Merchandising Operations and the Accounting Cycle - Pearson

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Summary Requirement 4 254 Part One The Basic Structure of Accounting Inventory Cost of goods sold $166,470 turnover = = = 2.7 times Average inventory ($59,500 + $65,800)/2 The increase in the rate of inventory turnover from 2.1 to 2.7 suggests higher profits in 2003 than in 2002. However, gross margin and expenses for both years must be checked to verify this suggestion. Cyber Coach 1. Use sales and gross margin to evaluate a company. The major revenue of a merchandising business is sales revenue, or net sales. The major expense is cost of goods sold. Net sales minus cost of goods sold is called gross margin, or gross profit. This amount measures the business’s success or failure in selling its products at a higher price than it paid for them. 2. Account for the purchase and sale of inventory. The merchandiser’s major asset is inventory. In a merchandising entity the accounting cycle is from cash to inventory as the inventory is purchased for resale, and back to cash as the inventory is sold. The invoice is the business document generated by a purchase or sale transaction. Most merchandising entities offer discounts to their customers and allow them to return unsuitable merchandise. They also grant allowances for damaged goods that the buyer chooses to keep. Sales Discounts and Returns and Allowances are contra accounts to Sales Revenue. 3. Adjust and close the accounts of a merchandising business. The end-of-period adjusting and closing process of a merchandising business is similar to that of a service business. In addition, a merchandiser adjusts inventory for theft losses, damage, and accounting errors. Self-Study Questions Test your understanding of the chapter by marking the correct answer for each of the following questions: 1. The major expense of a merchandising business is (p. 223) a. Cost of goods sold c. Rent b. Amortization d. Interest 2. Sales total $440,000, cost of goods sold is $210,000, Visit the Student Resource area of the Accounting Companion Website for extra practice with the new material in Chapter 5. www.pearsoned.ca/horngren 4. Prepare a merchandiser’s financial statements. The income statement may appear in the single-step format or the multi-step format. A single-step income statement has only two sections—one for revenues and the other for expenses—and a single income amount for net income. A multi-step income statement has subtotals for gross margin and income from operations. The multi-step format is the most widely used format. 5. Use the gross margin percentage and the inventory turnover ratio to evaluate a business. Two key decision aids for a merchandiser are the gross margin percentage (gross margin/net sales revenue) and the rate of inventory turnover (cost of goods sold/average inventory). Increases in these measures usually signal an increase in profits. 6. Compute cost of goods sold. Cost of goods sold is the cost of the inventory that the business has sold. It is the largest single expense of most merchandising businesses. Cost of goods sold is the sum of the cost of goods sold amounts recorded during the period. In a periodic inventory system, Cost of goods sold = Beginning inventory + Purchases (net of any contra accounts) + Freight in – Ending inventory. and operating expenses are $160,000. How much is gross margin? (p. 224) a. $440,000 c. $210,000 b. $230,000 d. $70,000 3. A purchase discount results from (p. 221) a. Returning goods to the seller b. Receiving a purchase allowance from the seller
c. Buying a large enough quantity of merchandise to get the discount d. Paying within the discount period 4. Which one of the following pairs includes items that are the most similar? (p. 233) a. Purchase discounts and purchase returns b. Cost of goods sold and inventory c. Net sales and sales discounts d. Sales returns and sales allowances 5. Which of the following is not an account? (p. 223) a. Sales revenue c. Inventory b. Net sales d. Supplies expense 6. Cost of goods sold is computed by adding beginning inventory and net purchases and subtracting X. What is X? (p. 247) a. Net sales c. Ending inventory b. Sales discounts d. Net purchases 7. Which account causes the main difference between a merchandiser’s adjusting and closing process and that of a service business? (p. 242) a. Advertising expense c. Cost of goods sold b. Interest revenue d. Accounts receivable Accounting Vocabulary Cost of goods sold (p. 223) Cost of sales (p. 223) Gross margin (p. 224) Gross margin percentage (p. 245) Gross profit (p. 224) Income from operations (p. 242) Inventory (p. 222) Inventory turnover (p. 245) Invoice (p. 227) Multi-step income statement (p. 244) Net purchases (p. 247) Net sales (p. 223) Operating expense (p. 240) Operating income (p. 242) Other expense (p. 242) Other revenue (p. 242) Periodic inventory system (p. 246) 8. The major item on a merchandiser’s income statement that a service business does not have is (p. 242) a. Cost of goods sold c. Salary expense b. Inventory d. Total revenue 9. The closing entry for Sales Discounts includes (pp. 242–243) a. Sales Discounts Income Summary b. Sales Discounts Sales Revenue c. Income Summary Sales Discounts d. Not used: Sales Discounts is a permanent account, which is not closed. 10. Which income statement format reports income from operations? (p. 244) a. Account format c. Single-step format b. Report format d. Multi-step format Answers to the Self-Study Questions follow the Similar Accounting Terms. Similar Accounting Terms Freight Freight in; Transportation costs; Shipping costs Gross margin Gross profit Income from operations Operating income Invoice Bill List price Full price; Price with no discounts deducted Purchase discount Cash discount; Discount given to reward prompt payment Quantity discount Trade discount; Discount given to reward purchase of more than one of a particular item Sales revenue Sales Cost of goods sold Cost of sales Answers to Self-Study Questions 1. a 4. d 7. c 10. d 2. b ($440,000 – $210,000 = $230,000) 5. b 8. a 3. d 6. c 9. c Perpetual inventory system (p. 226) Sales (p. 223) Sales discount (p. 233) Sales returns and allowances (p. 233) Sales revenue (p. 223) Single-step income statement (p. 244) Chapter Five Merchandising Operations and the Accounting Cycle 255
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 and 26: Two Key Ratios for Decision Making
Page 27 and 28: Wal-Mart 1 2 3 4 5 6 Austin Sound C
Page 29 and 30: Decision Guidelines How do merchand
Page 31 and 32: 3. Prepare the company’s multi-st
Page 33: Requirement 3 JAN KING DISTRIBUTING
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

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