Merchandising Operations and the Accounting Cycle - Pearson

More documents

Recommendations

Info

EXHIBIT 5-1 A Merchandiser’s Income Statement Contrasted with the Income Statement of a Service Business Net sales revenue minus cost of goods sold is called gross margin or gross profit. Net sales revenue – Cost of goods sold = Gross margin (sometimes abbreviated (same as Cost of sales) (same as Gross profit) as Sales) or, more simply, 224 Part One The Basic Structure of Accounting THE FORZANI GROUP LTD. Consolidated Statements of Income (adapted) For the Years Ended January 30, 2000, and January 31, 1999 (In thousands of dollars) 2000 1999 Revenue Corporate $325,041 $275,293 Franchise 129,060 103,355 454,101 378,648 Cost of sales 310,816 253,679 Gross margin 143,285 124,969 Operating and administrative expenses Store operating 84,828 76,826 General and administrative 33,008 29,358 117,836 106,184 Operating income before undernoted items 25,449 18,785 Amortization 8,564 6,514 Interest 2,542 4,147 11,106 10,661 Net earnings $ 14,343 $ 8,124 AIR & SEA TRAVEL, INC. Income Statement For the Year Ended December 31, 2003 Service revenue $113,000 Expenses (listed individually) 42,000 Net earnings $ 71,000 Sales – Cost of sales = Gross profit Gross margin is a measure of business success. A sufficiently high gross margin is vital to a merchandiser, since all other expenses of the company are deducted from this gross margin. FGL’s operations were more successful during the year ended January 30, 2000 because net income increased. The following example will clarify the nature of gross margin. Suppose SportChek’s cost for a certain piece of hockey equipment is $50 and SportChek sells the equipment to a customer in Halifax for $90. SportChek’s gross margin on the equipment is $40 ($90 – $50). The gross margin reported on FGL’s income statement, $143,285,000, is the sum of the gross margins on all the products the company sold during its 2000 fiscal year. What Goes into Inventory Cost? The $113,827,000 cost of inventory on The Forzani Group Ltd.’s (FGL) balance sheet represents all the costs FGL incurred to bring the merchandise to the point of sale.
Suppose FGL’s Sports Experts stores purchase soccer balls from a manufacturer in Hong Kong. Sports Experts’ cost of a soccer ball would include • Cost of the ball—say $4.00 per ball. • Customs duties paid to the Canadian government in order to import the soccer balls—say $0.35, added to the cost of each ball. • Shipping cost from the manufacturer in Hong Kong to Sports Experts’ location in Ontario. This cost is called freight or freight in. Assume freight adds $0.50 to each soccer ball. • Insurance on the soccer balls while in transit—say $0.15 per ball. In total, Sports Experts’ cost of a soccer ball totals $5.00 ($4.00 + $0.35 + $0.50 + $0.15). The cost principle applies to all assets, as follows: The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use. For merchandise inventory, the intended use is readiness for sale. After the goods are offered for sale, then other costs, such as advertising, display, and sales commissions, are expensed. Thus these costs are not included as the cost of inventory. The Operating Cycle for a Merchandising Business Some merchandising entities buy inventory, sell the inventory to their customers, and use the cash to purchase more inventory to repeat the cycle. Other merchandisers, like microbreweries such as Sleeman’s or companies like Magna International Inc., manufacture their products and sell them to customers. The balance of this chapter considers the first group of merchandisers that buy products and resell them. Exhibit 5-2 diagrams the operating cycle for cash sales and for sales on account. For a cash sale—Panel A—the cycle is from cash to inventory, which is purchased for resale and back to cash. For a sale on account—Panel B—the cycle is from cash to inventory to accounts receivable and back to cash. In all lines of business, managers strive to shorten the cycle in order to keep assets active. The faster the sale of inventory and the collection of cash, the higher the profits, assuming cost and selling price stay the same. Panel A—Purchase and Cash Sale Panel B—Purchase and Sale on Account Cash Sales Cash Inventory Purchases Collections of Cash Accounts Receivable Cash Sales on Account Purchases Inventory EXHIBIT 5-2 Operating Cycle of a Merchandiser Chapter Five Merchandising Operations and the Accounting Cycle 225
Page 1 and 2: C H 5A P T E R Merchandising Operat
Page 3: Before launching into merchandising
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 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?