Chapter 5

MERCHANDISING OPERATIONS

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CA
Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved.
 5-2

Operating Cycles
Illustration 5-2
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service
company.

Illustration 5-3

LO 1
 5-3

C1

SERVICE COMPANIES
Service organizations sell time to
earn revenue.
Examples: Accounting firms, law firms and plumbing
services
 5-4

C1

MERCHANDISER
Merchandising Companies

Manufacturer Wholesaler Retailer Consumers

 5-5

C1 REPORTING INCOME FOR A

MERCHANDISER
Merchandising companies sell products
to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
 5-6

C2 OPERATING CYCLE FOR A

MERCHANDISER
Begins with the purchase of merchandise
and ends with the collection of cash from the
sale of merchandise.
 5-7

C2

INVENTORY SYSTEMS
 5-8

C2

INVENTORY SYSTEMS

Perpetual systems Periodic systems

 continually update  accounting records
accounting records for relating to merchandise
merchandising transactions are
transactions updated only at the end
of the accounting period
 5-9

P1

MERCHANDISE PURCHASES
On November 2, Z-Mart purchased $1,200 of
merchandise inventory for cash.
 5 - 10

P1

TRADE DISCOUNTS
Used by manufacturers and wholesalers
to offer better prices for greater
quantities purchased.

Example
Example Quantity
Quantity sold
sold 1,000
1,000
Z-Mart
Z-Mart offers
offers aa 30%
30% trade
trade Price
Price per
per unit
unit $$ 5.25
5.25
Total
Total 5,250
5,250
discount
discount for
for orders
orders of of 1,000
1,000 Less
Less 30%
30%discount
discount (1,575)
(1,575)
units
units or
or more
more on on its
its popular
popular Invoice
Invoice price
price $$3,675
3,675
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price ofof $5.25.
$5.25.
 5 - 11

P1 ACCOUNTING FOR MERCHANDISE

PURCHASES
 5 - 12

Purchase Discounts

Credit terms may permit buyer to claim a cash discount

for prompt payment.
Example: Credit terms
Advantages: may read 2/10, n/30.
 Purchaser saves money.

 Seller shortens the operating cycle by converting the

accounts receivable into cash earlier.

LO 2
 5 - 13

PURCHASE DISCOUNTS
P1

A deduction from the invoice price granted to

induce early payment of the amount due.
 5 - 14

PURCHASE DISCOUNTS
P1

2/10,n/30
Number of
Days Otherwise,
Discount Discount Is Net (or All) Credit
Percent Available Is Due in 30 Period
Days
 5 - 15

Purchase Discounts

2/10, n/30 1/10 EOM n/10 EOM

2% discount if 1% discount if Net amount due

paid within 10 paid within first 10 within the first 10
days, otherwise days of next days of the next
net amount due month. month.
within 30 days.

LO 2
 5 - 16

PURCHASE DISCOUNTS
P1

On November 2, Z-Mart purchased $1,200 of

merchandise inventory on account, credit
terms are 2/10, n/30.
 5 - 17

PURCHASE DISCOUNTS
P1

On November 12, Z-Mart paid the amount

due on the purchase of November 2.
 5 - 18

PURCHASE DISCOUNTS
P1

After we post these entries, the accounts involved

look like these:
 5 - 19

P1 PURCHASE RETURNS AND

ALLOWANCES

Purchase Return . . .
Merchandise returned by the purchaser to
the supplier.
Purchase Allowance . . .
A reduction in the cost of defective or
unacceptable merchandise received by a
purchaser from a supplier.
 5 - 20

P1 PURCHASE RETURNS AND

ALLOWANCES

On November 15, Z-Mart (buyer) issues a

$300 debit memorandum for an allowance
from Trex for defective merchandise.
 5 - 21

P1 PURCHASE RETURNS AND

ALLOWANCES
Z-Mart purchases $1,000 of merchandise on June 1 with
terms 2/10, n/60. Two days later, Z-Mart returns $100 of
goods before paying the invoice. When Z-Mart later pays
on June 11, it takes the 2% discount only on the $900
remaining balance.
 5 - 22

P1 TRANSPORTATION COSTS AND

OWNERSHIP TRANSFER
 5 - 23

TRANSPORTATION COSTS
P1

Z-Mart purchased merchandise on terms of FOB

shipping point. The transportation charge is
$75.
 5 - 24

P1 ACCOUNTING FOR
MERCHANDISE
 5 - 25

P2 ACCOUNTING FOR
MERCHANDISE SALES
 5 - 26

SALES OF MERCHANDISE
P2

Each sales transaction for a seller of

merchandise involves two parts:

Revenue received in Recognition of the

the form of an asset cost of merchandise
from a customer. sold to a customer.
 5 - 27

SALES OF MERCHANDISE
P2

On November 3, Z-Mart sold $2,400 of

merchandise on credit. The merchandise has a
cost basis to Z-Mart of $1,600.
 5 - 28

SALES DISCOUNTS
P2

Sales discounts on credit sales can benefit a seller by

decreasing the delay in receiving cash and reducing future
collection efforts.
 5 - 29

SALES DISCOUNTS
P2

Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.

