Merchandising Operations
Chapter 6
© 2009 The McGraw-Hill Companies, Inc.
Operating Cycle for Service Companies
Sell
Services
Service Company
Receive
Cash
Incur
Operating
Expenses
McGraw-Hill/Irwin Slide 2
Operating Cycle for Merchandising
Companies
Sell
Products
Buy Merchandising Receive
Products Cash
Company
Incur
Operating
Expenses
McGraw-Hill/Irwin Slide 3
Operating Cycle for Manufacturing
Companies
Sell
Products
Make Manufacturing Receive
Products Cash
Company
Incur
Buy Raw
Operating
Materials
Expenses
McGraw-Hill/Irwin Slide 4
Inventory Systems
Perpetual Inventory System
In a perpetual inventory system the inventory
record shows the number of units and cost of
each type of merchandise stocked. The
inventory record is updated every time an item is
bought, sold, or returned. With the introduction
of relatively low cost computers, almost all
companies use the perpetual system.
McGraw-Hill/Irwin Slide 5
Inventory Systems
Periodic Inventory System
Rather than updating the inventory record each
time an item is sold, bought, or returned, the
periodic system updates the inventory record
at the end of the accounting period. A physical
count of inventory is used to update the
inventory record.
McGraw-Hill/Irwin Slide 6
Inventory Control
The continuous tracking of transactions in a perpetual inventory
system allows companies to keep just the right quantity of products
on the shelves for just the right amount of time. New microchip
technology allows the transmitting of data automatically from every
inventory item that enters, moves within, and exits a store.
Managers can estimate inventory theft, fraud, and error like this:
Determine inventory on hand at the beginning of the period. Oct. 1
Monitor every piece of inventory that enters and exits inventory.
Add any purchases: For +
October
Subtract any goods that are sold: -
Quantity per accounting records
Count inventory to determine what is actually there (on hand).
Shrinkage (theft, fraud, error)
McGraw-Hill/Irwin Slide 7
Recording Merchandise Purchases
Inventory purchases should be recorded at the
point at which ownership is transferred. Most
purchase and sales agreements specify one of
two possible times:
1. When the goods leave the seller’s shipping
department, known as the FOB (free on board)
shipping point, or
2. When the goods reach the customer at their
destination point, known as FOB destination.
McGraw-Hill/Irwin Slide 8
Purchases on Account
Wal-Mart purchased $5,000 of DVDs on account.
ASSETS = LIABILITIES + OWNERS’ EQUITY
Accounts
Inventory +5,000
Payable +5,000
McGraw-Hill/Irwin Slide 9
Transportation Costs (Freight-In)
Wal-Mart pays $300 cash to a trucker who
delivers goods to a Wal-Mart store.
ASSETS = LIABILITIES + OWNERS’ EQUITY
Inventory +300
Cash -300
McGraw-Hill/Irwin Slide 10
Purchase Returns and Allowances
Wal-Mart returned merchandise to a supplier and
received a $400 reduction in the balance owed
ASSETS = LIABILITIES + OWNERS’ EQUITY
Inventory -400 Accounts
Payable -400
McGraw-Hill/Irwin Slide 11
Purchase Discounts
2/10,n/30
Discount Number of “Net” Maximum
Percentage Days in Purchases Credit
Offered Discount (after returns Period
Period & allowances)
2% discount
period
Nov. 1 Nov. 10 Nov. 30
Date of End of discount End of credit
purchase period period
McGraw-Hill/Irwin Slide 12
Purchase Discounts
Wal-Mart receives a $100,000 shipment of LCD
televisions bought from Sony. The purchase is
subject to a 2/10, n/30 cash discount.
ASSETS = LIABILITIES + OWNERS’ EQUITY
Accounts
Inventory +100,000
Payable +100,000
McGraw-Hill/Irwin Slide 13
Purchase Discounts
Wal-Mart pays the invoice in time to take advantage
of the 2/10, n/30 cash discount.
ASSETS = LIABILITIES + OWNERS’ EQUITY
Accounts
Cash - 98,000
Payable -100,000
Inventory - 2,000
Purchase Discount Calculation
$100,000 × 2% = $2,000
McGraw-Hill/Irwin Slide 14
Summary of Purchase-Related Transactions
Effects of Purchase-Related Transactions on the
Inventory Account
Beginning inventory $ 75,000
Add: Purchases 105,000
Add: Transportation-in 300
Less: Purchase returns and allowances (400)
Less: Purchase discounts (2,000)
Cost of goods available for sale 177,900
Less: Cost of goods sold ?
Ending Inventory $ ?
Recorded as part of the sales transactions
described in the next section of this presentation.
McGraw-Hill/Irwin Slide 15
Recording Merchandise Sales
For merchandisers, the sale should generally be
recorded by the seller at the point at which ownership
is transferred to the customer.
For retail merchandisers, the transfer occurs when a
customer buys and takes possession of the goods at
checkout.
For wholesale merchandisers, the transfer of
ownership occurs at the time stated in the written
sales agreement – either FOB shipping point or FOB
destination.
