الثلاثاء، 29 مارس، 2016

Summarization chapter 5- ACCOUNTING FOR MERCHANDISING OPERATIONS


ACCOUNTING FOR MERCHANDISING OPERATIONS


Merchandising Operations

Companies use one of two systems to account for inventory:
 a perpetual inventory system or a periodic inventory system

In a perpetual inventory system, companies keep detailed records of the cost of each inventory purchase and sale. These records continuously—perpetually— show the inventory that should be on hand for every item Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs
In a periodic inventory system
In a periodic inventory system, companies do not keep detailed inventory records of the goods on hand throughout the period. Instead, they determine the cost of goods sold only at the end of the accounting period—that is, periodically. At that point, the company takes a physical inventory count to determine the cost of goods on hand. To determine the cost of goods sold under a periodic inventory system, the following steps are necessary:
1. Determine the cost of goods on hand at the beginning of the accounting period.
2. Add to it the cost of goods purchased.
3. Subtract the cost of goods on hand at the end of the accounting period.



ADVANTAGES OF THE PERPETUAL SYSTEM
Companies that sell merchandise with high unit values, such as automobiles,
furniture, and major home appliances, have traditionally used perpetual systems.
The growing use of computers and electronic scanners has enabled many more
companies to install perpetual inventory systems. The perpetual inventory system
is so named because the accounting records continuously—perpetually—show
the quantity and cost of the inventory that should be on hand at any time.
A perpetual inventory system provides better control over inventories than a
periodic system. Since the inventory records show the quantities that should be
on hand, the company can count the goods at any time to see whether the amount
of goods actually on hand agrees with the inventory records. If shortages are
uncovered, the company can investigate immediately. Although a perpetual
inventory system requires additional clerical work and additional cost to maintain
the subsidiary records, a computerized system can minimize this cost. Much of
Amazon.com’s success is attributed to its sophisticated inventory system.
Some businesses fi nd it either unnecessary or uneconomical to invest in a
sophisticated, computerized perpetual inventory system such as Amazon’s.
Many small merchandising businesses fi nd that basic computerized accounting
packages provide some of the essential benefi ts of a perpetual inventory system.
Also, managers of some small businesses still fi nd that they can control their
merchandise and manage day-to-day operations using a periodic inventory system



Recording Purchases of Merchandise

Companies purchase inventory using cash or credit (on account). They normally record purchases when they receive the goods from the seller. Every purchase should be supported by business documents that provide written evidence of the transaction. Each cash purchase should be supported by a canceled check or a cash register receipt indicating the items purchased and amounts paid. Companies record cash purchases by an increase in Inventory and a decrease in Cash.
A purchase invoice should support each credit purchase. This invoice indicates the total purchase price and other relevant information. However, the purchaser does not prepare a separate purchase invoice. Instead, the purchaser uses as a purchase invoice a copy of the sales invoice sent by the seller
Under the perpetual inventory system, companies record purchases of merchandise
for sale in the Inventory account


Freight Costs
The sales agreement should indicate who—the seller or the buyer—is to pay for transporting the goods to the buyer’s place of business. When a common carrier such as a railroad, trucking company, or airline transports the goods, the carrier prepares a freight bill in accord with the sales agreement.
Freight terms are expressed as either FOB shipping point or FOB destination.
The letters FOB mean free on board. Thus, FOB shipping point means that the
seller places the goods free on board the carrier, and the buyer pays the freight
costs. Conversely, FOB destination means that the seller places the goods free on
board to the buyer’s place of business, and the seller pays the freight.

FREIGHT COSTS INCURRED BY THE BUYER
When the buyer incurs the transportation costs, these costs are considered part of the cost of purchasing inventory
--------------
Inventory 150
Cash 150
(To record payment of freight on)
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FREIGHT COSTS INCURRED BY THE SELLER
In contrast, freight costs incurred by the seller on outgoing merchandiseare an operating expense to the seller
-----------------
Freight-Out (or Delivery Expense) 150
Cash 150
(To record payment of freight on
-------------

When the seller pays the freight charges, the seller will usually establish a higher
invoice price for the goods to cover the shipping expense

Purchase Returns and Allowances

A purchaser may be dissatisfi ed with the merchandise received because the goods
are damaged or defective, of inferior quality, or do not meet the purchaser’s specifi
cations. In such cases, the purchaser may return the goods to the seller for
credit if the sale was made on credit, or for a cash refund if the purchase was for
cash. This transaction is known as a purchase return. Alternatively, the purchaser
may choose to keep the merchandise if the seller is willing to grant an
allowance (deduction) from the purchase price. This transaction is known as a
purchase allowance.

