PA - #06 - Acctg for Merchandising - Handout

HANDOUT Principles of Accounting Accounting for Merchandising and Retail Businesses Handout Video #1 1. New Terminology: Merchandisers / Retailers Merchandise Inventory Cost of Goods Sold (COGS), or… Cost of Merchandise Sold, or… Cost of Sales Gross Profit (GP) Perpetual Inventory System Each purchase and sale is recorded in the inventory records in real time. The system updates what is sold and what is on hand continuously (perpetually). Periodic Inventory System Inventory records are NOT recorded or updated in real time. The inventory is calculated at the end of the accounting period (periodically). Income Statement Formats: Used by: Used by: Step Single Step Step Multiple Step Page 1

HANDOUT Example: A company sold $100 in merchandise. The customer returned $10 of merchandise and got a $5 discount. What were the Net Sales that should be shown? Sold Returns Discounts Net Sales Video #2.1 2. Sales Transactions a. Journal Entries Seller Sells Seller Receives a Return Revenue   Cost   AJEs at End of Period: Est Return Rev & Est Return Inv Estimate Returned Revenue Estimate Returned Cost (Inv) Credit Memo If there is a return or allowance and the items haven't been paid for yet, the Seller may issue a "Credit Memo." The Seller will credit the customer's A/R account, reducing the amount the customer owes. b. Valuation Accounts – Example Page 2

HANDOUT 3. Based on the following, prepare the sales transaction journal entries for Emmitt Company : a. Sold $500 in merchandise to a cash customer. The cost of the merchandise sold was $280. Revenue   Cost   b. Sold $2,000 in merchandise to a credit customer on a store account. The terms of the sale are 2/10, n/30. The cost of the merchandise sold was $1,600. Net Method: Revenue   Cost   c. Sold $1,200 worth of merchandise to a customer who charged the merchandise to her VISA card (personal credit card). The cost of the merchandise sold was $950. Hint: Bank card sales (VISA and MasterCard) are treated the same as cash sales because the retailer may deposit the credit card slips directly into his or her bank account. Revenue   Cost   Video #3.2 d. Accepted a return of $50 worth of merchandise from the cash customer in #a . The cost of the merchandise returned was $30. The customer received a cash refund. Page 4

HANDOUT Record both the Revenue and Cost entries. Assume appropriate valuation accounts are used to account for the returns. Revenue   Cost   e. Scenario #1: Received payment from the credit customer in #b within the discount period. Hint: Since the customer did pay within the discount period, you must recognize that discount as “final” with the cash collection transaction. Gross Sales x Disc % Disc $ A/R Gross Sales - Disc $ Cash Received f. Alternate Scenario #2: Received payment from the credit customer in #b but they did not pay within the discount period. Page 5

HANDOUT a. Journal Entries Seller Review Purchaser Seller Sells Seller Receives a Return Purchaser Purchases Purchaser Returns Product Revenue Cash or A/R Customer Refunds Payable     Sales Cash or A/R (Credit Memo)   Cost COGS Inventory     Inventory Est Returns Inventory   (In HW system, 2nd entry not always required) Recall: Credit Memo If there is a return or allowance and the items haven't been paid for yet, the Seller may issue a "Credit Memo." The Seller will credit the customer's A/R account, reducing the amount the customer owes. Debit Memo If there is a return or allowance and the item hasn't been paid for yet, the Buyer may issue a "Debit Memo." A debit memo informs the seller of the amount the buyer proposes to debit to the seller's A/P account. b. Credit Terms – Same Concept as Sales Transactions Credit Terms Translation n/30 Invoice is due in 30 days (no discount) n/eom Invoice is due in the last day of the month (regardless of purchase date) 2/10, n/30 2% disc if paid within 1 0 days. If not paid in 1 0 days, the entire amount is due in 30 days. 1/20, n/45 1% disc if paid within 2 0 days. If not paid in 2 0 days, the entire amount is due in 45 days. 3/15, n/60 3% disc if paid within 1 5 days. If not paid in 1 5 days, the entire amount is due in 60 days. c. Accounting Methods for Credit Terms – Same Concept as Sales Transactions Page 7

