Chapter 5: Accounting for Merchandising Operations Flashcards
FOB Shipping Point vs. FOB Destination
Shipping Point: Purchaser pays freight
- Cost of freight added to COGS in merchandise inventory
- Purchaser owners the freight in transit
Destination: Shipper pays freight
- cost of freight is an operating expense for the shipper
- Shipper owns freight in transit
Income from Operations
Does not include interest revenue/expense or other non-operations gains and losses (such as disposal of plant assets)
Perpetual vs Periodic Inventory Systems
Cost flow methods
Perpetual: records cost of goods and reduces inventory at the time of sale (so inventory always shows current)
- uses merchandise inventory account
vs.
Periodic: Cost of goods sold determined and recorded only at the end of the accounting period.
- no merchandise inventory account
Merchandising Company Operating Cycle
Have cash -> Buy inventory ->
inventory goes into merchandise inventory->
sell the inventory -> record sale in A/R–>
A/R paid in cash–> have cash to buy more inventory
Service Company Operating Cycle
Have cash –> Pay employees to perform services–>
Record services in A/R–> A/R paid in Cash–> have cash to pay employees
Merchandising Companies
AKA retailers and wholesalers. Businesses that buy and sell goods
Revenue account = sales revenue or just sales
Purchase Returns and Allowances
Return: product returned for credit or cash refund
Allowance: buyer keeps (defective/ unwanted) product and gets a deduction from the purchase price
Purchase Discounts
Incentivizes quick payments, thus shortening the operating cycle
- applies to invoice price LESS returns and allowances, not including freight
2/10, n/30: 2% off if paid in 10 days, net due in 30 days
1/10 EOM: 1% off if paid within 1st 10 days of next month
n/10 EOM: Net due within 1st 10 days of next month
Contra-Revenue account
Debit Increase | Credit Decrease
Debit Normal Balance
Normal balance decreases sales revenue. Sales less contra-revenue = net sales
ex:
- sales returns and allowances
- sales discounts
Journaling Sales Returns
(Sales Returns + allowances is a contra-revenue account. Sales account is not directly reduced to keep comparisons across periods even)
Case: Perpetual inventory item is returned.
Debit (increase) Sales returns + Allowances Credit (decrease) Accounts Receivable \+ Debit (increase) Merchandise Inventory Credit (decrease) Cost of Goods Sold
If return is defective the 2nd transaction is only for the scrap/ residual value.
If periodic inventory 2nd transaction isn’t done
Sales Allowance
An incentive for the customer to keep the unsatisfactory merchandise
Debit (increase) Sales Returns and Allowances
Credit (decrease) Accounts Receivable
same for perpetual and periodic inventory
Merchandise inventory account
A CURRENT asset account that exists in perpetual inventory systems only.
Debit increase | Credit decrease
Debit NB
Increases from: cost of merchandise purchased, freight
decrease from: returns, discounts, allowances
Permanent account - goes after A/R on balance sheets (only marketable inventory goes to this account)
Journaling Inventory Purchase (Perpetual Inventory)
Debit (increase) Merchandise Inventory
Credit (increase) A/R (or decrease cash)
Periodic inventory - Debit to purchases expense
Merchandise Transactions (Periodic Inventory)
Sales recorded in revenue account
Purchases recorded in Purchase account
Freight, purchase discounts etc all in separate accounts
A physical inventory count determines the Cost (value) of inventory on hand AND the cost of goods sold
Recording perpetual inventory on-time payment purchase discount
Assumes already recorded Debit Merchandise Inventory, Credit A/P
Debit (decrease) Accounts Payable (full amount)
Credit (decrease) cash (amount less discount)
Credit Merchandise inventory (discount amount)
Periodic inventory: Credit purchase discounts for discount amount
Determining Cost of goods sold (Periodic inventory system)
Beginning Inventory \+ Cost of Goods Purchased = Purchases - Returns and Allowances - Discounts \+ Freight in = Goods Available for Sale - Ending Inventory = Cost of Goods Sold
Sale of Inventory (perpetual system)
Debit (increase) A/R or Cash
Credit (increase) Sales/Revenue
+
Debit (increase) Costs of Good Sold (expense)
Credit (decrease) Merchandise inventory (asset)
Transaction recorded when the customer receives the goods, requires invoice or receipt backup.
