Chapter 6

Accounting for
Merchandising Businesses
Accounting, 21st Edition
Warren Reeve Fess

Copyright 2004 South-Western, a division

PowerPoint Presentation by Douglas Cloud of Thomson Learning. All rights reserved.
Professor Emeritus of Accounting
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Some
Some ofof the
the action
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has been
been automated,
automated, soso
click
click the
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mouse when
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see this
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lightning bolt
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lower right-hand
right-hand
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corner ofof the
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 Objectives
Objectives
1. Distinguish the activities of a service
business fromAfter studying
those
After this
of a merchandising
studying this
business. chapter,
chapter, you
you should
should
2. Describe and illustrate
be ablethe
be able to:financial
to:
statements of a merchandising business.
3. Describe the accounting for the sale of
merchandise.
4. Describe the accounting for the purchase of
merchandise.
 Objectives
Objectives
5. Describe the accounting for transportation costs,
sales taxes, and trade discounts.
6. Illustrate the dual nature of merchandising
transactions.
7. Prepare a chart of accounts for a merchandising
business.
8. Describe the accounting cycle for a
merchandising business.
9. Compute the ratio of net sales to assets as a
measure of how effectively a business is using
its assets.
 Nature
Nature of
of Businesses
Businesses
Service Business
Fees earned $XXX
Operating expenses XXX
Net income $XXX
 Nature
Nature of
of Businesses
Businesses
Merchandising Business
Sales $XXX
Cost of Merchandise Sold XXX
Gross Profit $XXX
Operating Expenses XXX
Net Income $XXX
Multiple-Step
Income
Statement
 NetSolutions
Income Statement For the Year Ended
December 31, 2007

Revenue from sales:

Sales $720,185
Less:Sales returns and allowances $ 6,140
Sales discounts 5,790 11,930
Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950

Continued
Operating expenses:
Selling expenses:
Sales salaries expense $56,230
Advertising expense 10,860
Depr. Expensestore equipment 3,100
Miscellaneous selling expense 630
Total selling expenses $ 70,820
Administrative expenses:
Office salaries expense $21,020
Rent expense 8,100
Depr. expenseoffice equipment 2,490
Insurance expense 1,910
Office supplies expense 610
Misc. administrative expense 760
Total admin. expenses 34,890
Total operating expenses 105,710
Income from operations $ 77,240

Continued
Other income and expenses:
Rent revenue $ 600
Interest expense (2,440) (1,840)
Net income $75,400

Concluded
Periodic
Periodic vs.
vs. Perpetual
Perpetual Methods
Methods of
of
Accounting
Accounting
Periodic Method
A method of determining the cost of merchandise
sold and the amount of merchandise on hand
Under this method, the inventory records do not
show the amount available for sale or the amount
sold during the period
Periodic
Periodic vs.
vs. Perpetual
Perpetual Methods
Methods of
of
Accounting
Accounting
Perpetual Method
Under this method, each purchase and sale of
merchandise is recorded in the inventory and the
cost of merchandise sold accounts.
The amount of merchandise available for sale
and the amount sold are continuously disclosed in
the inventory records.
 Cost
Cost of
of Merchandise
Merchandise Purchased
Purchased
Purchases $521,980
Less: Purchase returns and
allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased $527,755
 Cost
Cost of
of Merchandise
Merchandise Sold
Sold
Merchandise inventory, 1/1/07 $ 59,700
Purchases $521,980
Less: Purchase returns and
allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased 527,755
Merchandise available for sale $587,455
Less merchandise inventory, 12/31/07 62,150
Cost of merchandise sold $525,305
Single-Step Income
Statement for a
Merchandising
Business
 NetSolutions
Income Statement
For the Year Ended December 31, 2007

Revenues:
Net sales $708,255
Rent revenue 600
Total revenues $708,855
Expenses:
Cost of merchandise sold $525,305
Selling expenses 70,820
Administrative expenses 34,890
Interest expense 2,440
Total expenses 633,455
Net income $ 75,400
 Statement of
Owners Equity for
a Merchandising
Business
 NetSolutions
Statement of Owners Equity
For the Year Ended December 31, 2007

