Merchandising Operations and the Accounting Cycle - Pearson

More documents

Recommendations

Info

WORKING IT OUT Calculate inventory turnover from the following data: Beginning inventory $2,350 Ending inventory 1,980 Cost of goods sold 15,310 A: Inventory turnover = Cost of goods sold (Beginning inventory + Ending inventory)/2 Inventory turnover is $15,310 ($2,350 + $1,980)/2 = $15,310 $2,165 = 7.1 times per year 246 Part One The Basic Structure of Accounting Accounting and the -World Varsitybooks.com: A Textbook Case on the Fulfillment Cost Issue If you were to order this edition of Accounting from Varsitybooks.com, the company arranges for Baker & Taylor, a book distributor, to ship it to you immediately. Varsitybooks.com does not have a warehouse or any inventory, but it does have to pay Baker & Taylor to deliver the texts from the publishers to you. How does Varsitybooks.com, a fledgling company, account for these significant fulfillment costs? E-commerce has revolutionized business and has “bent” certain accounting rules in the process. One such rule is that the cost of goods sold to customers is reported on the Cost of Goods Sold line on the income statement. Yet, online companies like Amazon.com and Etoys Inc report some of this cost as Sales and Marketing Expenses because the companies never own the inventory. By including these fulfillment costs on the Marketing Expenses line, these companies do not subtract the considerable costs from their gross margin. Varsitybooks.com wanted to follow this practice, arguing that mail-order companies have always done this. Also, investors would understand that increased marketing costs are necessary for start-up companies to build a solid customer base. This practice would also protect already-thin gross margins. For instance, if Amazon.com accounts for fulfillment costs on the Cost of Goods Sold line, gross margins for the last quarter of 1999 would go from 15% to -3%. The company’s sales and net profit or net loss amounts would remain the same, but analysts and investors look at the gross margin figure to see how well a company can make money from basic business operations. This approach is controversial. The auditors of Varsitybooks.com advised that fulfillment costs be reported as cost of goods sold, and Varsitybooks.com finally followed their advice. Based on: Shannon Henry, “An E-Tail Identity Crisis,” The Washington Post, May 4, 2000, p. E01. Anonymous, “Web Retailers’ ‘Gross Profit’ Questioned; The SEC may make some firms account for distribution costs, possibly turning their profits into losses,” The Los Angeles Times, February 19, 2000, p. 2. Inventory turnover varies from industry to industry. Grocery stores, for example, turn their goods over faster than automobile dealers do. Drug stores have a higher turnover than furniture stores do. Retailers of electronic products, such as Austin Sound Centre Inc., have an average turnover of 3.6 times per year. Austin Sound’s turnover rate of 2.3 times per year suggests that Austin Sound is not very successful. Exhibit 5-11 compares the inventory turnover rate of Austin Sound and Wal-Mart Stores, Inc. Exhibits 5-10 and 5-11 tell an interesting story. Wal-Mart sells lots of inventory at a relatively low gross profit margin. Wal-Mart earns its profits by turning its inventory over rapidly—7.0 times during the year. Austin Sound Centre Inc., a small business, prices inventory to earn a higher gross margin on each dollar of sales and only turns over its inventory 2.3 times during the year. Gross margin percentage and rate of inventory turnover do not provide enough information to yield an overall conclusion about a merchandiser, but this example showed how owners and managers may use accounting information to evaluate a company.
Wal-Mart 1 2 3 4 5 6 Austin Sound Centre Inc. 1 2 Jan. Mar. June Sept. Dec. Measuring Cost of Goods Sold and Inventory Purchases in the Periodic Inventory System 7.0 times per year 2.3 times per year The perpetual inventory accounting system that we have illustrated is designed to produce up-to-date records of inventory and cost of goods sold. That system provides the data for many day-to-day decisions and for preparation of the financial statements. However, managers have other information needs that the perpetual inventory system does not meet. For example, the buyers for The Forzani Group Ltd. and Austin Sound Centre Inc. must know how much inventory to purchase in order to reach their sales goals. Another