McGraw-Hill/Irwin Slide 16
Recording Merchandise Sales
In a perpetual system, two effects are recorded when inventory is sold:
1. An increase in Sales Revenue and a corresponding increase it either
Cash (for a cash sale) or Accounts Receivable (for a credit sale), and
2. A decrease in Inventory and a corresponding increase in Cost of
Goods Sold (CGS), an expense account for the cost of inventory sold.
Wal-Mart sells a Schwinn mountain bike for $225 cash. The cost of
the bike to Wal-Mart is $175.
Debit Credit
(a) Cash (+A) 225
Sales Revenue (+R, +OE) 225
(b) Cost of Goods Sold (+E, -OE) 175
Inventory (-A) 175
ASSETS = LIABILITIES + OWNERS’ EQUITY
Cash + 225 Sales Revenue (+R) +225
Inventory - 175 Cost of Goods Sold (+E) -175
McGraw-Hill/Irwin Slide 17
Sales Returns and Allowances
The customer who purchased the Schwinn mountain bike was not happy
with its performance and returns the bike to Wal-Mart.
Debit Credit
(a) Sales Returns and Allowance (+xR, -OE) 225
Cash (-A) 225
(b) Inventory (+A) 175
Cost of Goods Sold (-E, +OE) 175
ASSETS = LIABILITIES + OWNERS’ EQUITY
Cash - 225 Sales Returns & Allowances (+xR) -225
Inventory + 175 Cost of Goods Sold (-E) +175
Contra Account
McGraw-Hill/Irwin Slide 18
Credit Card Sales
Wal-Mart sold an LCD TV for $500 that cost the company $350.
The customer used a credit card that charges a fee of 1% of the
sales amount.
Debit Credit
Cash (+A) (99% x $500) 495
Credit Card Fees (+E, OE) (1% x $500) 5
Sales Revenue (+R, +OE) 500
Cost of Goods Sold (+E, -OE) 350
Inventory (-A) 350
ASSETS = LIABILITIES + OWNERS’ EQUITY
Cash +495 Sales Revenue (+R) + 500
Inventory -350 Credit Card Fees (+E) - 5
Cost of Goods Sold (+E) - 350
McGraw-Hill/Irwin Slide 19
Sales on Account and Sales Discounts
Wal-Mart’s warehouse store, Sam’s Club, sells $1,000 of printer paper on
account to a local business, with payment terms of 2/10, n/30. The
paper cost Sam’s Club $670.
ASSETS = LIABILITIES + OWNERS’ EQUITY
Accounts Receivable +1,000 Sales Revenue (+R) + 1,000
Inventory -670 Cost of Goods Sold (+E) - 670
McGraw-Hill/Irwin Slide 20
Sales on Account and Sales Discounts
The customer pays for the paper within the 10-day discount period and
will receive a $20 discount (2% × $1,000).
ASSETS = LIABILITIES + OWNERS’ EQUITY
Accounts Receivable -1,000 Sales Discounts (+xR) - 20
Cash + 980
McGraw-Hill/Irwin Slide 21
Transportation Cost (Freight-Out)
When a company pays the shipping cost to deliver a product
to a customer (called freight-out), the cost will be recorded as
Delivery Expense.
Wal-Mart pays UPS $50 cash to deliver the printer
paper to its customer.
Debit Credit
Delivery Expense (+E, -OE) 50
Cash (-A) 50
ASSETS = LIABILITIES + OWNERS’ EQUITY
Cash - 50 Delivery Expense (+E) - 50
McGraw-Hill/Irwin Slide 22
Comparing Sales and Purchases
Accounting
HP, the seller, sold 1,000 laptop computer to Wal-Mart for $500,000
on terms of 3/10, n/30. The computers have a cost to HP of $300,000.
The companies would make the following entries:
HP (Seller) Wal-Mart (Purchaser)
Debit Credit Debit Credit
Accounts Receivable (+A) 500,000 Inventory (+A) 500,000
Sales Revenue (+R, +OE) 500,000 Accounts Payable (+L) 500,000
Cost of Goods Sold (+E, -OE) 300,000
Inventory (-A) 300,000
McGraw-Hill/Irwin Slide 23
Comparing Sales and Purchases Accounting
Wal-Mart returned 200 of those computers, for which the total
purchase price was $100,000 (the cost to HP was $60,000). The
companies will make the following entries:
HP (Seller) Wal-Mart (Purchaser)
Debit Credit Debit Credit
Sales Returns & Allowances (+xR, -OE) 100,000 Accounts Payable (-L) 100,000
Accounts Receivable (-A) 100,000 Inventory (-A) 100,000
Inventory (+A) 60,000
Cost of Goods Sold (-E, +OE) 60,000
McGraw-Hill/Irwin Slide 24
Comparing Sales and Purchases Accounting
Wal-Mart paid HP for the remaining computers within the
discount period.