Chris Clark, capital, 1/1/07 $153,800

Net income for year $75,400
Less withdrawals 18,000
Increase in owners equity 57,400
Chris Clark, capital, 12/31/07 $211,200
Balance Sheet
 NetSolutions
Balance Sheet
December 31, 2007

Assets
Current assets:
Cash $52,950
Accounts receivable 91,080
Merchandise inventory 62,150
Office supplies 480
Prepaid insurance 2,650
Total current assets $209,310

Continued
Property, plant, and equipment:
Land $20,000
Store equipment $27,100
Less accumulated
depreciation 5,70021,400
Office equipment $15,570
Less accumulated
depreciation 4,72010,850 Total property, plant, and
equipment 52,250
Total assets $261,560

Continued
 Liabilities
Liabilities
Current
Current liabilities:
liabilities:
Accounts
Accounts payable
payable $22,420
$22,420
Note
Notepayable
payable(current
(current portion)
portion) 5,000
5,000
Salaries
Salariespayable
payable 1,140
1,140
Unearned
Unearnedrent rent 1,800
1,800
Total
Totalcurrent
currentliabilities
liabilities $$ 30,360
30,360
Long-term
Long-term liabilities:
liabilities:
Note
Notepayable
payable(due(due 2017)
2017) 20,000
20,000
Total
Totalliabilities
liabilities $$ 50,360
50,360
Owners
OwnersEquity Equity
Chris
ChrisClark,
Clark,capital
capital 211,200
211,200
Total
Totalliabilities
liabilities and
andowners
ownersequity$261,560
equity$261,560

Concluded
Sales
Sales Transactions
Transactions
 Cash
Cash Sales
Sales
JOURNAL PAGE 26
Post.
Date Description Ref. Dr Cr.
2007
1 Jan. 3 Cash 1 800 00
2 Sales 1 800 00
3 To record cash sales.
4
5

On
On January
January 3,
3, aa firm
firm sold
sold $1,800
$1,800
of
of merchandise
merchandise for for cash.
cash.
 Cash
Cash Sales
Sales
6 3 Cost of Merchandise Sold 1 280 00
7 Merchandise Inventory 1 280 00
8 To record the cost of
9 merchandise sold.
10

Using
Using aa perpetual
perpetual inventory,
inventory, the
the inventory
inventory
cost
cost of
of $1,200
$1,200 must
must be
be recorded.
recorded.
 Cash
Cash Sales
Sales
JOURNAL PAGE 28
Post.
Date Description Ref. Dr Cr.
2007
1 Jan. 31 Credit Card Expense 48 00
2 Cash 48 00
3 To record service charges
4 on credit card sales for the
5 month.

At
Credit
At the
the end
Credit card
cardof
end sales
of the
the month,
sales (MasterCard
month, $48
$48 was
(MasterCard or
was
or
sent
Visa)
sent
Visa)to
toare
cover
are recorded
cover this
this service
recorded as
as cash
service
cashcharge.
sales.
charge.
sales.
 Sales
Sales on
on Account
Account
Jan. 12 Accounts ReceivableSims Co. 510 00
Sales 510 00
Invoice No. 7172.

12 Cost of Merchandise Sold 280 00

Merchandise Inventory 280 00
Cost of merchandise sold
on Invoice No. 7172.

On
On January
January 12,
12, aa firm
firm sold
sold Sims
Sims Company
Company
merchandise
merchandise on
on account,
account, $510.
$510. The
The cost
cost of
of
the
the merchandise
merchandise to to the
the seller
seller was
was $280.
$280.
 Sales
Sales Discounts
Discounts
The
The terms
terms for
for when
when payments
payments for
for
merchandise
merchandise areare to
to be
be made
made are
are
called
called credit
credit terms.
terms.

IfIf buyer
buyer isis allowed
allowed anan
amount
amount ofof time
time toto pay,
pay, itit isis
known
known as as the
the credit
credit period.
period.
Sales
Sales Discounts
Discounts
Credit Terms

If invoice is
paid within Invoice for
$1,500
10 days of
Terms:
invoice date 2/10, n/30

$1,470 paid (less

2% as a cash
discount)
 Sales
Sales Discounts
Discounts
Credit Terms

If invoice is
Invoice for NOT paid
$1,500 within 10
Terms: days of
2/10, n/30 invoice date
$1,500 PAID
 Sales
Sales Discounts
Discounts

Jan. 21 Cash 499 80

Sales Discounts 10 20
Accounts ReceivableSims Co. 510 00
Collection of Invoice
No. 7172, less discount.