Any shipping costs are recorded separately.
Sales Discounted payment
Debit (increase) Cash (due amount less discount)
Debit (increase) Sales Discount (amount of discount)
Credit (decrease) A/R (full amount
Check “Under new revenue recognition standards sales recorded at net amount or amount of sale less any discounts” (use “Sales Discount Forfeited account”)
Closing in a periodic system
- Purchase returns + Allowances and Purchase Discounts both closed via Income summary
- Merchandise Inventory + estimated returns inventory recorded as debits
- Beginning merchandise inventory and expense accounts closed via income summary
This should result in a merchandise inventory balance
Closing Merchandising Accounts
1) Revenue Accounts closed to income summary (includes sales revenue and discounts forfeited)
2) Expenses accounts closed to income summary (includes cost of goods sold + delivery expense
3) Close income summary to retained earnings
4) Close dividends to retained earnings
Merchandise Inventory Adjustment (perpetual inventory)
Reconciles actual inventory to books
Requires physical inventory count
Ending inventory (book)
- Ending inventory (actual)
= Over or understatement of books
Overstatement of books (need to reduce inventory)
Debit Cost of Goods Sold
Credit Merchandise Inventory
Understatement of books (need to increase inventory)
Debit Merchandise Inventory
Credit Cost of Goods Sold
Purchase Returns + Allowances and Purchase Discounts
Debit (decrease) A/P
Credit Merchandise Inventory Account (perpetual inventory)
or Credit Purchase Returns and Allowances (periodic inventory)
Freight
If shipping to a customer and seller pays freight
Debit (increase) expense
Credit (increase) liability or (decrease) cash
For freight in
Perpetual inventory ; freight debited to merchandise inventory (asset) account
Periodic inventory: Freight debited to Freight-in (expense) account
Estimating Sales Returns
(This was not in the Albany presentation)
Have a refunds payable account based on estimated returns calculated using historical data.
to adhere to the matching principle - so that statements show the “actual” sales for that period after returns
Refunds payable is a liability account
Estimated returns inventory (asset account) estimates the cost of goods sold that are returned
Returns then go to Refunds payable/ estimated returns inventory account.
Gross Profit Rate
(or Gross Profit Percentage)
Gross Profit/ Net Sales = Gross Profit Rate
Net Cost of Inventory Purchased
Purchase cost of inventory - Purchase returns and allowances - purchase discounts \+ freight in = Net Cost of Inventory Purchased
Gross Profit
Markup on merchandise inventory
Revenue - Returns - allowances - discounts = Net Sales
Net sales - cost of goods sold = gross profit (BEFORE operating expenses accounted for
Cost of Goods Sold for Periodic Inventory
Beginning Inventory Purchases Less Returns + Allowances Less Discounts = Net Purchases (add)Freight In Cost of Goods Purchased = Cost of Goods Available for Sale Less Ending Inventory = Cost of goods sold
Multi-Step Income Statement
Distinguishes between operating and non-operating activities (can also distinguish between selling and admin expense)
Sales less contra-revenue accounts = Net Sales
Net Sales less Cost of Goods Sold = Gross Profit
Gross profit less operating expenses = income from operations
Income from operations + other revenue or gains - other expenses or losses (less income tax expenses) = Net Income
Merchandising company Income Formula
Sales Revenue Less Cost of Goods Sold = Gross Profit Less Operating Expenses = Net income (or loss)
Sales Revenue Section of Income Statement
Sales Revenue
Sales
Less: Sales Returns + allowances
Sales discounts
Net SalesSingle Step income statement
Total Revenues less total expenses = income
List Revenues total Revenues List Expenses Total Expenses Revenues - Expenses = Net Income
IFRS vs GAAP Revaluation
Under IFRS companies may revalue land/ buildings/ intangible assets. These gains and losses are reported as equity adjustments, not income or loss
IFRS vs GAAP Income Statement Classifications
GAAP: classified by function (admin, distribution, manufacturing)
IFRS: either by function or by nature
if by function on income statement then the nature must be included in the notes
(Nature = salaries, depreciation, utilities etc…)
Also- no single vs. multi step income statements under IFRS
