Ch4.ppt

Accounting for Merchandise Operations Chapter 4 A200 Merchandising businesses Service Businesses: Sell services, not tangible goods. Examples: Doctors, Dentists, Accountants, Lawyers, Architects, Landscapers, Barbers, Hairdressers, Mechanics, Teachers (U.T.) Merchandisers (?Middle-men?): Purchase tangible goods from Manufacturers. Sell tangible goods (merchandise) to Customers. Examples: Grocery Stores, Clothing Stores, Car Dealerships (the Mall, the Strip) Merchandisers are both buyers and sellers of goods. Differences on the Income Statement Service Firm Income Statement Fees Earned (Operating Expenses) Net Income Merchandising Firm Income Statement (Multiple-step) Sales (Sales Returns & Allowances) (Sales Discounts) Net Sales (Cost of Merchandise Sold) Gross Profit (Operating Expenses) Net Income Computing Cost of Merchandise Sold (COMS) Sales (Sales Returns & Allowances) MI Beg Balance (Sales Discounts) +Purchases Net Sales -Purchase Discounts (Cost of Merchandise Sold) -Purchase Return?s + Allow?s Gross Profit +Transportation-in (Operating Expenses)* -MI End Balance Net Income = COMS *Selling expenses (advertising, sales commissions, storefront expenses such as rent, utilities, depreciation, insurance, supplies etc) and Administration expenses (administrative salaries, rent, utilities, depreciation, insurance on administrative building.) Compute COMS Merchandise Inventory (Jan 1) 20,000 Purchases 300,000 Purchase discounts 10,000 Purchase returns & allowances 5,000 Transportation ? In 2,000 Merchandise Inventory (Dec 31) 30,000 Computing COMS Merchandise Inventory (Jan 1) $20,000 Purchases $300,000 Purchase discounts (10,000) Purchase returns & allowances ( 5,000) 285,000 Transportation ? In 2,000 Merchandise available for sale: $307,000 Less: Merchandise Inventory (Dec 31) ( $30,000) COMS $277,000 This is computed by taking a physical count of inventory on hand Sales and Purchase Discounts Sales Discounts: Price reductions given by Manufacturers to customers when they sell goods - to encourage Merchandisers to pay quickly. Sales discounts reduce Sales Revenue for the period. Purchase Discounts: Cost reductions taken by Merchandisers when they purchase goods from manufacturers and then pay quickly. Purchase discounts reduce the cost of Inventory (Asset). Common Discount Terms: 2/10, net 30 = a 2% discount is offered if payment is made within 10 days; otherwise full payment is due within 30 days. n/30 or net 30 = no discount is offered; full payment is due within 30 days. n/eom = no discount is offered; full payment is due at the end of the month. Discount Example On April 1, Murphy Company (buyer) purchased on account 100 units of product from Behn Company (seller). The credit terms are 2/10, net 30, and the invoice total is $3,500. How much will Murphy pay to Behn if it pays on April 5? $3,500 x .02 = $70 (this is the discount) $3,500 ? 70 = $3,430 (price ? discount = amount due) How much will Murphy pay to Behn if it pays on April 30? $3,500 (no discount because Murphy paid after the discount period) Purchase discount to the buyer, Murphy (reduces cost of Inventory). Sales discount to the seller, Behn (reduces Sales Revenue). Transportation (Shipping) Costs (Who owns the goods during transit?) (Who is responsible for shipping costs?) FOB Shipping Point: The Buyer owns the goods during transit. The Buyer pays the shipping costs. This increases buyer?s cost of merchandise inventory (Asset on Balance Sheet). FOB Destination Point: The Seller owns the goods during transit. The Seller pays the shipping costs. This increases seller?s Transportation-out (Selling Expense on Income Statement). Transportation (Shipping) Cost Example On April 1, Murphy Company (buyer) purchased on account 100 units of product from Behn Company (seller). The credit terms are 2/10 net 30, and the invoice total is $3,550 ($50 of the total is shipping costs which Behn paid when it shipped the goods). How much will Murphy pay to Behn if it pays on April 5 and the shipping terms were FOB shipping point? $3,500 x .02 = $70 discount $3,500 ? 