HANDOUT Gross Method Record the entire invoice value up front - Assume no discounts are taken until they are taken Record the discount if/when the company takes it Unrealistic Approach --> Records all inventory value up front Not GAAP Net Method Record discounted invoice value up front Assume every discount is taken Conservative Approach --> Record least inventory value up front GAAP Method - Use for this class Video #5 5. Based on the following prepare the purchase transaction journal entries for S & V Company: a. S & V purchased $500 worth of merchandise for cash. b. S & V purchased $4,000 of merchandise on account; terms n/30. c. S & V paid for the merchandise purchased in #b . d. S & V purchased $2,000 of merchandise from its supplier on account; terms 3/15, n/45. Page 8

HANDOUT Gross Net Diff (Disc) Inv Purch - Inv Return Total Inventory x Disc % Inventory (Total) Disc $ A/P + Inv (Disc lost) Cash Paid Video #6.1 6. Transportation Costs a. Overview & Terminology Page 10

HANDOUT General Information:                     In Transit                 Seller Docks Buyer Docks   Seller owns   Buyer owner                             Who owns in Transit?                                       FOB Shipping Point:                         Seller Docks Buyer Docks   Seller owns   Buyer owner                             Who owns in Transit?             FOB Shipping Point                                                FOB Destination:                     Seller Docks Buyer Docks   Seller owns   Buyer owner                             Who owns in Transit?                    FOB Destination                                             Video #6.2 b. Important Details Credit terms Seller / Vendor credit terms do not apply to transportation Page 11

HANDOUT Product + Shipping = Total b. Swanson Co. purchased $1,000 worth of merchandise on account with terms 2/10, n/30, FOB Shipping Point. The freight costs of $50 were prepaid by the seller and added to the invoice. Prepare the calculations and journal entry for the purchase. Product + Shipping = Total c. Scenario #1: Swanson Co. paid for the merchandise purchased in #b . They paid the invoice within the discount period. Prepare the journal entry to record the payment. Page 13

HANDOUT d. Alternate Scenario #2: Swanson Co. paid for the merchandise purchased in #b . They paid the invoice, but it was not paid within the discount period. Prepare the journal entry to record the payment. Video #8 8. More Examples: Transportation a. Fontaine Inc. sold goods to Gilded Co. costing $100 are sold on account for $250, terms FOB Destination . The freight cost paid to have these goods delivered is $25. Prepare the entries to record this sale and the transportation costs: Revenue Page 14

HANDOUT al Format - Cost of Goods Sold **   Gross Profit - Operating Expenses   Net Income Supporting Detail for Multiple-Step Income Statement: Sales   Sales Periodic vs. Perpetual Diff accounts - Sales Returns & Allowances - Sales Discounts Same Sales Acct * Net Sales COGS   Inventory on hand at the beginning of the year Inventory (Periodic) + Cost of Goods Purchased *** Periodic Beg Inv   Goods Available for Sale (GAFS) + Purch   - Inventory left at the end of the year = GAFS   ** Cost of Goods Sold (Periodic Method)   - COGS = End Inv Purchases   Purchases - Purchase Returns and Allowances - Purchase Discounts Periodic vs. Perpetual Diff accounts   Net Purchases + Transportation In Same Inventory Acct ** * Cost of Goods Purchased (Periodic) b. Gem City Music uses the perpetual method of inventory. The Adjusted Trial Balance for Gem City Music is shown below. The accounts are presented in account number order ( not alphabetical order). Gem City Music Adjusted Trial Balance December 31, 20x1 Cash 11,000   Accounts Receivable 15,800   Page 16

HANDOUT Merchandise Inventory 9,600   Office Equipment 23,000   Accum Depr - Office Equipment   9,200 Accounts Payable   16,000 Salaries Payable   1,250 M. Marx, Capital   11,500 M. Marx, Drawing 12,800   Sales   189,300 Cost of Merchandise Sold 100,000   Selling Expenses 35,020   Administrative Expenses 18,030   Interest Expense 2,000     Total 227,250 227,250 Complete the multiple-step income statement on the next page. Based on the Adjusted Trial Balance information provided above, fill in the appropriate information into the highlighted areas to complete the multiple- step income statement for Gem City Music . Gem City Music Income Statement For the Year Ended December 31, 20x1 Sales Cost of Merchandise Sold Gross Profit Operating Expenses: Page 17