WILEY
IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
5-1 Westmont College
PREVIEW OF CHAPTER 5
Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
5-2
CHAPTER
Accounting for
5 Merchandising Operations
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the differences between service and merchandising companies.
2. Explain the recording of purchases under a perpetual inventory system.
3. Explain the recording of sales revenues under a perpetual inventory
system.
4. Explain the steps in the accounting cycle for a merchandising company.
5. Prepare an income statement for a merchandiser.
5-3
Merchandising Operations
Learning
Objective 1
Merchandising Companies Identify the
differences between
Buy and Sell Goods service and
merchandising
companies.
Retailer
Wholesaler Consumer
The primary source of revenues is referred to as
sales revenue or sales.
5-4 LO 1
Merchandising Operations
Income Measurement
Not used in a
Sales Less
Illustration 5-1
Service business.
Revenue Income measurement process for a
merchandising company
Cost of Equals Gross Less
Goods Sold Profit
Operating Equals Net
Cost of goods sold is the total Income
Expenses
cost of merchandise sold during (Loss)
the period.
5-5 LO 1
Operating Cycles
Illustration 5-2
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service
company.
Illustration 5-3
5-6 LO 1
Flow of Costs
Illustration 5-4
Companies use either a perpetual inventory system or a periodic
inventory system to account for inventory.
5-7 LO 1
Flow of Costs
PERPETUAL SYSTEM
◆ Maintain detailed records of the cost of each inventory
purchase and sale.
◆ Records continuously show inventory that should be on
hand for every item.
◆ Company determines cost of goods sold each time a
sale occurs.
5-8 LO 1
Flow of Costs
PERIODIC SYSTEM
◆ Do not keep detailed records of the goods on hand.
◆ Cost of goods sold determined by count at the end of
the accounting period.
◆ Calculation of Cost of Goods Sold:
Beginning inventory € 100,000
Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold € 775,000
5-9 LO 1
Flow of Costs
ADVANTAGES OF THE PERPETUAL SYSTEM
◆ Traditionally used for merchandise with high unit
values.
◆ Shows the quantity and cost of the inventory that
should be on hand at any time.
◆ Provides better control over inventories than a periodic
system.
5-10 LO 1
Freight Costs
Ownership of the goods
passes to the buyer when the
public carrier accepts the
goods from the seller.
Ownership of the goods
remains with the seller until
the goods reach the buyer.
Illustration 5-7
Shipping terms
Freight costs incurred by the seller are an
operating expense.
5-11 LO 2
Freight Costs
Illustration: Assume upon delivery of the goods on May 6, Sauk
Stereo pays Public Freight Company €150 for freight charges,
the entry on Sauk Stereo’s books is:
May 6 Inventory 150
Cash 150
Assume the freight terms on the invoice in Illustration 5-6 had
required PW Audio Supply to pay the freight charges, the entry
by PW Audio Supply would have been:
May 4 Freight-Out (Delivery Expense) 150
Cash 150
5-12 LO 2
Purchase Returns and Allowances
Purchaser may be dissatisfied because goods are damaged
or defective, of inferior quality, or do not meet specifications.
Purchase Return Purchase Allowance
Return goods for credit if the May choose to keep the
sale was made on credit, or merchandise if the seller will
for a cash refund if the grant a reduction from the
purchase was for cash. purchase price.
5-13 LO 2
Purchase Returns and Allowances
Illustration: Assume Sauk Stereo returned goods costing
€300 to PW Audio Supply on May 8.
May 8 Accounts Payable 300
Inventory 300
5-14 LO 2
Purchase Returns and Allowances
Question
In a perpetual inventory system, a return of defective
merchandise by a purchaser is recorded by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Inventory
5-15 LO 2
Purchase Discounts
Credit terms may permit buyer to claim a cash discount
for prompt payment.
Example: Credit terms
Advantages: may read 2/10, n/30.
◆ Purchaser saves money.
◆ Seller shortens the operating cycle by converting the
accounts receivable into cash earlier.
