Chapter 5

Merchandising Operations

What’s Different

• Service Company has labor and they do something for someone

• Merchandising Company buys goods from someone else to sell to customers.

New Revenue Account

• Our Revenue Account is now “Sales”• Net Income is computed

Sales-Cost of Goods=Gross Profit Gross Profit – Operating Expenses = New Income

Merchandise Inventory

• We now have inventory of the things we sell to customers

• Merchandise Inventory is an Asset• So when we buy inventory we debit

Merchandise Inventory and credit cash or accounts payable.

Example

• ATA Warehouse bought 100, 50” TV’s for $450 each. We will pay the bill in 30 days.

Merchandise Inventory Accounts Payable- Sony Company

Let’s Do BE5-1, Page 228

Freight

• Like anything delivered, there is a freight expense. There are two ways to pay freight

• The seller pays (sony) called FOB Destination• The buyer pays (ATA Warehouse) called FOB

Shipping Point

First Freight FOB

• Seller (Sony is paying the freight on the TV’s)• This is an expense to Sony

Delivery ExpenseCash (Or AP)

Buyer Pays Freight

• ATA Warehouse is paying for the freight on the TV’s which is added to the merchandise cost Merchandise Inventory Cash or AP

Purchase Returns

• Two of the TV’s were damaged and were returned to Sony Accounts Payable 900 Merchandise Inventory 900

Discounts

• Many times if you pay your bill before the month is up, the company will give you a discount.

• Sony has terms of 2/10, net 30– This means we can take a 2% discount off our bill

if we pay in 10 days, but the whole amount is due in 30 days.

Now we will pay Sony for our TV’s

• Remember, we bought 100 TV’s for $450 each but we returned two so we owe this is what our entries look like so far.

• Purchased 100, 50” tv’s for $450 each Merchandise Inventory 45,000 Accounts Payable 45,000

Freight was FOB Shipping

• So we had to pay the freight of $500 Merchandise Inventory $500 Accounts Payable $500• We returned 2 of the TV’s Accounts Payable $900 Merchandise Inventory $900

Pay the Bill

• We have a balance of $44,600 to pay, Sony give 2/10, net 30, so we can take 2% of the total.

Accounts Payable $44,600 Cash (44,600-2%) $43,708 Merchandise Inventory $892

Do E5-2 and E5-3 Page 231

Sales Side

• Now we want to sell our TV’s We sold three TV’s to the WTU Company on account. We

want a 20% profit (we have to make a profit). Sales tax is 6%

1. Record the sale Accounts Receivable ? Sales ?

Sales Tax Payable ?2. Take it out of inventory

Cost of Goods Sold ? Merchandise Inventory ?

“I don’t like this TV”

• One of the TV’s was returned but is still in working order.

• We want to make sure we know how many things were returned so we use a contra-sales account, “Sales Returns and Allowance”. We also want to reduce his bill.

• Sales Returns and Allowances ? Sales Tax Payable ? A/R-WTU Co. ?

Put it Back in Inventory

• Merchandise Inventory $450 Cost of Goods Sold $450(This amount is at our original cost)*****

Sales Discounts

• We also give discounts to companies to pay early. We have 1/10, net 30. WTU pays their bill within the 10 Days.

Cash Sales Discounts Accts Receivable Do Problem 5-1A Page 235, 236

Closing Entries

• All accounts that record transactions for a fiscal year must be closed using the temporary account, Income Summary

• Look at all the accounts on Page 212

Financial Statements

• Multi-Step Income Statement• Look at Page 216– Look at the Sales Section

Sales-Sales Returns and Allowances=Net Sales-Cost of Goods Sold=Net Profit

Assignments for Chapter

• BE 5-1, E 5-1, E-53• P5-1A• P5-2A• ***Read Instructions and Transactions

Carefully****

• Test is like 5-1A and Terms

Terms to KnowMerchandising Company Sells goods to customers

Cost of Goods Sold Your cost of the goods sold to customers

Perpetual Inventory Inventory down continuously (scanned)

Periodic Inventory Inventory taken time to time

Merchandise Inventory All the goods available for sale, is an asset

Freight Cost Delivery Cost

FOB Destination Freight charges paid by seller

FOB Shipping Point Freight charges paid by buyer

Purchase Discounts Amount deducted from bill when paid early

Sales Discounts Amount deducted from bill when paid early

Purchase/Sales Returns Merchandise returned for credit

2/10 Net 30 2% deducted if paid in 10 days, entire amount due in 30 days.