Assume that Sauk Stereo returned goods costing $300 to PW Audio Supply on May 8
------------------
Accounts Payable 300
Inventory 300
(To record return of goods purchasedfrom PW Audio Supply)
----------------


Purchase Discounts


The credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment. The buyer calls this cash discount a purchase discount.
This incentive offers advantages to both parties. 
The purchaser saves money, and the seller is able to shorten the operating cycle by converting the
accounts receivable into cash
Credit terms specify the amount of the cash discount and time period in which it is offered.In the sales invoice credit terms are 2/10, n/30 This means that the buyer may take a 2% cash discount on the invoice price, less (“net of”) any returns or allowances, if payment is made within 10 days of the invoice date (the discount period). Otherwise, the invoice price, less any returns or allowances, is due 30 days from the invoice date.

--------------------
Accounts Payable 3,500
Cash 3,430
Inventory 70
(To record payment within discount
------------

Summary of Purchasing Transactions




Recording Sales of Merchandise



In accordance with the revenue recognition principle, companies record sales revenue when the performance obligation is satisfied.
Sales may be made on credit or for cash. A business document should support every sales transaction, to provide written evidence of the sale. Cash register documents provide evidence of cash sales. A sales invoice

The seller makes two entries for each sale. The fi rst entry records the sale: The seller increases (debits) Cash (or Accounts Receivable, if a credit sale) and also increases (credits) Sales Revenue. The second entry records the cost of the merchandise sold: The seller increases (debits) Cost of Goods Sold and also decreases (credits) Inventory for the cost of those goods



For internal decision-making purposes, merchandising companies may use
more than one sales account. For example, PW Audio Supply may decide to keep
separate sales accounts for its sales of TV sets, DVD recorders, and microwave ovens.





Sales Returns and Allowances





Sales Discounts




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Completing the Accounting Cycle

A merchandising company generally has the same types of adjusting entries as a
service company. However, a merchandiser using a perpetual system will require
one additional adjustment to make the records agree with the actual inventory on
hand. Here’s why: At the end of each period, for control purposes, a merchandising
company that uses a perpetual system will take a physical count of its goods on
hand. The company’s unadjusted balance in Inventory usually does not agree with
the actual amount of inventory on hand. The perpetual inventory records may be
incorrect due to recording errors, theft, or waste. Thus, the company needs to adjust
the perpetual records to make the recorded inventory amount agree with the inventory
on hand. This involves adjusting Inventory and Cost of Goods Sold.
For example, suppose that PW Audio Supply has an unadjusted balance of
$40,500 in Inventory. Through a physical count, PW Audio Supply determines
that its actual merchandise inventory at year-end is $40,000. The company would

make an adjusting entry as follows.


Closing Entries


A merchandising company, like a service company, closes to Income Summary all
accounts that affect net income. In journalizing, the company credits all temporary
accounts with debit balances, and debits all temporary accounts with credit
balances, as shown below for PW Audio Supply. Note that PW Audio Supply

closes Cost of Goods Sold to Income Summary.



Summary of Merchandising Entries



Forms of Financial Statements
Multiple-Step Income Statement
The multiple-step income statement is so named because it shows several steps
in determining net income. Two of these steps relate to the company’s principal

operating activities. A multiple-step statement also distinguishes betw
operating and nonoperating activities. Finally, the statement also highlights

intermediate components of income and shows subgroupings of expenses


Single-Step Income Statement
Another income statement format is the single-step income statement. The
statement is so named because only one step—subtracting total expenses from
total revenues—is required in determining net income.
In a single-step statement, all data are classifi ed into two categories: (1) revenues,
which include both operating revenues and other revenues and gains; and (2)
expenses, which include cost of goods sold, operating expenses, and other expenses

and losses





Classified Balance Sheet




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