Chapter Accounting for Merchandising Businesses = 317” apn rcs Key Points ‘The multiple-step income statement of a merchandiser reports sales. The cost of the ‘merchandise sold is subtracted from sales to determine the gross profit. Operating income is determined by subtracting selling and administrative expenses from gross profit. Net income is determined by add- ing of subtracting the net of other revenue and expense, The income statement may also be reported in a single-step form. “The statement of owner's equity is similar to that for a service business. ‘The balance sheet reports merchandise inventory at the end of the period as a current asset. Also, customer refunds payable is reported as a current liability. ‘The closing entries for a merchandising business are similar to those for a service business except that the ‘cost of merchandise sold is also closed. Learning Outcomes, ‘example xercss, Practice rercises + Prepare a multiple-step income statement for a merchandising, business, + Prepare a single-step income statement. + Prepare a statement of owner's equity for a merchandising business. + Prepare a balance sheet for a merchandising business. + Prepare the closing entries for a merchandising business, ‘ribe and illustrate the use of asset turnover in evaluating a company’s operating performance. Key Points Asset turnover measures how effectively a business is using its assets to generate sales. A high ratio indicates an effective use of assets. Asset turnover is computed as follows: ales ‘Asset Turnover = ————Sales__ ‘Average Total ASeS Learning Outcomes ‘xample recs Practice frercises + Interpret a high asset turnover. *+ Compute the asset turnover EGS PEG-8A,6-8B UUs aea) ‘The following transactions were completed by Montrose Company during May of the ‘current year. Montrose Company uses a perpetual inventory system, ‘May 3. Purchased merchandise on account from Floyd Co., $4,000, terms FOB shipping point, 2/10, n/30, with prepaid freight of $120 added to the invoice. 5. Purchased merchandise on account from Kramer Co., $8,500, terms FOB destination, 1/10, 0/30. 6. Sold merchandise on account to C. F. Howell Co., list price $4,000, trade discount 30%, terms 2/10, n/30. The cost of the merchandise sold was $1,125. (Continued)May 8. 10. B. 4 15. 16. 19. Purchased office supplies for cash, $150. Retumed merchandise purchased on May 5 from Kramer Co., $1,300. Paid Floyd Co. on account for purchase of May 3. Purchased merchandise for cash, $10,500. Paid Kramer Co. on account for purchase of May 5, less return of May 10. Received cash on account from sale of May 6 to C. F. Howell Co. Sold merchandise on MasterCard credit cards, $2,450. The cost of the merchan- dise sold was $980. 22, Sold merchandise for cash to Comer Co., $3,480. The cost of the merchandise sold was $1,400. 24. Sold merchandise on account to Smith Co., $4,350, terms n/30. The cost of the ‘merchandise sold was $1,750. 25. Refunded Comer Co. $600 for damaged merchandise from sale on May 22. Comer 31, Co. agreed to keep the merchandise. Paid a service processing fee of $140 for MasterCard sales. Instructions 1. Journalize the preceding transactions. 2, Journalize the adjusting entry for merchandise inventory shrinkage, $3,750. 3. Journalize the adjusting entries for estimated customer refunds and allowances. ‘Assume that sales of $3,000 are estimated to be refunded. Solution 1. May 3. Merchandise Inventory [4,000 ~ ($4,000 x 256] + $120 4040 ‘Accounts Payable—Floyd Co. 4040 5 Merchandise Inventory [$8,500 ($8,500 > 19) ais ‘Accounts Payable—Kramer Co. ats 6 Accounts Receivable—C.F Howell Co. 2748 Sales 278 [4,000 - (30% x $4,000)|= $2,800 2.748 6 Costof Merchandise Sold 125 Merchandise Inventory ans 8 Office Supplies 150 Cash 150 10 Accounts Payable—Kramer Co. {51,300 ($1,300 % 196)] 1.287 Merchandise inventory 1287 13 Accounts Payable—Floyd Co. 4040 Cosh 4040 14 Merchandise Inventory 19800 Cash 10500 15 _ Accounts Payable—Kramer Co. ($8,415 ~$1.287) 7128 ash 71%8 16 Gash 2148 ‘Accounts Recelvable—C.F. Howell Co. 2m 19 Gash 2450 Sales 2450 19. Costof Merchandise Sold 960 Merchandise Inventory 920 2 Cash 3490 Sales 3.480‘Sales A Comet Merchandise Sete WR trend IeaReIY D CustomerRetunds Payable co) a 31 cudtcndtnne - cs ioe 1 gach azo sae, a pep 3h sa 0 tne Rnd Pte ae ee 108 (ie on bod (general expenses) (300) destination (292) asset turnover (303) FOB (free on board) cash refund (290) shipping point (292) re ee sdcasy senna C ending eee pen ‘(credit memo) (290) gross loos 281) non ie cowntce, eno rec eas Go See seceeatianes mae omer swans CD pete eee cats fapeae ony a ORI on soe ba pemeranun, Spanpep income Satemeat 38) ‘estimated retums inventory (308) ‘operating cycle (280) LPeQeTaST CM at CY 1, What distinguishes a merchandising business from a service business? 2, Can a business earn a gross profit but incur a net, loss? Explain. 3. The credit period during which the buyer of mer- chandise is allowed to pay usually begins with what date? © n/eom? Sh i) 40 3750 3,000 ‘other expense (300) other revenue (300) periodic inventory system (283) perpetual inventory system (283) physical inventory (283) sales (281) sales discount (289) selling expenses (300) single-step income statement (301) trade discounts (297) ‘wholesalers (297) 4, What is the meaning of (a) 1/15, n/60; (b) 0/30; 5. How are sales to customers using MasterCard and VISA recorded? 6. What is the nature of (a) a credit memo issued by the seller of merchandise, (b) a debit memo issued by the buyer of merchandise?