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Learning Objectives
1. Nature of Merchandising Business
2. Accounting for Purchases
3. Accounting for Sales
4. Transportation Costs
5. Merchandise Transactions
6. Merchandising Chart of Accounts
7. Merchandising Income Statement
8. Merchandising Accounting Cycle
9. Financial Analysis and Interpretation
Chapter 6
Accounting for Merchandising Businesses
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Nature of merchandise business
Service business
Provide service
Usually it is a small business
Merchandise business
Purchase and sell merchandise inventory
Bigger than service business
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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
Income tax expense x
Net income $ xx
Comparison of Income Statements:
Service Co. And Merchandising Co.
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sales revenue or sales
the amount that a business earns from selling
merchandise inventory is called sales revenue, or sales.
cost of merchandise sold
the major expense of a merchandiser is cost of goods
sold.
Gross margin or Gross profit
The excess of sales over cost of sales is called gross
margin.
Merchandise inventory
Merchandise on hand at the end of an account period
Special terms
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Compute the net income
Service business:
Fees earned operating expenses = net income

Merchandise business:
Sales cost of merchandise sold = gross profit
Gross profit operating expenses = net income

The cost of merchandise sold is the largest expense for the
merchandise business, say 70% or more
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Income Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse. sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
75% of revenues
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Merchandise Inventory

Merchandising involves selling inventory
Inventory is usually an important asset
Inventory must be accounted for periodically or
perpetually
Inventory system
Perpetual inventory system
Periodic inventory system
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Perpetual inventory system
In a perpetual inventory system, each
purchase and the cost of each sale are
recorded in Merchandise Inventory.

Most companies using the perpetual
inventory system.


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Periodic inventory system
In a periodic inventory system, the inventory
records do not show the amount available for sale
or sold during the period. Instead, a detailed listing
of merchandise for sale at the end of the
accounting period is prepared by the physical
count.
This physical inventory is used to determine the
cost of the merchandise inventory on hand and the
cost of merchandise sold.
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Continuous determination of inventory value
Continuous determination of gross profit
Affordable with computers, scanners, and bar
codes on most products
Perpetual inventory accounting provides
management controls
Managers know which items are selling fastest
and the profit margin on those items
Advantages of Using Perpetual Inventory
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Accounting for purchase
Purchase order
Receive the inventory
Invoice and payment

Exhibit 1 invoice
Netsolutions purchase $1,500 merchandise inventor
Credit term: 2/10; n/30
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Purchase and payment


Jan. 12
Merchandise inventory 1500
Accounts payable 1500
Jan. 22
Accounts payable 1500
Cash 1500
Payment without discount
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Purchase and payment


Jan. 12
Merchandise inventory 1500
Accounts payable 1500
Jan. 22
Accounts payable 1500
Cash 1470
Merchandise inventory 30
Payment with the discount: 1500 *2% = $30
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Discount rate
Purchase amount: $1500
Discount rate: 2% for 20 days
1500* 2% =30
Interest rate: 12% per year
1470*12%*20/360= 9.80
Savings from borrowing:
30 9.80 =20.20
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What is the due date of the
invoice?
Question 1:
An invoice dated august 13, has terms n/30.

Question 2:
An invoice dated November 22


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What is the due date of the
invoice?
Question 1:
An invoice dated august 13, credit terms n/30.
Solution:
Sep. 12
Question 2:
An invoice dated November 22, credit terms:2/10,n/30
Solution:
Dec. 2
Dec. 22
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Purchases returns and allowances
Purchase returns
Purchase business return the merchandise inventory to
selling business
get a debit memorandum from the sales business
Purchase allowances
Purchase business do not return the merchandise
inventory to selling business
get a debit memorandum from the sales business

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Purchases returns and allowances
Example : p.231
1. May 2, purchases $5,000 of inventory.
2. May 4, returns $3,000 of inventory
3. Credit term: 2/10; n/30
4. Discount: (5000-3000) * 2% = $40

Recording in the journal
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Accounting for sales
To record:
Sales revenue
Cost of sales
Sales expenses
Example: p. 233
Sales :$ 1000
Cost of sales: $550
Credit card charges: $50
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Sales discount
To set up a separate account: sales discounts
It is a contra account to Sales.
Balance on usually on the debit side.
Example : p. 233
Sales: $1500
Discount: $30
Net sales: $1470
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Sales returns and allowances
To set up a separate account:
Sales returns and allowances
It is a contra account to Sales.
Balance on usually on the debit side.
Example : p. 234
Sales returns: $225, cost $140
Record the deduction of sales
Record the deduction of cost of sales
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Sales taxes
Example p.235
Sales price $100
Sales tax rate 6%
Total amount $106 of accounts receivable

