WILEY

PREVIEW OF CHAPTER 5

IFRS EDITION
Financial Accounting
Prepared by IFRS 3rd Edition
Coby Harmon
University of California, Santa Barbara Weygandt ● Kimmel ● Kieso
5-1 Westmont College 5-2

CHAPTER
Merchandising Operations
5 Accounting for
Merchandising Operations Merchandising Companies
Learning
Objective 1
Identify the differences
between service and
LEARNING OBJECTIVES Buy and Sell Goods merchandising
companies.
After studying this chapter, you should be able to: Retailer
1. Identify the differences between service and merchandising companies.
2. Explain the recording of purchases under a perpetual inventory system.
3. Explain the recording of sales revenues under a perpetual inventory
system.
4. Explain the steps in the accounting cycle for a merchandising company. Wholesaler Consumer
5. Prepare an income statement for a merchandiser.
The primary source of revenues is referred to as
sales revenue or sales.
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 Merchandising Operations Operating Cycles
Illustration 5-2
Income Measurement The operating
cycle of a
Not used in a
Sales Less
Illustration 5-1 merchandising
Service business.
Revenue Income measurement process for a
merchandising company company
ordinarily is longer
Equals
Cost of Gross Less
than that of a
Goods Sold Profit
service company.

Operating Equals Net

Cost of goods sold is the total Income
Expenses
cost of merchandise sold during (Loss)
the period.
Illustration 5-3

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Flow of Costs Flow of Costs

Illustration 5-4

PERPETUAL SYSTEM
 Maintain detailed records of the cost of each inventory
purchase and sale.

 Records continuously show inventory that should be on

hand for every item.

 Company determines cost of goods sold each time a

sale occurs.

Companies use either a perpetual inventory system or a periodic

inventory system to account for inventory.
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 Flow of Costs Flow of Costs

PERIODIC SYSTEM ADVANTAGES OF THE PERPETUAL SYSTEM

 Do not keep detailed records of the goods on hand.  Traditionally used for merchandise with high unit
 Cost of goods sold determined by count at the end of values.
the accounting period.  Shows the quantity and cost of the inventory that
 Calculation of Cost of Goods Sold: should be on hand at any time.

Beginning inventory € 100,000  Provides better control over inventories than a periodic
Add: Purchases, net 800,000 system.
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold € 775,000

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Recording Purchases of Merchandise Recording Purchases of Merchandise

Learning Objective 2 Illustration 5-6
Explain the recording of
 Made using cash or credit (on purchases under a perpetual Illustration: Sauk Stereo (the
inventory system.
account). buyer) uses as a purchase
invoice the sales invoice
 Normally record when
prepared by PW Audio Supply,
goods are received from
Inc. (the seller). Prepare the
the seller.
journal entry for Sauk Stereo for
 Purchase invoice should the invoice from PW Audio
support each credit Supply.
purchase.
May 4 Inventory 3,800
Illustration 5-6 Accounts Payable 3,800
Sales invoice used as purchase
invoice by Sauk Stereo
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 Freight Costs Freight Costs

Illustration: Assume upon delivery of the goods on May 6, Sauk

Ownership of the goods Stereo pays Public Freight Company €150 for freight charges, the
passes to the buyer when the entry on Sauk Stereo’s books is:
public carrier accepts the
goods from the seller. May 6 Inventory 150
Cash 150

Ownership of the goods Assume the freight terms on the invoice in Illustration 5-6 had
remains with the seller until required PW Audio Supply to pay the freight charges, the entry by
the goods reach the buyer. PW Audio Supply would have been:

Illustration 5-7 May 4 Freight-Out (Delivery Expense) 150

Shipping terms
Freight costs incurred by the seller are an
Cash 150
operating expense.
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Purchase Returns and Allowances Purchase Returns and Allowances

Purchaser may be dissatisfied because goods are damaged or Illustration: Assume Sauk Stereo returned goods costing
defective, of inferior quality, or do not meet specifications. €300 to PW Audio Supply on May 8.

Purchase Return Purchase Allowance May 8 Accounts Payable 300

Return goods for credit if the May choose to keep the Inventory 300
sale was made on credit, or merchandise if the seller will
for a cash refund if the grant a reduction from the
purchase was for cash. purchase price.

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 Purchase Returns and Allowances Purchase Discounts

Question Credit terms may permit buyer to claim a cash discount for
In a perpetual inventory system, a return of defective prompt payment.
merchandise by a purchaser is recorded by crediting: Example: Credit terms
Advantages: may read 2/10, n/30.
a. Purchases
 Purchaser saves money.
b. Purchase Returns
 Seller shortens the operating cycle by converting the
c. Purchase Allowance accounts receivable into cash earlier.
d. Inventory

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Purchase Discounts Purchase Discounts

Illustration: Assume Sauk Stereo pays the balance due of

2/10, n/30 1/10 EOM n/10 EOM €3,500 (gross invoice price of €3,800 less purchase returns
and allowances of €300) on May 14, the last day of the
2% discount if 1% discount if Net amount due discount period. Prepare the journal entry Sauk Stereo
paid within 10 paid within first 10 within the first 10 makes on May 14 to record the payment.
days, otherwise days of next days of the next
net amount due month. month. May 14 Accounts Payable 3,500
within 30 days.
Inventory 70
Cash 3,430

(Discount = €3,500 x 2% = €70)

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 Purchase Discounts > DO IT!

