LOGO

Chapter 4

International Financial Accounting

MA. Nguyen Quoc Nhat

 Learning Objectives
1. Describe and illustrate merchandising operations and
the two types of inventory systems
2. Account for the purchase of inventory using a perpetual
system
3. Account for the sale of inventory using a perpetual
system
4. Adjust and close the accounts of a merchandising
business
5. Prepare a merchandiser’s financial statements
6. Use gross profit percentage, inventory turnover, and
days in inventory to evaluate a business
7. Account for the sale of inventory using a periodic system
8. Prepare worksheets for a merchandiser
[Link] Company Logo
 Chapter ‘s content
4.1 What Are Merchandising Operations?
4.2 Accounting for Inventory in the
Perpetual System
4.3 Adjusting and Closing the Accounts of a
Merchandiser
4.4 Preparing a Merchandiser’s Financial
Statements
4.5 Three Ratios for Decision Making

[Link] Company Logo

4.1 What Are Merchandising Operations?

[Link] Company Logo

4.1 What Are Merchandising Operations?

The operating cycle of a merchandiser is as follows :

1. It begins when the company purchases inventory
from a vendor.
2. The company then sells the inventory to a customer.
3. Finally, the company collects cash from customers.

[Link] Company Logo

4.1 What Are Merchandising Operations?

Inventory Systems:
There are two main types of inventory
accounting systems:
● Periodic system
● Perpetual system

[Link] Company Logo

4.1 What Are Merchandising Operations?

Inventory Systems:
There are two main types of inventory accounting
systems:
● Periodic system - the business
physically counts its inventory periodically to
determine the quantities on hand
● Perpetual system - the number of inventory units
and the dollar amounts are perpetually
(constantly) updated.

[Link] Company Logo

4.2 Accounting for Inventory in the Perpetual
System
◆4.2.1 Purchase of Inventory
Purchase inventory (goods)
Journalize the transaction
Dr Inventory
Cr Accounts payable
(or) Cash

[Link] Company Logo

4.2 Accounting for Inventory in the Perpetual
System
◆4.2.1 Purchase of Inventory
Purchase Discounts
Many businesses offer customers a discount for early payment.
This is called a purchase discount.
RCA’s credit terms of “3/15, NET 30 DAYS” mean that Smart
Touch can deduct 3% from the total bill (excluding freight charges, if
any) if the company pays within 15 days of the invoice date. Otherwise,
the full amount— NET—is due in 30 days.
These credit terms can also be expressed as “3/15, n/30.”
Journalize the entry
Dr Accounts Payable
Cr Cash
Cr Inventory
[Link] Company Logo
4.2 Accounting for Inventory in the Perpetual
System
◆4.2.1 Purchase of Inventory
Purchase Returns and Allowances
Businesses allow customers to return
merchandise that is defective, damaged, or
otherwise unsuitable. This is called a purchase
return
Journalize the entries
Dr Accounts Payable
Cr Inventory

[Link] Company Logo

 4.2 Accounting for Inventory in the
Perpetual System
4.2.1 Purchase of Inventory
Suppose Smart Touch buys $35,000 of
inventory, returns $700 of the goods, and
takes a 2% early payment discount. Smart
Touch also pays $2,100 of freight in. The
following summary shows Smart Touch’s
net cost of this inventory. All amounts are
assumed for this illustration.

[Link] Company Logo

 4.2 Accounting for Inventory in the
Perpetual System

[Link] Company Logo

 4.2 Accounting for Inventory in the
Perpetual System
4.2.2 Sale of Inventory
Sales revenue (Sales): The amount a business earns
from selling merchandise inventory.
Dr Accounts Receivable (Cash)
Cr Sales Revenue
Cost of goods sold (COGS) (also known as Cost
of sales or COS)is the cost of inventory that has
been sold to customers. → the merchandiser’s
major expense
Dr Cost of goods sold
Cr Inventory