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Sales taxes
Example p.235
Sales price $100
Sales tax rate 6%
Total amount $106 of accounts receivable

Accounts receivable 106
Sales 100
sales tax payable 6
Sales tax payable 6
Cash 6
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Trade discount
Wholesalers give the purchaser the discount
for large amount of purchase.
P. 235
30% of discount for $2400 sales
The sales revenue: 2400 * 70%=1680
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Transportation cost
FOB shipping point
FOB destination




If FOB shipping point, the buyer pays the
transportation costs.
If FOB destination, the seller pays the
transportation costs.
seller
Shipping
point
buyer
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Example: FOB shipping point
Buyers record:
Buy merchandise inventory $ 900
Transportation cost $ 50

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Example: FOB shipping point
Buyers record:

Merchandise inventory 900
Accounts payable 900
Merchandise inventory 50
Cash 50
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More example
Under the term of FOB shipping point,
sometimes the seller prepaid the
transportation cost, then to get the refund
from the buyer.
Selling merchandise inventory $800
Term: FOB shipping point
Transportation cost $45
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More example
Accounts receivable 800
Sales 800
Cost of merchandise sold 360
Merchandise inventory 360
Transportation out 45
Cash 45
The sellers record:
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Example : FOB destination
sellers record
selling merchandise inventory $700
Cost of sales $480
Transportation cost 40

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Example : FOB destination
sellers record

Accounts receivable 700
Sales 700
Cost of merchandise sold 48
Merchandise inventory 48
Transportation out 40
Cash 40
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Illustration of Accounting for
merchandise inventory
Seller: Scully company
Buyer: Burton company
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Selling and Buying Merchandise Inventory
Description Debit Credit
Accts. Receivable 7,500
Sales 7,500

Cost of Mdse. Sold 4,500
Mdse. Inventory 4,500



No entry
Mdse. Inventory 7,500
Accts. Payable 7,500







Mdse. Inventory 150
Cash 150
Seller Buyer
Description Debit Credit
July1. Merchandise was sold with credit terms of n/45.
July 2. Paid transportation cost.
Recorded at full cost
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Accounting for Merchandise Transactions
Description Debit Credit
Accts. Receivable 5,000
Sales 5,000
Cost of Mdse. Sold 3,500
Mdse. Inventory 3,500
Mdse. Inventory 5,000
Accts. Payable 5,000
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit
July 5. Scully Company sold merchandise on account to
Burton Co., $5,000, terms FOB destination, n/30. The cost
of the merchandise sold was $3,500.
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Accounting for Merchandise Transactions
Description Debit Credit
Transportation Out 250
Cash 250
Mdse. Inventory 5,000
Accts. Payable 5,000



No entry.
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit
July 7. Scully Company paid transportation costs of $250
for delivery of merchandise sold to Burton Co. on July 5.
Accts. Receivable 5,000
Sales 5,000
Cost of Mdse. Sold 3,500
Mdse. Inventory 3,500
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Accts. Receivable 5,000
Sales 5,000
Cost of Mdse. Sold 3,500
Mdse. Inventory 3,500

Transportation Out 250
Cash 250
Accounting for Merchandise Transactions
Description Debit Credit
Sales Ret. & Allow. 1,000
Accts Receivable 1,000
Mdse. Inventory 700
Cost of Mdse. Sold 700
Mdse. Inventory 5,000
Accts. Payable 5,000



No entry.


Accts. Payable 1,000
Mdse. Inventory 1,000
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit
July 13. Scully Company issued Burton Co. a credit memo for
merchandise returned, $1,000. The merchandise cost was $700.
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Accounting for Merchandise Transactions
Description Debit Credit
Cash 4,000
Accts. Receivable 4,000
Accts. Payable 4,000
Cash 4,000
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit
July 15. Scully Company received payment from
Burton Co. for purchase of July 5.
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Cash 4,000
Accts. Receivable 4,000
Accounting for Merchandise Transactions
Description Debit Credit
Accts. Receivable 12,500
Sales 12,000
Cash 500
Cost of Mdse. Sold 7,200
Mdse. Inventory 7,200
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit
July 18. Scully Company sold merchandise on
account to Burton Co., $12,000, terms FOB
shipping point, 2/10, n/eom. Scully Company
prepaid transportation costs of $500. Cost of
merchandise sold was $7,200.
Accts. Payable 4,000
Cash 4,000

Mdse. Inventory 12,500
Accts. Payable 12,500


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Cash 4,000
Accts. Receivable 4,000

Accts. Receivable 12,500
Sales 12,000
Cash 500
Cost of Mdse. Sold 7,200
Mdse. Inventory 7,200
Accounting for Merchandise Transactions
Description Debit Credit
Cash 12,260
Sales Discounts 240
Accts. Receivable 12,500
Accts. Payable 4,000
Cash 4,000