Illustration: If Sauk Stereo failed to take the discount, and On September 5, Zhu Company buys merchandise on account
instead made full payment of €3,500 on June 3, the journal from Gao Company. The selling price of the goods is ¥15,000,
entry would be: and the cost to Gao Company was ¥8,000. On September 8,
Zhu returns defective goods with a selling price of ¥2,000.
June 3 Accounts Payable 3,500 Record the transactions on the books of Zhu Company.
Cash 3,500
Sept. 5 Inventory 15,000
Accounts Payable 15,000
Sept. 8 Accounts Payable 2,000
Inventory 2,000

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Recording Sales of Merchandise Recording Sales of Merchandise

Learning Objective 3
 Made using cash or credit (on account). Explain the recording of sales
revenue under a perpetual Journal Entries to Record a Sale
inventory system.
 Sales revenue, like service
revenue, is recorded when #1 Cash or Accounts Receivable XXX Selling
the performance obligation
Sales Revenue XXX Price
is satisfied.

 Performance obligation is
satisfied when the goods #2 Cost of Goods Sold XXX
are transferred from the Cost
Inventory XXX
seller to the buyer.

 Sales invoice should

support each credit sale.

Illustration 5-6
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 Recording Sales of Merchandise Sales Returns and Allowances

Illustration: PW Audio Supply records the sale of €3,800 on May  “Flip side” of purchase returns and allowances.
4 to Sauk Stereo on account (Illustration 5-6) as follows
 Contra-revenue account to Sales Revenue (debit).
(assume the merchandise cost PW Audio Supply €2,400).
 Sales not reduced (debited) because:
May 4 Accounts Receivable 3,800
► Would obscure importance of sales returns and
Sales Revenue 3,800
allowances as a percentage of sales.

4 Cost of Goods Sold 2,400 ► Could distort comparisons.

Inventory 2,400

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Sales Returns and Allowances Sales Returns and Allowances

Illustration: Prepare the entry PW Audio Supply would make to Illustration: Assume the returned goods were defective and
record the credit for returned goods that had a €300 selling had a scrap value of €50, PW Audio would make the following
price (assume a €140 cost). Assume the goods were not entries:
defective.
May 8 Sales Returns and Allowances 300
May 8 Sales Returns and Allowances 300 Accounts Receivable 300
Accounts Receivable 300
8 Inventory 50
8 Inventory 140 Cost of Goods Sold 50
Cost of Goods Sold 140

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 Sales Discount Sales Discount

 Offered to customers to promote prompt payment of the Illustration: Assume Sauk Stereo pays the balance due of
balance due. €3,500 (gross invoice price of €3,800 less purchase returns
and allowances of €300) on May 14, the last day of the
 Contra-revenue account (debit) to Sales Revenue.
discount period. Prepare the journal entry PW Audio Supply
makes to record the receipt on May 14.

May 14 Cash 3,430

Sales Discounts 70 *
Accounts Receivable 3,500

* [(€3,800 – €300) X 2%]

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Recording Sales of Merchandise Forms of Financial Statements

Learning Objective 4 Learning Objective 5
Explain the steps in the Prepare an income statement
Adjusting Entries accounting cycle for a Income Statement for a merchandiser.
merchandising company.

 Generally the same as a service company.  Primary source of information for evaluating a company’s
performance.
 One additional adjustment to make the records agree with
the actual inventory on hand.  Format is designed to differentiate between the various
sources of income and expense.
 Involves adjusting Inventory and Cost of Goods Sold.

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Income Income
Statement Statement
The income statement Key Items:
is a primary source of
 Net sales
information for
evaluating a
company’s
performance.

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Income Income
Statement Statement
Key Items: Key Items:
 Net sales  Net sales
 Gross profit  Gross profit

Illustration 5-11
Gross profit rate formula
and computation

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Income Income
Statement Statement
Key Items: Key Items:
 Net sales  Net sales
 Gross profit  Gross profit
 Operating  Operating
expenses expenses
 Other income and
expense

5-37 Illustration 5-14 LO 5 5-38 Illustration 5-14 LO 5

Income Income
Statement Statement
Key Items: Key Items:
 Net sales  Net sales
 Gross profit  Gross profit
 Operating  Operating
expenses expenses
 Other income and  Other income and
expense expense
 Interest expense

5-39 Illustration 5-14 LO 5 5-40 Illustration 5-14 LO 5

Income
Statement
Key Items:
 Net sales
 Gross profit
 Operating
expenses
 Other income and
expense
 Interest expense
 Net income

5-41 Illustration 5-14 LO 5