5-16 LO 2
Purchase Discounts
2/10, n/30 1/10 EOM n/10 EOM
2% discount if 1% discount if Net amount due
paid within 10 paid within first 10 within the first 10
days, otherwise days of next days of the next
net amount due month. month.
within 30 days.
5-17 LO 2
Purchase Discounts
Illustration: Assume Sauk Stereo pays the balance due of
€3,500 (gross invoice price of €3,800 less purchase returns
and allowances of €300) on May 14, the last day of the
discount period. Prepare the journal entry Sauk Stereo
makes on May 14 to record the payment.
May 14 Accounts Payable 3,500
Inventory 70
Cash 3,430
(Discount = €3,500 x 2% = €70)
5-18 LO 2
Purchase Discounts
Illustration: If Sauk Stereo failed to take the discount, and
instead made full payment of €3,500 on June 3, the journal
entry would be:
June 3 Accounts Payable 3,500
Cash 3,500
5-19 LO 2
Purchase Discounts
Should discounts be taken when offered?
Discount of 2% on €3,500 €70.00
€3,500 invested at 10% for 20 days 19.18
Savings by taking the discount €50.82
Example: 2% for 20 days = Annual rate of 36.5%
€3,500 x 36.5% x 20 ÷ 365 = €70
5-20 LO 2
Summary of Purchasing Transactions
Inventory
Debit Credit
4th - Purchase 3,800 300 8th - Return
6th - Freight-in 150 70 14th - Discount
Balance 3,580
5-21 LO 2
> DO IT!
On September 5, Zhu Company buys merchandise on account
from Gao Company. The selling price of the goods is ¥15,000,
and the cost to Gao Company was ¥8,000. On September 8,
Zhu returns defective goods with a selling price of ¥2,000.
Record the transactions on the books of Zhu Company.
Sept. 5 Inventory 15,000
Accounts Payable 15,000
Sept. 8 Accounts Payable 2,000
Inventory 2,000
5-22 LO 2
Recording Sales of Merchandise
Illustration: PW Audio Supply records the sale of €3,800 on
May 4 to Sauk Stereo on account (Illustration 5-6) as follows
(assume the merchandise cost PW Audio Supply €2,400).
May 4 Accounts Receivable 3,800
Sales Revenue 3,800
4 Cost of Goods Sold 2,400
Inventory 2,400
5-23 LO 3
Sales Returns and Allowances
◆ “Flip side” of purchase returns and allowances.
◆ Contra-revenue account to Sales Revenue (debit).
◆ Sales not reduced (debited) because:
► Would obscure importance of sales returns and
allowances as a percentage of sales.
► Could distort comparisons.
5-24 LO 3
Sales Returns and Allowances
Illustration: Prepare the entry PW Audio Supply would make
to record the credit for returned goods that had a €300 selling
price (assume a €140 cost). Assume the goods were not
defective.
May 8 Sales Returns and Allowances 300
Accounts Receivable 300
8 Inventory 140
Cost of Goods Sold 140
5-25 LO 3
Sales Returns and Allowances
Illustration: Assume the returned goods were defective
and had a scrap value of €50, PW Audio would make the
following entries:
May 8 Sales Returns and Allowances 300
Accounts Receivable 300
8 Inventory 50
Cost of Goods Sold 50
5-26 LO 3
Sales Discount
◆ Offered to customers to promote prompt payment of
the balance due.
◆ Contra-revenue account (debit) to Sales Revenue.
5-27 LO 3
Sales Discount
Illustration: Assume Sauk Stereo pays the balance due of
€3,500 (gross invoice price of €3,800 less purchase returns
and allowances of €300) on May 14, the last day of the
discount period. Prepare the journal entry PW Audio Supply
makes to record the receipt on May 14.
May 14 Cash 3,430
Sales Discounts 70 *
Accounts Receivable 3,500
* [(€3,800 – €300) X 2%]
5-28 LO 3
> DO IT!
On September 5, Zhu Company buys merchandise on account
from Gao Company. The selling price of the goods is ¥15,000,
and the cost to Gao Company was ¥8,000. On September 8,
Zhu returns defective goods with a selling price of ¥2,000 and
the fair value of ¥300. Record the transactions on the books of
Gao Company.
