hhofma3e_ch05_inst

Report
Chapter 5
1
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Describe and illustrate merchandising
operations and the two types of inventory
systems
Account for the purchase of inventory
using a perpetual system
Account for the sale of inventory using a
perpetual system
2
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Adjust and close the accounts of a
merchandising business
Prepare a merchandiser’s financial
statements
Use gross profit percentage, inventory
turnover, and days in inventory to
evaluate a business
3
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1
Describe and illustrate merchandising operations
and the two types of inventory systems
4
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Manufactures make products
Combine raw materials, labor, and
overhead to create products
Merchandisers sell finished products
Distributors that sell to retailers
are merchandisers
Retailers that sell to consumers are
merchandisers
We will learn to account for both
retailer and distributor transactions
5
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1) Purchase
inventory
Inventory is the
asset account
Items held for
future sale
2) The sale is a
busy transaction
Revenue, yes
Also involves an expense, Cost of goods sold is a
common account name for the expense
3) Collecting has nothing new
6
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Bought $60 merchandise for cash
General Journal
Journal Entry Steps
1)
Identify account
& type
2)
Increase or
decrease and
apply debit and
credit rules
3)
Journalize &
check
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General Journal
1
Inventory
Cash
60
60
Purchased inventory for cash
Sold that same $60 in
merchandise for $100 on account
General Journal
Journal Entry Steps
1)
Identify account
& type
2)
Increase or
decrease and
apply debit and
credit rules
3)
Journalize &
check
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1
Inventory
Cash
60
60
Purchased inventory for cash
2
2
Accounts receivable
Sales Revenue
100
100
Cost of goods sold
Inventory
60
60
Recognized revenue and expense of sale
Collected the $100 From the
customer
General Journal
Journal Entry Steps
1)
Identify account
& type
2)
Increase or
decrease and
apply debit and
credit rules
3)
Journalize &
check
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1
Inventory
Cash
60
60
Purchased inventory for cash
2
2
Accounts receivable
Sales Revenue
Cost of goods sold
Inventory
100
100
60
60
Recognized revenue and expense of sale
3
Cash
Accounts receivable
100
100
Collected payment on account
Post to see balances? Show gross margin?
These are the basics behind all merchandising
transactions.
Know these. The rest are just minor twists on these.
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PERIODIC
Do not track inventory changes and COGS with
every transaction.
Cost of goods sold calculated by:
Counting inventory at period end
Then solving for COGS with account math
Good/Bad
Cheap to operate
Good enough if you can track
it all manually
Bar codes/scanners/old school
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PERPETUAL
Track inventory movement & COGS constantly
Provides real time record of transactions
Cost of goods sold constant tracking
Inventory on hand
Good/Bad
Better control of inventory
Technology simplifies
Still need physical counts
Show why
14
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2
Account for the purchase of inventory using a
perpetual system
15
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We are learning the “Gross method”
Debit inventory for full invoice amount
“Net method” would record discounted amount.
Freight in versus freight out
All costs associated with acquiring inventory are
part of the cost of the inventory.
Debit inventory for these costs
Expense as COGS when selling inventory
Freight out is not an inventory cost. It is an
operating expense.
Why does this particular point matter?
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General Journal
1
Inventory
Accounts payable
700
700
Purchased inventory on account 2/10, n/30
The Inventory account is used for goods
purchased with the intent to resell for profit
Debit for gross amount of purchase
$700 should include all freight in, transportation
insurance, duties, or other purchase related costs.
The method of payment is credited
Accounts payable, if on account
Cash, if purchased with cash
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Discount for early payment
Expressed as:
2/10 , n/30
Percentage of
discount
available
# of days the
discount is
available
Is 2% worth the bother?
Terms progression:
Otherwise, Full
(Net) amount
due within 30
days
Number of days
until full amount
due
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Background: Original purchase journal entry
General Journal
1
Inventory
Accounts payable
700
700
Purchased inventory on account 2/10, n/30
Guidelines to enter payment
Record the actual cash paid
Completely discharge the payable
Correct the inventory amount to reflect actual net cost
General Journal
1
Accounts payable
Inventory
Cash
700
14
686
Paid invoice within discount period
Should we post to “T” account to see the inventory balance?
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Purchase discount are applied to inventory cost only
Sellers earn profits from merchandise sales
There is room built in to cover discounts
Sellers historically have fronted the shipping money as a favor for the buyer
This was not a profit center for sellers
Therefore the norm is no discounts on shipping costs
To calculate the discount, factor in only product costs on the invoice. Do not
include shipping.
Who pays given the following freight terms? AND, how do they account for it?