[Link] Company Logo

 4.2 Accounting for Inventory in the
Perpetual System
4.2.2 Sale of Inventory
A sales return: The customer may return goods to
Smart Touch, asking for a refund or credit to the
customer’s account.
A sales allowance: Smart Touch may grant a sales
allowance to entice the customer to accept non-
standard goods. This allowance will reduce the future
cash collected from the customer.
A sales discount: If the customer pays within the
discount period—under terms such as 2/10, n/30—
Smart Touch collects the discounted amount.
Freight out: Smart Touch may have to pay delivery
expense to transport the
goods to the buyer.
[Link] Company Logo
 4.2 Accounting for Inventory in the
Perpetual System
4.2.2 Sale of Inventory
A sales return: The customer may return goods
to Smart Touch, asking for a refund or credit to
the customer’s account.
Journalize:
(a) Dr Sales return and allowances
Cr Accounts receivable
(or)Cr Cash

(b) Dr Inventory
Cr Cost of goods sold
[Link] Company Logo
 4.2 Accounting for Inventory in the
Perpetual System
4.2.2 Sale of Inventory
A sales allowance : Smart Touch may grant a
sales allowance to entice the customer to accept
non-standard goods. This allowance will reduce
the future cash collected from the customer.
Journalize:
Dr Sales return and allowances
Cr Accounts receivable
A sales discount:
Dr Cash
Dr Sales discount
Cr Accounts receivable
[Link] Company Logo
 4.2 Accounting for Inventory in the
Perpetual System
4.2.2 Sale of Inventory

Freight out: Smart Touch may have to pay

delivery expense to transport the
goods to the buyer.
Journalize:
Dr Delivery expense
Cr Cash
(or) Cr Accounts payable

[Link] Company Logo

 4.2 Accounting for Inventory in the
Perpetual System
4.2.3 Transportation Costs
FOB shipping point: Means the buyer takes
ownership (title) to the goods at the shipping
point. In this case, the buyer (owner of the goods
at the shipping point) also pays the
FOB destination: Means the buyer takes ownership
(title) to the goods at the delivery destination point. In
this case, the seller (owner of the goods while in
transit) usually pays the freight

[Link] Company Logo

◆Freight costs are either freight in or freight out.
▪ Freight in: is the transportation cost to ship
goods INTO the purchaser’s warehouse; thus,
it is freight on purchased goods.
▪ Freight out: is the transportation cost to ship
goods OUT of the warehouse and to the
customer; thus, it is freight on goods sold.

[Link] Company Logo

 4.2 Accounting for Inventory in the
Perpetual System
4.2.2 Sale of Inventory

Net Sales Revenue, Cost of Goods

Sold, and Gross Profit
Net sales revenue – Cost of goods sold
= Gross profit

[Link] Company Logo

 Example
◆Example:
1. Purchased inventory on account $2000
2. Purchased goods for $6000. Credit term of 2/10 net 30
3. Paid a $360 freight bill on goods purchased.
4. Returned 30% purchase on transaction 1. It was
defective
5. Sold goods for cash $1600 (Cost,$800)
6. Received returned goods from the customer of the
sale, $800 (cost, $400)
7. Sold inventory for $2,000 on credit terms of 2/10,
n/30 (cost, $1,180).
 Example

◆Example (cont):
8. Borrowed money from the bank to take
advantage of the discount offered on the
transaction 2. Signed a note payable to the
bank for the net amount 5,880
9. Received cash in full settlement of the account
from the customer who purchased inventory
on transaction 7

[Link] Company Logo

 Example

Requirements:
1) Journalize the preceding transaction.
Explanation are not required
2) Set Up T- Accounts and Post the journal entries
to show the ending balance in the inventory and
Cost of goods sold accounts only
3) Assume the note payable signed at 8 transaction
require the payments of $100 interest expenses.
Was borrowing fund to take the cash discount a
wise or unwise decision. What was the net saving
or cost of the decision
[Link] Company Logo
4.3 Adjusting and Closing the Accounts of a
Merchandiser
A merchandiser adjusts and closes
accounts the same way a service entity
does.
If a worksheet is used, the trial
balance is entered, and the worksheet is
completed to determine net income or net
loss