Sept. 5 Accounts Receivable 15,000
Sales Revenue 15,000
Sept. 5 Cost of Goods Sold 8,000
Inventory 8,000
5-29 LO 3
> DO IT!
On September 5, Zhu Company buys merchandise on account
from Gao Company. The selling price of the goods is ¥15,000,
and the cost to Gao Company was ¥8,000. On September 8,
Zhu returns defective goods with a selling price of ¥2,000 and
the fair value of ¥300. Record the transactions on the books of
Gao Company.
Sept. 8 Sales Returns and Allowances 2,000
Accounts Receivable 2,000
Sept. 8 Inventory 300
Cost of Goods Sold 300
5-30 LO 3
Recording Sales of Merchandise
Learning Objective 4
Explain the steps in the
Adjusting Entries accounting cycle for a
merchandising company.
◆ Generally the same as a service company.
◆ One additional adjustment to make the records agree with
the actual inventory on hand.
◆ Involves adjusting Inventory and Cost of Goods Sold.
5-31 LO 4
Adjusting Entries
Illustration: Suppose that PW Audio Supply has an unadjusted
balance of €40,500 in Merchandise Inventory. Through a physical
count, PW Audio determines that its actual merchandise inventory
at year-end is €40,000. The company would make an adjusting
entry as follows.
Cost of Goods Sold 500
Inventory 500
5-32 LO 4
Closing Entries
5-33 LO 4
Closing Entries
5-34 LO 4
> DO IT!
The trial balance of Celine’s Sports Wear Shop at December 31
shows Inventory €25,000, Sales Revenue €162,400, Sales
Returns and Allowances €4,800, Sales Discounts €3,600, Cost
of Goods Sold $110,000, Rent Revenue €6,000, Freight-Out
€1,800, Rent Expense €8,800, and Salaries and Wages
Expense €22,000. Prepare the closing entries for the above
accounts.
Dec. 31 Sales Revenue 162,400
Rent Revenue 6,000
Income Summary 168,400
5-35 LO 4
The trial balance of Celine’s Sports Wear Shop at December 31
shows Inventory €25,000, Sales Revenue €162,400, Sales
Returns and Allowances €4,800, Sales Discounts €3,600, Cost
of Goods Sold €110,000, Rent Revenue €6,000, Freight-Out
€1,800, Rent Expense €8,800, and Salaries and Wages
Expense €22,000. Prepare the closing entries for the above
accounts.
Dec. 31 Income Summary 151,000
Cost of Goods Sold 110,000
Sales Returns and Allowances 4,800
Sales Discounts 3,600
Freight-Out 1,800
Rent Expense 8,800
Salaries and Wages Expense 22,000
5-36 LO 4
Forms of Financial Statements
Learning Objective 5
Prepare an income
Income Statement statement for a
merchandiser.
◆ Primary source of information for evaluating a
company’s performance.
◆ Format is designed to differentiate between the various
sources of income and expense.
5-37 LO 5
Income
Statement
The income statement
is a primary source of
information for
evaluating a
company’s
performance.
5-38 Illustration 5-14 LO 5
Income
Statement
Key Items:
◆ Net sales
5-39 Illustration 5-14 LO 5
Income
Statement
Key Items:
◆ Net sales
◆ Gross profit
5-40 Illustration 5-14 LO 5
Income
Statement
Key Items:
◆ Net sales
◆ Gross profit
Illustration 5-11
Gross profit rate formula
and computation
5-41 Illustration 5-14 LO 5
Income
Statement
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
5-42 Illustration 5-14 LO 5
Income
Statement
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Other income
and expense
5-43 Illustration 5-14 LO 5
Income
Statement
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Other income
and expense
5-44 Illustration 5-14 LO 5
Income
Statement
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Other income and
expense
◆ Interest expense
5-45 Illustration 5-14 LO 5
Income
Statement
Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Other income and
expense
◆ Interest expense
◆ Net income
5-46 Illustration 5-14 LO 5
COMPREHENSIVE INCOME
Includes certain adjustments to pension plan assets, gains and
losses on foreign currency translation, and unrealized gains and
losses on certain types of investments.