computation of cost of goods sold—from the periodic inventory system—helps managers plan their purchases of inventory. This alternative computation of cost of goods sold is used so often in accounting that your education would be incomplete without it. (The supplement at the end of the chapter covers the periodic inventory system in more detail.) Exhibit 5-12 gives the alternative computation of Austin Sound Centre Inc.’s cost of goods sold for 2004. Austin Sound began the year with inventory of $38,600. During the year, Austin Sound purchased more goods, also paying freight charges. The sum of these amounts make up Austin Sound’s cost of goods available for sale. Note that net purchases equals purchases minus purchase discounts and purchase Beginning inventory....................................... $ 38,600 + Net purchases ............................................ 87,200* + Freight in ..................................................... 5,200 = Cost of goods available for sale ............... 131,000 – Ending inventory ....................................... (40,200) = Cost of goods sold...................................... *Computation of Net purchases: $ 90,800 Purchases..................................................... $ 91,400 – Purchase discounts .................................... (3,000) – Purchase returns and allowances ............ (1,200) = Net purchases ............................................. $ 87,200 Exhibit 5-11 Rate of Inventory Turnover for Two Merchandisers REAL WORLD EXAMPLE Many business use the gross margin percentage (also known as the markup percentage) as a means of determining how well inventory is selling. If too much inventory is purchased and it must be marked down, the gross margin percentage will decline. By monitoring the gross margin percentage, problems can be corrected quickly. OBJECTIVE 6 Compute the cost of goods sold under the periodic inventory system WORKING IT OUT Calculate inventory turnover given the following data: Beg. inventory..............$ 2,350 End. inventory..................1,980 Purchases ......................14,550 Freight in.............................390 A: Cost of goods sold/Avg. inv. Inv. turn. = $15,310*/ $2,165** = 7.1 times *$2,350 + $14,550 + $390 – $1,980 = $15,310 **($2,350 + $1,980)/2 = $2,165 EXHIBIT 5-12 Measuring Cost of Goods Sold in the Periodic Inventory System Chapter Five Merchandising Operations and the Accounting Cycle 247
Page 1 and 2: C H 5A P T E R Merchandising Operat
Page 3 and 4: Before launching into merchandising
Page 5 and 6: Suppose FGL’s Sports Experts stor
Page 7 and 8: debiting the Inventory account. A $
Page 9 and 10: Austin paid within the discount per
Page 11 and 12: STOP & THINK Refer to the Accounts
Page 13 and 14: STOP & THINK Why is there no Januar
Page 15 and 16: sales. Therefore the GST paid on pu
Page 17 and 18: Requirement 2 Inventory Cost of Goo
Page 19 and 20: Exhibit 5-5. All the new accounts
Page 21 and 22: EXHIBIT 5-7 Financial Statements of
Page 23 and 24: Journal Adjusting Entries a. Dec. 3
Page 25: Two Key Ratios for Decision Making
Page 29 and 30: Decision Guidelines How do merchand
Page 31 and 32: 3. Prepare the company’s multi-st
Page 33 and 34: Requirement 3 JAN KING DISTRIBUTING
Page 35 and 36: c. Buying a large enough quantity o
Page 37 and 38: Date: ___________________________ T
Page 39 and 40: 2. The R39 truck tires were ordered
Page 41 and 42: Required 1. Prepare the business’
Page 43 and 44: $7,700, $12,160, and $10,180 thousa
Page 45 and 46: 2. The note payable signed on May 2
Page 47 and 48: Trial Balance Adjustments Account T
Page 49 and 50: Sales discounts....................
Page 51 and 52: e. Store supplies on hand at Decemb
Page 53 and 54: Required 1. Inventory on hand at Se
Page 55 and 56: c. The equipment is expected to las
Page 57 and 58: HEIGHTS PHARMACY LTD. Balance Sheet
Page 59 and 60: Supplement to Chapter 5 Accounting
Page 61 and 62: Panel A Panel B Beginning inventory
Page 63 and 64: AUSTIN SOUND CENTRE INC. Trial Bala
Page 65 and 66: Assets Current assets: Cash .......
Page 67 and 68: Journal Adjusting Entries a. Dec. 3
Page 69 and 70: Summary Problem for Your Review The
Page 71 and 72: Requirement 2 Adjusting Entries 200
Page 73 and 74: Requirement 4 Inventory Cost of goo
Page 75 and 76: Required Journalize these transacti
Page 77:
BLISS SALES COMPANY LTD. Trial Bala
show all

Merchandising Operations and the Accounting Cycle - Pearson

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?