On
On January
January 21,21, the
the firm
firm receives
receives the
the
amount
amount due
due from
from Sims
Sims (refer
(refer to
to Slide
Slide
25),
25), less
less the
the 22 percent
percent discount.
discount.
Sales
Sales Returns
Returns and
and Allowances
Allowances
Merchandise
Merchandise that that isis returned
returned to
to the
the
vendor
vendor isis referred
referred to
to asas aa sales
sales return.
return.

IfIf there
there isis aa defect
defect inin the
the product
product or or the
the
wrong
wrong item item was
was shipped,
shipped, the the seller
seller
may
may reduce
reduce the the initial
initial price
price at at which
which
the
the goods
goods werewere sold.
sold. ThisThis isis known
known as as
aa sales
sales allowance.
allowance.
 Sales
Sales Returns
Returns and
and Allowances
Allowances
Jan. 13 Sales Returns and Allowances 225 00
Accounts ReceivableKrier Co. 225 00
Credit Memo No. 32.

13 Merchandise Inventory 140 00

Cost of Merchandise Sold 140 00
Cost of merchandise
returnedCredit Memo 32.

On
On January
January 13,
13, issued
issued Credit
Credit Memo
Memo 32 32 to
to Krier
Krier
Company
Company for
for merchandise
merchandise returned
returned to
to NetSolutions.
NetSolutions.
Selling
Selling price,
price, $225;
$225; cost
cost to
to NetSolutions,
NetSolutions, $140.
$140.
 Purchase
Purchase
Transactions
Transactions
 Purchase
Purchase Transactions
Transactions
Post.
Date Description Ref. Dr Cr.
2007
1 Jan. 3 Merchandise Inventory 2 510 00
2 Cash 2 510 00
3 Purchased inventory from
4 Bowen Co.
5

On
On January
January 3,
3, Purchased
Purchased merchandise
merchandise
for
for cash
cash from
from Bowen
Bowen Company,
Company, $2,510.
$2,510.
 Purchase
Purchase Discounts
Discounts
Whats
Whats the
the last
last
day
day the
the invoice
invoice
can
can be
be paid?
paid?
Alpha
Alpha Technologies
Technologies
issues
issues an
an invoice
invoice for
for
$3,000
$3,000 toto
NetSolutions
NetSolutions dated
dated
March
March 12,
12, with
with terms
terms
2/10,
2/10, n/30.
n/30.
Purchase
Purchase Discounts
Discounts

The
The full
full amount
amount isis
Lets
due
due on
Lets do
do aa simple
on April
April 11.
simple
11.
calculation.
calculation.
Invoice period 30
Days in March 31
Date of invoice 12
Remaining days 19
April 11
 Purchase
Purchase Discounts
Discounts
We
Wecancan borrow
borrow at
at an
an annual
annual interest
interest rate
rate
of
of 6%.
6%. Should
Should we
we borrow
borrow to
to pay
pay the
the
invoice
invoice within
within the
the discount
discount period?
period?

$60
$60 discount
discount
(2%
(2% xx
$3,000)?
$3,000)?
Purchase
Purchase Discounts
Discounts

Lets
Lets see
see Interest
Interest on
on
the
the amount
amount due due of
of $3,000
$3,000
less
less the
the 22 percent
percent
Discount $60.00
Interest for 20 days
at the rate of 6%
on $2,940 9.80
Savings from
borrowing $50.20
Purchase
Purchase Discounts
Discounts
Looks
Looks like
like we
we should
should take
take
advantage
advantage ofof the
the discount
discount even
even ifif
we
we have
have to
to borrow
borrow thethe money.
money.