[Link] Company Logo

 4.3 Adjusting and Closing the Accounts
of a Merchandiser
Kiểm tra
4.3.1 Adjusting Inventory Based on a Physical Count
The Inventory account should stay current at
all times in a perpetual inventory system. However,
the actual amount of inventory on hand may differ
from what the books show. Theft, damage, and
errors occur
Inventory balance before adjustment - Actual
inventory on hand = Adjusting entry to inventory
❑The adjusting entry
Dr Cost of goods sold
Cr Inventory
[Link] Company Logo
 4.3 Adjusting and Closing the Accounts
of a Merchandiser
Example:
◆Inventory on book show amount of $6000
(Unadjusted balance ), but Physical Counts the
Inventory on hand $5600
Apply the Formulas :
◆Inventory balance before adjustment - Actual
inventory on hand = Adjusting entry to inventory
=> 6000 -5600 = $400

Dr Cost of goods sold $400

Cr Inventory
[Link]
$400
Company Logo
 4.3 Adjusting and Closing the Accounts
of a Merchandiser
4.3.2 Closing the account of a Merchandiser
Kết chuyển

[Link] Company Logo

 4.3 Adjusting and Closing the Accounts
of a Merchandiser
◆Closing the account of a Merchandiser
◆Closing the entries
1) Dr Sales Revenues
Cr Sales discount
Cr Sales returns and allowances
Cr Income summary

[Link] Company Logo

 4.3 Adjusting and Closing the Accounts
of a Merchandiser
◆Closing the account of a Merchandiser
◆Closing the entries
2) Dr Income summary
Cr Cost of goods sold
Cr Wage expense
Cr Rent expense
Cr Depreciation expense
Cr Insurance expense
Cr Supplies expense
Cr Interest expense
[Link] … Company Logo
 4.3 Adjusting and Closing the Accounts
of a Merchandiser
◆Closing the account of a Merchandiser
◆Closing the entries
3)a. Dr Income summary
Cr ….., capital
(If the company have a mount of net income)
3)b. Dr ………, Capital
Cr Income summary
(If the company have a mount of net loss)
4) Dr ….., capital
Cr drawing, capital
[Link] Company Logo
4.3 Adjusting and Closing the Accounts of a
Merchandiser
Closing still means to zero out all accounts that aren’t on
the balance sheet. All amounts are assumed for this
illustration.

[Link] Company Logo

4.4 Preparing a Merchandiser’s Financial
Statements
Income Statement:
The income statement begins with
Sales, Cost of goods sold, and Gross profit.
Then come the operating expenses, which
are those expenses other than Cost of goods
sold

[Link] Company Logo

4.4 Preparing a Merchandiser’s Financial
Statements
Income Statement:
Comparing Service Co With Merchandiser

[Link] Company Logo

4.4 Preparing a Merchandiser’s Financial
Statements
Balance sheet:
For a merchandiser, the balance sheet
is the same as for a service business, except
merchandisers have an additional current
asset, Inventory. Service businesses have no
inventory.

[Link] Company Logo

 Balance sheet

[Link] Company Logo

 4.5 Three Ratios for Decision Making
The Gross Profit Percentage
◆Gross profit (gross margin) is net sales minus the
cost of goods sold. Merchandisers strive to
increase the gross profit percentage (also called
the gross margin percentage), which is
computed as follows:

Gross profit
Gross profit percentage = Net sales revenue

Company Logo
[Link]
 4.5 Three Ratios for Decision Making
◆The Rate of Inventory Turnover
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒈𝒐𝒐𝒅 𝒔𝒐𝒍𝒅
◆𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚∗

Average Inventory *=
𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 +𝑬𝒏𝒅𝒊𝒏𝒈 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
𝟐

Company Logo
[Link]
 4.5 Three Ratios for Decision Making
◆Days in Inventory
𝟑𝟔𝟓
◆𝑫𝒂𝒚𝒔 𝒊𝒏 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 =
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝒓𝒂𝒕𝒊𝒐𝒔

