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ACTG 2110

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ACTG 2110 Chapter 6 Accounting for Merchandising Businesses – PowerPoint PPT presentation

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Title: ACTG 2110


1
ACTG 2110
  • Chapter 6 Accounting for Merchandising
    Businesses

2
Merchandising Companies
  • Businesses that buy goods with the intention of
    reselling the goods at a higher price
  • Ex. Target, WalMart, Dillards, Krogers,
    Books-a-Million, Old Navy, Sears, Etc.
  • Two new accounts
  • Inventory merchandise to be resold
  • Listed as a current asset on the balance sheet
  • Cost of goods sold merchandise that has been
    sold
  • Expensed on the income statement
  • Generally a large expense (often the largest)

3
Operating cycle
  • CashgtgtgtgtgtBuy inventorygtgtgtgtgtgtgtSell
    inventorygtgtgtgtgtgtgtgtgtCollect cash from customers or
    the accounts receivable collections
  • Shorter the operating cycle, the better off you
    are (get cash back fast!!!)

4
Multi-step Income Statement
  • Net sales (Sales sales returns and allowances
    sales discounts)
  • Less cost of goods sold
  • Gross profit margin
  • Operating expenses
  • Selling expenses
  • General Administrative expenses
  • Income from operations (Operating income)
  • Add other income (interest income)
  • Subtract other expenses (interest expense)
  • Net income

5
Other Financial Statements
  • Single-step income statement
  • All revenues listed together (no other income)
  • All expenses listed together (no gross profit
    margin or other expenses)
  • Statement of owners equity
  • Same as for service businesses
  • Balance sheet
  • Now includes inventory as a current asset

6
Inventory Systems
  • Perpetual
  • Inventory account continuously updated
  • Inventory is counted at the end of the period to
    see whether it agrees with accounting records
  • All purchases increase Inventory
  • Cost of goods sold is recorded every time a sale
    occurs
  • Periodic
  • Inventory account only updated occasionally or
    periodically
  • Inventory is counted at end of the period
  • All purchases go to an expense account entitled
    Purchases
  • Cost of goods sold is backed into

7
Accounting for Inventory Perpetual System
  • Sales of Inventory (2 entries)
  • Cost of goods sold XXX
  • Inventory XXX
  • Accts. Rec./Cash XXX
  • Sales XXX
  • Sales Discounts
  • Cash XXX
  • Sales Discounts XXX
  • Accounts Receivable XXX
  • Sales Returns and Allowances
  • Sales Returns and Allowances XXX
  • Accounts Receivable/Cash XXX

8
Accounting for Inventory Perpetual System
  • Purchases of inventory
  • Inventory XXX
  • Accounts Payable XXX
  • Purchases Discounts
  • Payment terms 2/10, n/30
  • 2 discount if paid in 10 days, net must be paid
    by 30 days
  • Gross method (purchases discounts reduce the
    inventory amounts)
  • Net method (purchase recorded at the amount after
    the discount if discount not taken, inventory is
    increased)

9
Accounting for Inventory Perpetual System
  • Purchases returns and allowances
  • Recorded as decreases in inventory
  • Transportation Costs
  • Freight in (Added to inventory cost)
  • FOB Shipping point
  • Buyer generally pays freight
  • Buyer owns inventory when it reaches the
    shipping point
  • FOB Destination
  • Seller generally pays freight
  • Seller owns inventory until it reaches the buyer
    or the destination
  • Freight out/Delivery expense (Selling/marketing
    cost to deliver goods)

10
Sales Taxes
  • Example
  • Cash/Accts. Rec. 1,060
  • Sales 1,000
  • Sales Tax Payable 60
  • (1,000 sale 6 sales tax collected)
  • Sales Tax Payable 60
  • Cash 60
  • (Business pays sales tax to state)

11
Adjusting Entries
  • Adjust for inventory shrinkage
  • Example Inventory records show 1,000, while
    inventory count shows 950
  • Cost of goods sold 50
  • Inventory 50

12
Financial Analysis and Interpretation
  • Ratio of net sales to assets (Asset turnover)
  • Net sales/Average assets
  • Represents how effective a business uses its
    assets to increase sales
  • Higher the ratio, the better
  • Net sales trends
  • Gross profit margins (Gross profit/Net sales)
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