Discount $60.00
Interest for 20 days
at the rate of 6%
on $2,940 9.80
Savings from
borrowing $50.20
 Purchase
Purchase Discounts
Discounts
JOURNAL PAGE 27
Post.
Date Description Ref. Dr Cr.
2007
1 Mar. 12 Merchandise Inventory 3 000 00
2 Accounts PayableAlpha
3 Technologies 3 000 00
4
5

On
On March
March 12,
12, NetSolutions
NetSolutions purchased
purchased
merchandise
merchandise on
on account
account from
fromAlpha
Alpha
Technologies,
Technologies, $3,000.
$3,000.
 Purchase
Purchase Discounts
Discounts
JOURNAL PAGE 27
Post.
Date Description Ref. Dr Cr.
2007
1 Mar. 22 Accounts PayableAlpha Technol. 3 000 00
2 Cash 2 940 00
3 Merchandise Inventory 60 00
4
5

IfIf payment
payment isis made
made by
by March
March 22 22 NetSolutions
NetSolutions
records
records the
the discount
discount as
as aa reduction
reduction in
in cost.
cost.
 Purchase
Purchase Discounts
Discounts
JOURNAL PAGE 27
Post.
Date Description Ref. Dr Cr.
2007
1 Apr. 11 Accounts PayableAlpha Technol. 3 000 00
2 Cash 3 000 00
3
4
5

IfIf NetSolutions
NetSolutions doesdoes not
not pay
pay the
the invoice
invoice until
until
April
April 11,
11, itit would
would pay
pay the
the full
full amount.
amount.
Purchases
Purchases Returns
Returns and
and Allowances
Allowances
A
Apurchases
purchases return
return involves
involves actually
actually
returning
returning merchandise
merchandise thatthat isis
damaged
damaged or or does
does not
not meet
meet the
the
specifications
specifications of
of the
the order.
order.

When
When the the defective
defective or
or incorrect
incorrect
merchandise
merchandise isis keptkept by
by the
the buyer
buyer and
and
the
the vendor
vendor makes makes aa price
price adjustment,
adjustment,
this
this isis aa purchases
purchases allowance.
allowance.
 Purchases
Purchases Returns
Returns and
and Allowances
Allowances
You
You sent
sent meme the
the wrong
wrong interface
interface cards.
cards.
Well
Well send
send aa debit
debit memorandum
memorandum with with the
the
returned
returned items.
items.
NetSolutions
NetSolutions received
received the
the
delivery
delivery from
from Maxim
Maxim
Systems
Systems andand determined
determined that
that
$900
$900 ofof the
the items
items were
were not
not
the
the merchandise
merchandise ordered.
ordered.
Debit
Debit memorandum
memorandum #18 #18 isis
issued
issued to
to Maxim
Maxim Systems.
Systems.
 Purchases
Purchases Returns
Returns and
and Allowances
Allowances

Mar. 7 Accounts PayableMaxim Systems 900 00

Merchandise Inventory 900 00
Debit Memo No. 18
 Purchases
Purchases Returns
Returns and
and Allowances
Allowances

On
On May
May 2,
2, NetSolutions
NetSolutions purchased
purchased $5,000
$5,000
of
of merchandise
merchandise from
from Delta
Delta Data
Data Link,
Link,
subject
subject to
to terms
terms 2/10,
2/10, n/30.
n/30.
May 2 Merchandise Inventory 5 000 00
Accounts PayableDelta Data 5 000 00
Purchased merchandise.
 Purchases
Purchases Returns
Returns and
and Allowances
Allowances
On
On May
May 4,4, NetSolutions
NetSolutions returns
returns
$3,000
$3,000 of
of the
the merchandise.
merchandise.

May 4 Accounts PayableDelta Data Links 3 000 00

Merchandise Inventory 3 000 00
Returned portion of
merchandise purchased.
 Purchases
Purchases Returns
Returns and
and Allowances
Allowances
On
On May
May 12,
12, NetSolutions
NetSolutions pays
pays the
the amount
amount due.
due.

May 12 Accounts PayableDelta Data Links 2 000 00

Cash ($5,000 1 960 00
($5,000
Merchandise Inventory $3,000)
$3,000) xx 40 00
Paid invoice. 2%
2%
Transportation
Costs
 FOB
FOB Shipping
Shipping Point
Point
Buyer pays freight costs and debits
Merchandise Inventory

Fruit Express

Title
Title passes
passes to
to buyer
buyer as
as
shipment
shipment leaves
leaves
shipping
shipping point.
point.
 FOB
FOB Shipping
Shipping Point
Point
June 10 Merchandise Inventory 900 00
Accounts PayableMagna Data 900 00
Purchased merchandise, terms
FOB shipping point.

