are ____ from the inventory count if they cannot be sold.
excluded
cost of goods sold is what type of account?
expense
what does 2/10, n/30 mean?
if you pay us on time, we will allow a 2% discount. or if you pay us within 10 days, we will allow you to pay us 2% less. if you don't pay within 10 days, then the original balance/net is due within 30 days.
when we grant a cash discount as the seller
it reduces the true amount of revenue we earn -record that in an account called sales discount (from the sellers point of view)
allowance
they keep the goods and you reduce the revenue you earned
discount period
time period in which a discount may be taken by the buyer
fob shipping point - title
title passes when goods are SHIPPED
fob destination
title passes when goods reach the destination/ arrive
merchandisers can be
wholesalers or retailers