Mdse. Inventory 12,500
Accts. Payable 12,500




Accts. Payable 12,500
Mdse. Inventory 240
Cash 12,260
Scully Company (Seller) Burton Co. (Buyer)
Description Debit Credit
July 28. Scully Company received payment from
Burton Co. less discount (2% x $12,000).
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Chart of accounts for a
merchandise business
What are new accounts in the chart of accounts?
1. Assets
2. Liabilities
3. Owners equity
4. Revenue
5. Costs and expense
6. Other income
7. Other expense
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NetSolutions
Merchandising Chart of Accounts
Balance Sheet Accounts

200 Liabilities
210 Accounts Payable
211 Salaries Payable
212 Unearned Rent
215 Notes Payable

300 Owners Equity
310 Chris Clark, Capital
311 Chris Clark, Drawing
312 Income Summary
100 Assets
110 Cash
111 Notes Receivable
112 Accounts Receivable
113 Interest Receivable
115 Merchandise Inventory
116 Office Supplies
117 Prepaid Insurance
120 Land
123 Store Equipment
124 Accumulated Depreciation
Store Equipment
125 Office Equipment
126 Accumulated Depreciation
Office Equipment
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NetSolutions
Merchandising Chart of Accounts
Income Statement Accounts
600 Other Income
610 Rent Income
611 Interest Income
700 Other Expense
710 Interest Expense
400 Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
500 Costs and Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense
Store Equipment
523 Transportation Out
529 Misc. Selling Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Misc. Admin. Expense

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Income statement for a
merchandise business
A service business
Single-step form]
A merchandise business
Multiple-step form
Exhibit 7
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Revenue from sales:
Sales $720,185
Less:Sales returns and allow. $ 6,140
Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
NetSolutions
Income Statement (Multiple-Step)
For the Year Ended December 31, 2004
Continued
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Operating expenses:
Selling expenses:
Sales salaries expense $60,030
Advertising expense 10,860
Depr. expensestore equip. 3,100
Miscellaneous selling expense 630
Total selling expenses $ 74,620
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expenseoffice equip. 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. admin. expenses 760
Total admin. expenses 34,890
Total operating expenses 109,510
Income from operations $ 73,440


Continued
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Other income:
Interest revenue $ 3,800
Rent revenue 600
Total other income $ 4,400
Other expense:
Interest expense 2,440 1,960
Net income $75,400

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Revenues:
Net sales $708,255
Interest revenue 3,800
Rent revenue 600
Total revenues $712,655
Expenses:
Cost of merchandise sold $525,305
Selling expenses 74,620
Administrative expenses 34,890
Interest expense 2,440
Total expenses 637,255
Net income $ 75,400
NetSolutions
Income Statement (Single-Step)
For the Year Ended December 31, 2004
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NetSolutions
Balance Sheet
December 31, 2002
Continued
Assets
Current assets:
Cash $ 52,950
Notes receivable 40,000
Accounts receivable 60,880
Interest receivable 200
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets $219,310

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NetSolutions
Balance Sheet
December 31, 2002
Property, plant, and
equipment:
Land $ 10,000
Store equipment $ 27,100
Less accum. depreciation 5,700 21,400
Office equipment $ 15,570
Less accum. depreciation 4,720 10,850
Total property, plant, and
equipment 42,250
Total assets $261,560

Continued
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NetSolutions
Balance Sheet
December 31, 2002
Liabilities
Current liabilities:
Accounts payable $ 22,420
Note payable (current portion) 5,000
Salaries payable 1,140
Unearned rent 1,800
Total current liabilities $30,360
Long-term liabilities:
Note payable (due 2004) 20,000
Total liabilities $ 50,360
Owners Equity
Chris Clark, capital 211,200
Total liabilities and owners equity $261,560
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Merchandise inventory shrinkage
Book records: $63,950
Physical inventory : $ 62,150
Inventory shortage: $ 1,800

Adjusting:
Cost of merchandise sold 1800
Merchandise inventory 1800
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Profitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the
effectiveness and efficiency of operations as well
as resources available.
Profitability analysis focuses primarily on the
relationship between operating results reported in
the income statement and resources reported in
the balance sheet.
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Profitability Measures Effective Use of Assets
Ratio of Net Sales to Assets
2003 2002
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500

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Ratio of Net Sales to Assets
Use: To assess the effectiveness
in the use of assets
Net sales on account $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
Ratio of net sales to assets 1.4 to 1 1.2 to 1

Profitability Measures Effective use of Assets
2003 2002
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HOME WORK
READING:
1. Illustrative problem
2. Self- examination questions
3. Multiple choice
Writing:
1. Exercise: 6-25;6-26;6-27
2. Problem : 6-5B
Discussion:

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This is the end of Chapter 6.

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