10 Merchandise Inventory 50 00
Cash 50 00
Paid shipping cost .

On
On June
June 10,
10, NetSolutions
NetSolutions buys
buys merchandise
merchandisefrom
from
Magna
Magna Data
Data on
on account,
account, $900,
$900, terms
terms FOB
FOB shipping
shipping
point
point and
and pays
pays the
the transportation
transportation cost
cost of
of $50.
$50.
 FOB
FOB Destination
Destination
Seller pays freight costs and debits
Transportation Out

Fruit Express

Title
Title passes
passes to
to buyer
buyer
upon
upon arrival
arrival at
at
destination.
destination.
 FOB
FOB Destination
Destination
June 15 Accounts ReceivableKranz Co. 700 00
Sales 700 00
Sold merchandise, terms FOB
destination.

15 Cost of Merchandise Sold 480 00

Merchandise Inventory 480 00
Cost of sale of Kranz Co .

On
On June
June 15,
15, NetSolutions
NetSolutions sells
sells merchandise
merchandise to to Kranz
Kranz
Company
Company on on account,
account, $700,
$700, terms
terms FOB
FOB destination.
destination.
The
The cost
cost of
ofthe
the merchandise
merchandise soldsold isis $480.
$480.
NetSolutions
NetSolutions pays
pays the
the transportation
transportation cost
cost of
of$40.
$40.
 FOB
FOB Destination
Destination

June 15 Transportation Out 40 00

Cash 40 00
Paid shipping cost on
merchandise sold.

On
On June
June 15,
15, NetSolutions
NetSolutions sells
sells merchandise
merchandise to to Kranz
Kranz
Company
Company on on account,
account, $700,
$700, terms
terms FOB
FOB destination.
destination.
The
The cost
cost of
ofthe
the merchandise
merchandise soldsold isis $480.
$480.
NetSolutions
NetSolutions pays
pays the
the transportation
transportation cost
cost of
of$40.
$40.
 Sales
Sales Taxes
Taxes

Aug. 12 Accounts ReceivableLemon Co. 106 00

Sales 100 00
Sales Taxes Payable 6 00
Invoice No. 339

On
On August
August 12,12, merchandise
merchandise isis sold
sold on
on
account
account to
to Lemon
Lemon Company,
Company, $100.
$100. The
The
state
state has
has aa 6%
6% sales
sales tax.
tax.
 Sales
Sales Taxes
Taxes

Sept.15 Sales Tax Payable 2 900 00

Cash 2 900 00
Payment for sales taxes
collected during August.

On
On September
September 15,15, the
the seller
seller sends
sends in
in aa
payment
payment ofof $2,900
$2,900 to
to the
the taxing
taxing unit
unit for
for
the
the August
August taxes
taxes collected.
collected.
 Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)
Accounts ReceivableBurton Co. 7,500
Sales 7,500

Cost of Merchandise Sold 4,500

Merchandise Inventory 4,500
Burton Company (Buyer)
Merchandise Inventory. 7,500
Accounts PayableScully Co. 7,500

July 1. Scully Company sold merchandise on account

to Burton Co., $7,500, terms FOB shipping point, n/45.
The cost of the merchandise sold was $4,500.
 Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)
No entry.

Burton Company (Buyer)

Merchandise Inventory 150
Cash 150

July 2. Burton Company paid transportation charges of

$150 on July 1 purchase from Scully Company.
 Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)
Accounts ReceivableBurton Co. 5,000
Sales 5,000

Cost of Merchandise Sold 3,500

Merchandise Inventory 3,500
Burton Company (Buyer)
Merchandise Inventory. 5,000
Accounts PayableScully Co. 5,000

July 5. Scully Company sold merchandise on account

to Burton Co., $5,000, terms FOB shipping point,
n/30. The cost of the merchandise sold was $3,500.
 Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)
Transportation Out 250
Cash 250

Burton Company (Buyer)

No entry.