70 + 50 = $3,480 (The buyer, Murphy, owned the goods in transit, so Murphy must pay the shipping. Behn paid it originally, so Murphy is paying it back.) How much will Murphy pay to Behn if it pays on April 30 and the shipping terms were FOB destination? $3,500 (The seller, Behn, owned the goods in transit, so Behn must pay the shipping and not discount b/c payment is is made after the discount period.) Seller sells $2,500 worth of merchandise to buyer on account. COMS is $1,500. The terms are 2/10, net 30 FOB shipping point. Transportation costs are $75. Record the sellers entries: A/R + $2,500 Sales Revenue + $2,500 Merchandise Inventory ($1,500) COMS expense + $1,500 Assets = Liabilities + Equity Cash + A/R + Merch Inv. = R/E + 2,500 = +2,500 rev?s - 1,500 -1,500 COGS Revenues ? Expenses Sales 2,500 ? COGS 1,500 = Gross Profit $1,000 Buyer purchases $2,500 worth of merchandise on account. The terms are 2/10, net 30 FOB shipping point. Transportation costs are $75. Record the Buyers entries: Merchandise Inventory + $2,500 A/P + $2,500 Merchandise Inventory + 75 Cash (75) Assets = Liabilities + Equity Cash + A/R + Merch Inv. = A/P R/E + 2,500 = + 2,500 -75 +75 Buyer returns $500 worth of merchandise to seller. Cost of the goods returned are $300 to the seller. Record the sellers entries. A/R ($500) Sales Returns and Allowances + $500 Merchandise Inventory + $300 COMS (300) Assets = Liabilities + Equity Cash + A/R + Merch Inv. = R/E -500 = - 500 sales R+A +300 + 300 COMS Revenues ? Expenses Sales R+A COMS (500) - (300) Note: Sales Returns and allowance increases, however because it is a contra-revenue it causes revenues and R/E?s to decrease. COMS expense decreases because merchandise is no longer sold and this causes R/E?s to increase. Buyer returns $500 worth of merchandise to seller. Record the buyers entries. Merchandise Inventory (500) A/P (500) Buyer Assets = Liabilities + Equity Cash + A/R + Merch Inv. = A/P R/E - 500 = - 500 Buyer pays seller for the merchandise in time to take the discount. Record the transactions for the seller? $2,500 ? 500 = $2,000 $2,000 x .02 = $40 $2,000 ? 40 = $1960 Cash + $1,960 Sales Discounts + $40 (contra revenue) A/R ($2,000) Assets = Liabilities + Equity Cash + A/R + Merch Inv. = R/E +1960 -2,000 -40 sales disct?s Note: Sales Discounts increases, but because it is a Contra-Revenue, it causes revenues and R/E?s to decrease. Buyer pays Seller for the merchandise in time to take the discount. Record the transactions for the Buyer? $2,500 ? 500 = $2,000 2000 x .02 = $40 $2,000 ? 40 = $1960 Cash ($1,960) A/P ($2,000) Merchandise Inventory ($40) Assets = Liabilities + Equity Cash + A/R + Merch Inv. = A/P R/E -1,960 -40 = - 2,000 Financial Statement Analysis Ratios Gross Profit % = Gross Profit ÷ Net Sales This ratio measures what percent of each dollar in a sales transaction is profit to the seller (before other expenses). Example: Sales $2,500 Sales R%A (500) Sales Discounts (40) Net Sales $1,960 COMS (1,500 ? 300) (1,200) Gross Profit $760 $760 ÷ $1,960 = 38.8% Is this number good or bad? Can?t tell without Horizontal Analysis and checking industry averages.