FOB: Shipping point
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FOB: Destination
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Background: Original purchase journal entry
General Journal
1
Inventory
Accounts payable
700
700
Purchased inventory on account 2/10, n/30
Guidelines to enter payment
Record the actual cash paid
Completely discharge the payable
See that no further adjustment is needed
General Journal
1
Accounts payable
Cash
700
700
Paid invoice ouside of the discount period
The optional “Net method” highlights foregone discounts by
using
a “Lost discounts expense” account to control this waste.
21
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You received a vendor invoice for $1,400 of
welding supplies inventory. Freight in is an
additional $75. Payment terms are 2/10, n/30
Journalize your purchase
Journalize two different payment scenarios:
If you pay 8 days after the invoice date
If you pay 30 days after the invoice date.
NOTE: There is no discount on the freight
charge. You must pay that portion in full.
22
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Purchase return
Merchandise returned by the purchaser
Purchase allowance
Seller reduces amount owed
Incentive for purchaser to keep goods
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Background: Original purchase journal entry
General Journal
1
Inventory
Accounts payable
700
700
Purchased inventory on account 2/10, n/30
Reverse the liability for the amount returned
Assume we sent back $100 in product at our cost
Remove the inventory that was returned
Directly reverses original purchase entry
General Journal
1
Accounts payable
Inventory
100
100
Returned inventory to manufacturer
Entry the same for a purchase allowance
Purchaser keeps the inventory
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3
Account for the sale of inventory
using a perpetual system
26
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Both of these events happen
during a merchandise sale:
Sales revenue
Amount earned from selling
inventory
Revenue account
Cost of goods sold
Cost of inventory sold to
customers
Expense account
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Two journal entries:
Record the sale
Credit sale (shown)
How would a cash sale be different?
General Journal
1
Accounts receivable
Sales revenue
5,000
5,000
Sale on account
Record the expense & update the inventory
General Journal
1
Cost of goods sold
Inventory
2,900
2,900
Recorded cost of goods sold
Together these entries track the core earnings ability
of the company
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Sales returns and allowances
Return: customer gives goods back
Allowance: no return required
Indirect reversal of sale entry
Use a contra revenue account (debit balance)
Monitor returns volume
Limit fraud
Manage quality & customer satisfaction
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Candlestick Auto Parts
Income Statement
For the year ended May 31, 1995
Sales revenue
Less cost of goods sold
Gross margin
Less other expenses
Wages
Utilitities
Rent
Interest
Net income
$44,000
30,000
$14,000
7,000
3,000
2,300
700
$1,000
Candlestick Auto Parts
Income Statement
For the month ended May 31, 1995
Sales revenue
Less Sales returns and allowances
Net sales revenue
Less cost of goods sold
Gross margin
Less other expenses
Wages
Utilitities
Rent
Interest
Net income
$49,000
($5,000)
$44,000
30,000
$14,000
7,000
3,000
2,300
700
$1,000
The one of the left looks like a simple decline in
sales.
The one on the right reveals the trusted
manager’s returns fraud scheme.
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Background: Original sale journal entries
General Journal
1
General Journal
Accounts receivable
Sales revenue
1
5,000
5,000
Sale on account
Cost of goods sold
Inventory
2,900
2,900
Recorded cost of goods sold
Enter a partial $600 sales return; our cost of the
returned merchandise was $400.
Reduce Net sales, without removing original sales figures
Refund Cash or reduce amount owed to us
General Journal
1
Sales returns and allowances
600
Accounts receivable
600
Received returned goods
Reverse the original inventory transaction directly
General Journal
1
400
Inventory
Cost of goods sold
400
Placed goods back in inventory
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Sales discounts
Customer pays within the credit terms discount
period
We grant a discount for early payment receipt
We put cash to work earning profits sooner
We need to reduce reported sales, but not directly
Use a contra revenue account
Highlight free money given to customers
Control abuse and plug fraud opportunity
Sales discount is the account name
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Background: Original sale journal entry (assume no returns)
General Journal
1
Accounts receivable
Sales revenue
5,000
5,000
Sale on account 2/10, n/30
Sales discounts
Customer pays us within the discount period
Enter actual cash amount received
Fully discharge amount owed to us
Account for the sales discount without destroying original
sales information
General Journal
1
Cash
Sales discount
Accounts receivable
4,900
100
5,000
Received payment in discount period
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Sales made to customers
minus
Sales Returns & Allowances
minus
Sales Discounts
equals
Net Sales
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Net Sales
minus
Cost of Goods Sold
equals
Gross Profit
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Multi-step Income Statement
Lists several important subtotals
Gross profit
Operating income
Most popular form
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6
Use gross profit percentage, inventory turnover,
and days in inventory to evaluate a business
49
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Calculation:
Gross Profit
Net Sales Revenue
Core profitability indicator
High 50%-60% Plus!