Illustration 5-15
Separate statement of net Reported in a combined statement of net income
income and comprehensive
income and comprehensive income, or in a separate
schedule that reports only comprehensive income.
5-47 LO 5
Inventory Presentation in the Classified
Statement of Financial Position
Illustration 5-16
Assets section of a classified statement of financial position
5-48 LO 5
APPENDIX 5B Periodic Inventory System
Learning
Objective 7
Determining Cost of Goods Sold Explain the recording
of purchases and
Under a Periodic System sales of inventory
under a periodic
inventory system.
◆ No running account of changes in
inventory.
◆ Ending inventory determined by physical count.
◆ Cost of goods sold not determined until the end of the
period.
5-49 LO 7
Determining Cost of Goods Sold
Under a Periodic System Illustration 5B-2
Cost of goods sold for a
merchandiser using a periodic
inventory system
Illustration 5B-2
5-50 LO 7
Recording Merchandise Transactions
◆ Record revenues when sales are made.
◆ Do not record cost of merchandise sold on the date of
sale.
◆ Physical inventory count determines:
► Cost of merchandise on hand and
► Cost of merchandise sold during the period.
◆ Record purchases in Purchases account.
◆ Purchase returns and allowances, Purchase discounts,
and Freight costs are recorded in separate accounts.
5-51 LO 7
Recording Purchases of Merchandise
Illustration: On the basis of the sales invoice (Illustration 5-6)
and receipt of the merchandise ordered from PW Audio Supply,
Sauk Stereo records the €3,800 purchase as follows.
May 4 Purchases 3,800
Accounts Payable 3,800
5-52 LO 7
Recording Purchases of Merchandise
FREIGHT COSTS
Illustration: If Sauk pays Public Freight Company €150
for freight charges on its purchase from PW Audio Supply on
May 6, the entry on Sauk’s books is:
May 6 Freight-In (Transportation-In) 150
Cash 150
5-53 LO 7
Recording Purchases of Merchandise
PURCHASE RETURNS AND ALLOWANCES
Illustration: Sauk Stereo returns €300 of goods to PW Audio
Supply and prepares the following entry to recognize the
return.
May 8 Accounts Payable 300
Purchase Returns and Allowances 300
5-54 LO 7
Recording Purchases of Merchandise
PURCHASE DISCOUNTS
Illustration: On May 14 Sauk Stereo pays the balance due on
account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio for payment within 10 days. Sauk
Stereo records the payment and discount as follows.
May 14 Accounts Payable 3,500
Purchase Discounts 70
Cash 3,430
5-55 LO 7
Recording Sales of Merchandise
Illustration: PW Audio Supply, records the sale of €3,800 of
merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-6) as follows.
May 4 Accounts Receivable 3,800
Sales Revenue 3,800
No entry is recorded for cost of goods sold at the time of the
sale under a periodic system.
5-56 LO 7
Recording Sales of Merchandise
SALES RETURNS AND ALLOWANCES
Illustration: To record the returned goods received from Sauk
Stereo on May 8, PW Audio Supply records the €300 sales
return as follows.
May 8 Sales Returns and Allowances 300
Accounts Receivable 300
5-57 LO 7
Recording Sales of Merchandise
SALES DISCOUNTS
Illustration: On May 14, PW Audio Supply receives payment
of €3,430 on account from Sauk Stereo. PW Audio honors the
2% cash discount and records the payment of Sauk’s account
receivable in full as follows.
May 14 Cash 3,430
Sales Discounts 70
Accounts Receivable 3,500
5-58 LO 7
Recording Sales of Merchandise
COMPARISON OF ENTRIES
Illustration 5B-3
Comparison of entries for perpetual and periodic inventory systems
5-59 LO 7
Recording Sales of Merchandise
COMPARISON OF ENTRIES
Illustration 5B-3
Comparison of entries for perpetual and periodic inventory systems
5-60 LO 7
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5-61