HP (Seller) Wal-Mart (Purchaser)
Debit Credit Debit Credit
Cash (+A) 388,000 Accounts Payable (-L) 400,000
Sales Discounts (+xR, -OE) 12,000 Cash (-A) 388,000
Accounts Receivable (-A) 400,000 Inventory (-A) 12,000
Amount subject to discount $400,000
Discount percentage 3%
Amount of discount $12,000
McGraw-Hill/Irwin Slide 25
Multistep Income Statement
McGraw-Hill/Irwin Slide 26
Gross Profit Percentage
Gross Profit Net Sales – Cost of Goods Sold
= × 100%
Percentage Net Sales
Gross Profit =
$312,427 - $240,391 × 100% = 23.1%
Percentage $312,427
McGraw-Hill/Irwin Slide 27
Comparison to Benchmarks
Average Gross Profit Percentages for Merchandising Sector
Saks 37.5%
Other Department Stores 28.1%
Wal-Mart 23.1%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
McGraw-Hill/Irwin Slide 28
Supplement 6A: Periodic Inventory
With the periodic inventory system, inventory records
are updated only at the end of the accounting period.
The system does not track the cost of goods sold
during the accounting. The total effects and the
resulting financial statements are identical under the
periodic and perpetual systems. Only the timing and
nature of the journal entries differ.
McGraw-Hill/Irwin Slide 29
Periodic Inventory Records
A local cell phone dealer stocks and sells just one item, the
MOTORAZR phone. At the beginning of the year, the company
has an inventory of 800 units at a cost of $50 per phone.
On April, 14th, the dealer purchases 1,100 units at a
unit cost of $50
Debit Credit
Purchases (+A) 55,000
Accounts Payable (+L) 55,000
(1,100 × $50 = $55,000)
McGraw-Hill/Irwin Slide 30
Periodic Inventory Records
A local cell phone dealer stocks and sells just one item, the
MOTORAZR phone. At the beginning of the year, the company
has an inventory of 800 units at a cost of $50 per phone.
On November 30th, the dealer sold 1,300 units, at a
unit selling price of $83.
Debit Credit
Accounts Receivable (+A) 107,900
Sales Revenue (+R, +OE) 107,900
(1,300 × $83 = $107,900)
McGraw-Hill/Irwin Slide 31
Periodic Inventory Records
A local cell phone dealer stocks and sells just one item, the
MOTORAZR phone. At the beginning of the year, the company
has an inventory of 800 units at a cost of $50 per phone.
On December 31st, the dealer counted the inventory
of MOTORAZR phones and determined that 600 units
were on hand, at a unit cost of $50.
Calculate Cost of Goods Sold at the End of the Period
Beginning inventory (800 units × $50) $40,000
Add net purchases (1,100 units × $50) 55,000
Cost of goods available for sale 95,000
Deduct ending inventory (600 units × $50) 30,000
Cost of goods sold $65,000
McGraw-Hill/Irwin Slide 32
Periodic Inventory Records
A local cell phone dealer stocks and sells just one item, the
MOTORAZR phone. At the beginning of the year, the company
has an inventory of 800 units at a cost of $50 per phone.
On December 31st, update the inventory and record
cost of goods sold
Debit Credit
Cost of Goods Sold (+E, -OE) 95,000
Inventory (-A) (beginning) 40,000
Purchases (-A) 55,000
Inventory (+A) (ending) 30,000
Cost of Goods Sold (-E, +OE) 30,000
Cost of Goods Sold = $95,000 − $30,000 = $65,000
McGraw-Hill/Irwin Slide 33
Supplement 6B: Closing Entries
A company owned and operated by John T. Lyon reports
the following revenue and expense accounts in its
preclosing trial balance at the end of 2010:
Debit Credit
Sales Revenue 175,000
Cost of Goods Sold 92,000
Salaries Expense 28,000
Rent Expense 24,000
Shipping Expense (Freight-out) 2,000
Interest Income 2,400
Depreciation Expense 3,200
Sales Returns and Allowances 1,200
Sales Discounts 600
Let’s prepare the closing entries.
McGraw-Hill/Irwin Slide 34
Supplement 6B: Closing Entries
Step 1: Close all revenue accounts to the Income Summary.
Debit Credit
Sales Revenue (-R, -OE) 175,000
Interest Income (-R, -OE) 2,400
Income Summary (+OE) 177,400
Income Summary
177,400
McGraw-Hill/Irwin Slide 35
Supplement 6B: Closing Entries
Step 2: Close all expense accounts to the Income Summary.
Debit Credit
Income Summary (-OE) 151,000
Cost of Goods Sold (-E, +OE) 92,000
Salaries Expense (-E, +OE) 28,000
Rent Expense (-E, +OE) 24,000
Shipping Expense (-E, +OE) 2,000
Depreciation Expense (-E, +OE) 3,200
Sales Returns and Allowances (-xR, +OE) 1,200
Sales Discounts (-xR, +OE) 600
Income Summary
151,000 177,400
26,400
McGraw-Hill/Irwin Slide 36
Supplement 6B: Closing Entries
Step 3: Close the Income Summary to the Owner’s Equity.
Debit Credit
Income Summary (-OE) 26,400
John T. Lyon, Capital (+OE) 26,400
Income Summary
151,000 177,400
26,400 26,400
-0-
McGraw-Hill/Irwin Slide 37
End of Chapter 6
© 2009 The McGraw-Hill Companies, Inc.