The account was paid in full within the 60-day period.

The account was paid in full within the 10-day discount period.
 5 - 30

P2 SALES RETURNS AND

ALLOWANCES

Sales returns and allowances usually involve

dissatisfied customers and the possibility of
lost future sales.

Sales returns refer Sales allowances

to merchandise that refer to reductions in
customers return to the selling price of
the seller after a merchandise sold to
sale. customers.
 5 - 31

P2
SALES RETURNS AND
ALLOWANCES

Recall Z-Mart’s sale for $2,400 that had a cost

of $1,600. Assume the customer returns part of
the merchandise. The returned items sell for
$800 and cost $600.
 5 - 32

SALES ALLOWANCES
P2

Assume that $800 of the merchandise Z-Mart

sold on November 3 is defective but the buyer
decides to keep it because Z-Mart offers a
$100 price reduction.
 5 - 33

P4
INCOME STATEMENT

An income
statement
format shows
net sales and
other
costs and
expenses.
 5 - 34

P4
CLASSIFIED STATEMENT OF
FINANCIAL POSITION

Highly
Liquid

Less
Liquid
 5 - 35

APPENDIX 5B Periodic Inventory System

Learning
Objective 7
Determining Cost of Goods Sold Explain the recording
of purchases and
Under a Periodic System sales of inventory
under a periodic
inventory system.
 No running account of changes in
inventory.
 Ending inventory determined by physical count.
 Cost of goods sold not determined until the end of the
period.

LO 7
 5 - 36

Determining Cost of Goods Sold

Under a Periodic System Illustration 5B-2
Cost of goods sold for a
merchandiser using a periodic
inventory system

Illustration 5B-2

LO 7
 5 - 37

Recording Merchandise Transactions

 Record revenues when sales are made.

 Do not record cost of merchandise sold on the date of
sale.
 Physical inventory count determines:
► Cost of merchandise on hand and
► Cost of merchandise sold during the period.
 Record purchases in Purchases account.
 Purchase returns and allowances, Purchase discounts,
and Freight costs are recorded in separate accounts.

LO 7
 5 - 38

Recording Purchases of Merchandise

Illustration: On the basis of the sales invoice (Illustration 5-6)

and receipt of the merchandise ordered from PW Audio Supply,
Sauk Stereo records the €3,800 purchase as follows.

May 4 Purchases 3,800

Accounts Payable
3,800

LO 7
 5 - 39

Recording Purchases of Merchandise

FREIGHT COSTS
Illustration: If Sauk pays Public Freight Company €150
for freight charges on its purchase from PW Audio Supply on
May 6, the entry on Sauk’s books is:

May 6 Freight-In (Transportation-In) 150

Cash
150

LO 7
 5 - 40

Recording Purchases of Merchandise

PURCHASE RETURNS AND ALLOWANCES

Illustration: Sauk Stereo returns €300 of goods to PW Audio
Supply and prepares the following entry to recognize the
return.

May 8 Accounts Payable 300

Purchase Returns and Allowances 300

LO 7
 5 - 41

Recording Purchases of Merchandise

PURCHASE DISCOUNTS
Illustration: On May 14 Sauk Stereo pays the balance due on
account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio for payment within 10 days. Sauk
Stereo records the payment and discount as follows.

May 14 Accounts Payable 3,500

Purchase Discounts
70
Cash
3,430

LO 7
 5 - 42

Recording Sales of Merchandise

Illustration: PW Audio Supply, records the sale of €3,800 of

merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-6) as follows.

May 4 Accounts Receivable 3,800

Sales Revenue
3,800
No entry is recorded for cost of goods sold at the time of the
sale under a periodic system.

LO 7
 5 - 43

Recording Sales of Merchandise

SALES RETURNS AND ALLOWANCES

Illustration: To record the returned goods received from Sauk
Stereo on May 8, PW Audio Supply records the €300 sales
return as follows.

May 8 Sales Returns and Allowances 300

Accounts Receivable
300

LO 7
 5 - 44

Recording Sales of Merchandise

SALES DISCOUNTS
Illustration: On May 14, PW Audio Supply receives payment
of €3,430 on account from Sauk Stereo. PW Audio honors the
2% cash discount and records the payment of Sauk’s account
receivable in full as follows.

May 14 Cash 3,430

Sales Discounts 70
Accounts Receivable 3,500

LO 7
 5 - 45

P5 APPENDIX 5A:
PERIODIC INVENTORY SYSTEM
(a)

(b)

(c)

(d)

(e)

(f)

(g)

A periodic inventory system requires updating the inventory account only at the end of a
period to reflect the quantity and cost of both the goods available and the goods sold.
 5 - 46

END OF CHAPTER 5