Few competitors
Highly differentiated product
Low 20% - 40%
Price competitive industry
Undifferentiated product
Changes are signals to earnings
50
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Costco Wholesale Corp.
Partial Income Statement
For Year Ended August 29, 2010
Net Sales Revenue
$
Less: Cost of goods sold
Gross profit
$
Less: Other Expenses
Net income
$
77,946
67,995
9,951
8,648
1,303
Gross profit is the sales revenue minus the
cost of goods sold.
Sales Revenue
is goods or
services
provided:
Measured at
selling price.
Cost of goods
sold is those
same goods or
services
provided.
Measured at
Costco’s cost.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Comparitive income statements
Fiscal year 2010
Net Sales Revenue
Cost of goods sold
Gross profit
Other Expenses
Net income
Costco
Macys
$ 77,946 100% $ 23,489
100%
67,995 87%
13,973
59%
$ 9,951 13% $ 9,516
41%
8,648 11%
9,166
39%
$ 1,303 1.7% $ 350
1.5%
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Inventory turns:
Cost of goods sold
Average inventory
Days in inventory:
365 days
Inventory turns
Measures how rapidly inventory is sold
High turns
4-5 or more
Fresh inventory
Low storage costs
Low turns
Under 3
Opposites of above
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Napa (GPC): Big, carries more obscure parts than any other
chain, sells to professional installers
O’Reilly (ORLY) : ½ the size, do it yourself customers, carries
only popular items
Which firm would you expect to have higher inventory turns?
NAPA
COGS
Avg inventory
$7,954,645
=
$2,219,397
X 1,000
O'reilly
Inventory
Turns
COGS
Avg inventory
$2,776,533
=
$1,968,353
3.6
Inventory
Turns
1.4
$’s x 1,000
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Overall inventory turns
Compare to industry norms
Trade groups, RMA financial statement studies
Segmented inventory turns analysis
Product line
SKU
Custom reports
Pull slow items
Add quicker selling items
Placement/merchandising
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4
Adjust and close the accounts
of a merchandising business
58
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Physical count of inventory at least once per
year
Account may differ from the books due to:
Theft or damage – Inventory shrinkage
Errors
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Note, the contra accounts and COGS fit right in
60
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7
Account for the sale of inventory using
a periodic system (Appendix 5A)
65
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Periodic system has separate accounts for:
Purchases
Purchases discount
Purchase returns and allowance
Transportation cost
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Separate purchase discount account
Purchase returns and allowance
67
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Purchases (debit)
minus
Purchase discounts (credit)
minus
Purchase returns and allowances (credit)
equals
Net purchases
68
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Costs to transport purchased inventory are
debited to Freight in
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Must be calculated under periodic system
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If a company is using a price tag stamped on
the good to ring up your purchase, the company
is probably using a periodic inventory system.
If a company is using a bar code scanner to ring
up your purchase, the company is using a
perpetual inventory system.
All purchase transactions are between the
company and a vendor. In a perpetual system,
every transaction that affects the quantity or
price of inventory is either debited or credited
to the asset, Inventory, based on the rules of
debit and credit.
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Increases debit Inventory (increase in quantity
or cost per unit). Decreases credit Inventory
(decrease in quantity or cost per unit).
All sales transactions are between the company
and a customer. In a perpetual system, each
sales transaction has two entries. The first entry
records the sales price to the customer (debit
Cash or Accounts receivable and credit Sales
revenue). The second entry updates the
Inventory account (debit COGS and credit
Inventory).
72
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When customers return goods, two entries are
made. The first entry records the returned goods
from the customer at their sales price (debit
Sales returns and allowances and credit Cash or
Accounts receivable). The second entry updates
the Inventory account (debit Inventory and
credit COGS). When customers pay early to take
advantage of terms offered, it reduces the
amount of cash the company receives and a
Sales discount is recorded.
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Closing entries are made at the end of a period
to all accounts that are temporary (not on the
balance sheet). To close an account means to
make the balance zero.
The form of the income statement can give users
more information for decisions. The multi-step
income statement, with more subtotals, has more
value than the single-step income statement.
Regardless of the form, bottom line net income
or loss is the same amount.
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The preparation of the statement of retained
earnings and the balance sheet are the same for
merchandising as for service companies. The
only difference is the addition of the asset
account, Inventory, on the balance sheet.
Ratios serve as an alternate way to measure how
well a company is managing its various assets.
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otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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