Chapter 4 -- Accounting for Merchandising Operations

Merchandise inventory is an _______ reported on the _____________ ______ and contains the cost of products purchased for sale.

Asset; Balance Sheet

Merchandise inventory that is still available for sale is considered a(n) (asset/expense/revenue) and is reported on the (balance sheet/income statement) and merchandise that is sold during the period is considered a(n) (asset/expense/liability) and reported on the (balance sheet/income statement)

Asset; Balance Sheet; Expense; Income Statement

Identify the financial statements of a merchandiser:

Balance Sheet; Income Statement; Statement of Retained Earnings

Merchandisers earn net income by (buying/manufacturing) and (selling/purchasing) merchandise.

Buying; Selling

Wholesaler

Buys products from manufactures and sells them to retailers.

Retailer

Buys products from manufactures or wholesalers and sells them to customers.

Merchandise

Consist of products, also called goods, that a company buys to resell to customers.

Cost of goods sold is characterized by:

Cost of goods sold is subtracted from net sales in order to figure gross profit. Expenses are subtracted from gross profit in order to calculate net income. The heading of the statement contains three lines.

Sticky Company's merchandise inventory balance at year end is $15050, but a physical count reveals that only $15,000 of inventory exists. The adjusting entry to record the shrinkage includes a debit to __________________ for $_____ and a credit to ___________________ for $_____.

Cost of goods sold; $50; Merchandise Inventory; $50

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1400 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale.

Credit Sales $1400; Credit Merchandise Inventory $500; Debit Cash $1400; Debit Cost of Goods Sold $500

The merchandise inventory account on a classified balance sheet is reported in the:

Current assets section

Recall that Merchandise Inventory is considered a(n) (current/plan/intangible) asset on the (balance/income) (sheet/statement) of a merchandiser using the periodic inventory system.

Current; Balance; Sheet

On Dec. 20, X-Mart received a $100 allowance because the merchandise it purchased earlier in the month was of poor quality. Demonstrate the required journal entry for the return assuming the perpetual inventory method, to record the allowance on X-Mart's books--assuming the purchase was made on account.

Debit Accounts Payable $100; credit Merchandise Inventory $100

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it purchased $400 of merchandise on account with terms 2/15, n/40. On May 3, X-Mart returned $50 of merchandise due to defect. Assuming that the purchase was paid for within the discount period, demonstrate the required journal entry for X-Mart to record the payment.

Debit Accounts Payable $350; Credit Merchandise Inventory $7; Credit Cash $343

Jello's Market purchased $1000 of goods on account with terms 2/10, n/30. They returned $200 of the goods due to defect the next day. If Jello pays for the purchase within the discount period and uses the perpetual inventory system, the required journal entry to record the payment would:

Debit Accounts Payable $800; Credit Merchandise Inventory $16; and credit Cash $784

Jo's Market sold $1000 of goods on credit with terms of 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; and credit Merchandise Inventory $400

X-Mart uses the perpetual inventory system to account for its merchandise. On June 1, it sold $7000 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale.

Debit Cost of Goods Sold $500; Credit Merchandise Inventory $500; Debit Cash; Credit Sales $7000

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

Dogs R US uses the perpetual inventory system to account for its merchandise. A customer returned this merchandise due to a defect. Assuming that the purchase was originally bought on credit for $400 with a cost to Dogs R US of $100, and the defective, returned merchandise is only estimated to be worth $30, demonstrate the required journal entry to record the return and to write down the defective merchandise.

Debit Sales Returns and Allowances $400; Credit Account Receivable $400; Debit Merchandise Inventory $30; Debit Loss from Defective Merchandise $70; Credit Cost of Goods Sold $100

On Jan. 5, a customer returned merchandise that had been purchased earlier on credit. The original sale was for $500, and the cost to the seller was $150. Demonstrate the required journal entry to record the return on the books of the seller, assuming the goods can be sold to another customer.

Debit Sales Returns and Allowances $500; debit Merchandise Inventory $150; credit Accounts Receivable $500; and credit Cost of Goods Sold $150.

