Merchandising Operations and the Accounting Cycle - Pearson

Requirement 2
Inventory Cost of Goods Sold
June 3 1,610 June 9 644 June 12 550 June 22 480
15 5,000 12 550 18 1,180
16
22
260
480
18
24
1,180
150
Bal. 1,250
30 865
Bal. 5,691
Requirement 3
The decision to borrow funds was wise, because the discount ($150) exceeded the
interest paid on the amount borrowed ($95). Thus the entity was $55 better off as a
result of its decision.
Cyber
Coach
Visit the Student Resource area of the Accounting Companion Website
for extra practice with the new material in Chapter 5.
www.pearsoned.ca/horngren
Adjusting and Closing the Accounts of a
Merchandiser
A merchandising business adjusts and closes the accounts the same way a service
entity does. If a work sheet is used, the trial balance is entered and the work sheet
is completed to determine net income or net loss. The work sheet provides the data
for journalizing the adjusting and closing entries and for preparing the financial
statements.
Adjusting Inventory Based on a Physical Count
In theory, the Inventory account remains up to date at all times. However, the actual
amount of inventory on hand may differ from what the books show. Losses due to
theft and damage can be significant. Also, accounting errors can cause Inventory’s
balance to need adjustment either upwards or, more often, downwards. For this
reason virtually all businesses, such as the grocery chain Loblaws, take a physical
count of inventory at least once each year. The most common time for a business to
count its inventory is at the end of the fiscal year, before the financial statements are
prepared. The business then adjusts the Inventory account to the correct amount on
the basis of the physical count.
Exhibit 5-5, Austin Sound Centre Inc.’s trial balance at December 31, 2004, lists a
$40,500 balance for inventory. With no shrinkage—due to theft or error—the business
should have on hand inventory costing $40,500. But on December 31, when Frank
Ernest, the manager of Austin Sound, counts the merchandise in the store, the total
cost of the goods on hand comes to only $40,200. Austin Sound would record the
inventory shrinkage of $300 (which is $40,500 – $40,200) with this adjusting entry:
OBJECTIVE 3
Adjust and close the accounts
of a merchandising business
under the perpetual inventory
system
KEY POINT
If inventory exceeds physical
inventory, in the accounting
records, inventory would be
adjusted downwards. As a result
of this inventory adjustment, cost
of goods sold is higher and gross
margin is lower. The cost
associated with buying these
missing units is not accompanied
by the revenue from a sale.
Therefore gross margin shrinks by
this amount (cost).
Chapter Five Merchandising Operations and the Accounting Cycle 237