Company Logo
[Link]
 4.5 Three Ratios for Decision Making -Example
Hong Ha, JSC
Balance sheet on December 12, 2016
2016 2015
Assets
Cash 20,000 45,000
Accounts receivable 90,000 73,000
Inventory 145,000 142,000
Plant Asset, net 460,000 420,000
Total Assets 715,000 680,000
Liabilities
Current
Accounts payable 90,000 50,000
Accrued liabilities 5,000 10,000
Long-term notes payable 160,000 80,000
Stockholders’ Equity 370,000 250,000
Retained earnings 90,000 80,000
Total liabilities and stockholders’ equity 715,000 680,000
 4.5 Three Ratios for Decision Making -Example
Hong Ha, JSC
Balance sheet on December 12, 2016
2016 2015
Assets
Cash 20,000 45,000
Accounts receivable 90,000 73,000
Inventory 145,000 142,000
Plant Asset, net 460,000 420,000
Total Assets 715,000 470,000
Liabilities
Current
Accounts payable 90,000 50,000
Accrued liabilities 5,000 10,000
Long-term notes payable 160,000 80,000
Stockholders’ Equity 370,000 250,000
Retained earnings 90,000 80,000
Total liabilities and stockholders’ equity 715,000 470,000
 4.5 Three Ratios Hong
for Decision Making -Example
Ha, JSC
Income statement
Year ended December 12, 2016
2016 2015
Sales Revenue 350,000 320,000
Less: Sales discount 40,000 25,000
Sales return and allowance 30,000 45,000
Net sales Revenue 280,000 250,000
Cost of goods sold 140,000 130,000
Gross profit 140,000 120,000
Operating expenses
Salary expenses 12000 11900
Rent expenses 15000 14900
Depriciatetion 12400 12300
Total Operating expenses 39400 39100
[Link]
income 100,600 80,900
Company Logo
4.5 Three Ratios for Decision Making -Example

Requirements:
Compute Three Ratios as follows:
1. Gross profit percentage?
2. Inventory turnover?
3. Days in inventory ?
 Review
1. Which account does a merchandiser use that
a service company does not use?
a. Inventory
b. Cost of goods sold
c. Sales revenue
d. All of the above 2.

[Link] Company Logo

 Review
[Link] two main inventory accounting systems
are the
a. perpetual and periodic.
b. purchase and sale.
c. returns and allowances.
d. cash and accrua

[Link] Company Logo

 Review
3. QN, Jsc purchased inventory for $6,300 and
also paid a $260 freight bill. QN, Jsc returned
40% of the goods to the seller and later took a
2% purchase discount. How much did QN, Jsc
take purchase discount?
A. $260
B. $3,959.2
C. $75.6
D. $2,520.
 Review
[Link] Austin Sound had sales of $300,000
and sales returns of $45,000. Cost of goods
sold was $152,000. How much gross profit did
Austin Sound report?
a. $148,000
b. $103,000
c. $255,000
d. $88,000

[Link] Company Logo

 Review
4. QN, Jsc purchased inventory for $5,300 and
also paid a $260 freight bill. JC Manufacturing
returned 45% of the goods to the seller and
later took a 2% purchase discount. What is QN,
Jsc ’s final cost of the inventory that it kept?
(Round your answer to the nearest whole
number.)
A. $2,997
B. $2,337
C. $3,117
D. $2,857 5.
 4.5 Three Ratios for Decision Making
◆For Example: 2015 2014
Assets
Current
Cash 20,000 45,000
Accounts receivable 90,000 73,000
Inventory 145,000 142,000
Plant Asset, net 460,000 420,000
Total Assets 715,000 470,000
Liabilities
Current
Accounts payable 90,000 50,000
Accrued liabilities 5,000 10,000
Long-term notes payable 160,000 80,000
Stockholders’ Equity 370,000 250,000
Retained earnings 130,000 80,000
Company Logo
[Link]
liabilities and stockholders’ equity 715,000 470,000
LOGO

[Link]