X-Mart uses the perpetual inventory system to account for its merchandise. A customer who purchased merchandise on account requested an allowance on merchandise purchase due to its poor quality, but did not return the goods back to X-Mart. Assuming that X-Mart gives an allowance of $50 on the merchandise, demonstrate the required journal entry on X-Mart's books to record the allowance.

Debit Sales Returns and Allowances $50; Credit Account Receivable $50

Merchandiser

Earns net income by buying and selling merchandise. Often wholesalers, or retailers.

Gross Profit

Equals net sales less cost of goods sold.

Cost of Goods Sold

Expense of buying and preparing the merchandise.

To compute net income for a merchandiser, you will start with net sales, subtract cost of goods sold and subtract other ___________.

Expenses

What sub-headings would appear on a multiple-step income statement?

General and administrative expenses, selling expenses, net sales, cost of goods sold, income from operations, gross profit.

What items are included in ta merchandising company's income statement but are not included in a service company's income statement?

Gross Profit, Sales Discounts, Sales Returns, Cost of goods sold,. loss from defective merchandise.

Credit Terms

Include the amounts and timing of payments from buyers to sellers.

A merchandiser has four closing journal entries at the end of an accounting cycle. What are they?

Income summary, dividends account, revenue accounts, expense accounts.

Describe good cash management practices involving inventory purchases.

Invoices should be paid on the last day of the discount period. Buyers should take advantage of early payment discounts.

A single-step income statement can be identified by which format?

It shows only one total for all expenses

Why is perpetual inventory systems becoming more popular?

Managers have immediate access to detailed information on sales and inventory levels. Technological advances have made it easier to use.

The balance sheet of a merchandiser and a service business have one major difference. What is one item that would appear only on a merchandiser's balance sheet.

Merchandise Inventory

Which order would a merchandisers multi-step income statement appear?

Net sales --> Cost of goods sold --> Gross profit --> Expenses --> Net income

A (periodic/perpetual) inventory system can be described as an inventory system that updates the inventory account only at the end of the (purchase/period).

Periodic; Period

Which Inventory System is described; Net Income will be reported when the credit column total is larger than the debit column total of the Income Statement columns. The cost of goods sold will be reported in the debit column of the Income Statement columns. The sales Discounts account will appear in the debit column of the Income Statement columns. The depreciated Expense will be reported in the debit column of the income Statement columns.

Perpetual Inventory System

What is included in Merchandise Inventory?

Purchase costs, costs necessary to ready the merchandise for sale, taxes assessed, and shipping fees charged by the vendor.

Merchandise Inventory

Refers to the products that company owns and intends to sell.

Demonstrate how t prepare a multiple-step income statement by ranking the items in the order they would appear on a multi-step income statement of a merchandiser.

Sales --> Cost of goods sold --> Gross Profit --> Operating expenses --> Income from operations --> Other revenues and expenses

Cash Discount

Sellers can grant to encourage buyers to pay earlier. A buyer views this as a purchase discount, a seller views this as a sales discount.

Which are the two classifications of operating expenses on a multiple-step income statement?

Selling; General and administrative

Credit period

The amount of time allowed before full payment is due.

Credit terms of n/15 EOM were printed on an invoice. Explain what this means.

The credit terms stands for net 15 days after end of month.

When a company, using the periodic inventory system completes a worksheet.....

The ending balance in the Merchandise Inventory account will appear in the debit column of the Balance sheet columns. Purchases will be reported in the debit column of the Income Statement columns. Purchase Discounts will be reported in the credit column of the Income Statement columns. The ending balance in the Merchandise Inventory account will be reported in the credit column of the Income Statement columns.

Discount Period

The term in which a cash discount can be applied.

Shrinkage

The terms used to refer to the loss of inventory due to theft, breakage or deterioration.

What is the purpose of a sales discount?

They decrease the time that the seller has to wait for payment.

Perpetual Inventory System

Updates accounting records for each purchase and sale of inventory.

Periodic Inventory System

Updates the accounting records for purchases and sales of inventory only at the end of the period.