July 7. Scully Company paid transportation costs

of $250 for delivery of merchandise sold to
Burton Company on July 5.
 Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)
Sales Returns and Allowances 1,000
Accounts ReceivableBurton Co. 1,000

Merchandise Inventory 700

Cost of Merchandise Sold 700
Burton Company (Buyer)
Accounts PayableScully Co. 1,000
Merchandise Inventory 1,000
July 13. Scully Company issued Burton Company a credit
memorandum for $1,000 of merchandise returned from a July 5
purchase on account. The cost of the merchandise was $700.
 Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)
Cash 4,000
Accounts ReceivableBurton Co. 4,000

Burton Company (Buyer)

Accounts PayableScully Co. 4,000
Cash 4,000

July 15. Scully Company received payment

from Burton Company for purchase of July 5.
 Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)
Accounts ReceivableBurton Co. 12,000
Sales 12,000

Accounts ReceivableBurton Co. 500

Cash 500
Burton Company (Buyer)
Merchandise Inventory 12,500
Accounts PayableScully Co. 12,500
July 18. Scully Company sold merchandise on account to Burton
Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to the
invoice. The cost of the merchandise sold was $7,200.
 Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Continued (Seller)
Cost of Merchandise Sold 7,200
Merchandise Inventory 7,200

Burton Company (Buyer)

July 18. Scully Company sold merchandise on account to Burton

Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to the
invoice. The cost of the merchandise sold was $7,200.
 Illustration
Illustration of
of Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions
Scully Company (Seller)
Cash 12,260
Sales Discounts 240
Accounts ReceivableBurton Co. 12,500

Burton Company (Buyer)

Accounts PayableScully Co. 12,500
Merchandise Inventory 240
Cash 12,260
July 28. Scully Company received payment
from Burton Company for purchase of July
18, less discount (2% x $12,000).
 NetSolutions
Chart of Accounts
Balance Sheet Accounts
100 Assets 200 Liabilities
110 Cash 210 Accounts Payable
112 Accounts Receivable 211 Salaries Payable
115 Merchandise Inventory 212 Unearned Rent
116 Office Supplies 215 Notes Payable
117 Prepaid Insurance
120 Land 300 Owners Equity
123 Store Equipment 310 Chris Clark, Capital
124 Accumulated Depreciation 311 Chris Clark, Drawing
Store Equipment 312 Income Summary
125 Office Equipment
126 Accumulated Depreciation
Office Equipment
 NetSolutions
Chart of Accounts
Income Statement Accounts

400 Revenues 500 Costs and Expenses

410 Sales 510 Cost of Merchandise Sold
411 Sales Returns and 520 Sales Salaries Expense
Allowances 521 Advertising Expense
412 Sales Discounts 522 Depreciation Expense
Store Equipment
600 Other Income 523 Transportation Out
610 Rent Revenue 529 Miscellaneous Selling Expense
530 Office Salaries Expense
700 Other Expense 531 Rent Expense
710 Interest Expense 532 Depreciation Expense
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Admin. Expense
 Merchandise
Merchandise Inventory
Inventory
Shrinkage
Shrinkage
NetSolutions
NetSolutions inventory
inventory
records
records indicate
indicate that
that
$63,950
$63,950 of of merchandise
merchandise
should
should bebe available
available for
for sale
sale
on
on December
December 31,31, 2007.
2007.
The
The physical
physical count
count reveals
reveals
that
that only
only $62,150
$62,150 isis
actually
actually available.
available.
 Merchandise
Merchandise Inventory
Inventory
Shrinkage
Shrinkage
Adjusting Entry
Dec. 31 Cost of Merchandise Sold 1 800 00
Merchandise Inventory 1 800 00

Inventory records $63,950

Inventory count 62,150
Inventory shortage $ 1,800
 Profitability Measures -- Effective Use of Assets
Ratio
Ratio of
of Net
Net Sales
Sales to
toAssets
Assets
Sears Penney
Net sales $41,366,000 $31,846,000
Total assets:
Beginning of year $50,409,000 $19,742,000
End of year $44,317,000 $20,908,000
Average $47,363,000 $20,325,000
Ratio of net sales to assets .87 to 1 1.57 to 1

Ratio
Ratio Use:
Use: To
Toassess
assess the
the effectiveness
effectiveness in
in the
the
use
useofof assets
assets to
to generate
generate sales.
sales.
Chapter 6

The
The End
End