3 Accounting for

Merchandising Operations
Learning Objectives
Describe merchandising operations and inventory
1 systems.

2 Record purchases under a perpetual inventory system.

3 Record sales under a perpetual inventory system.

Apply the steps in the accounting cycle to a

4 merchandising company.

Compare a multiple-step with a single-step income

5 statement.
5-1
 Business:

Service business

Merchandising

Manufacturing

5-2
 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
Profit
Sold

Operating Equals Net

Cost of goods sold is the total Income
Expenses
cost of merchandise sold during (Loss)
the period.

5-3 LO 1
 Merchandising Operations
Illustration 5-2
Operating
Cycles
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service
company.

Illustration 5-3

5-4 LO 1
 Merchandising Operations

Flow of Costs
Illustration 5-4

Companies use one of two systems to account for inventory: a perpetual

inventory system or a periodic inventory system.

5-5 LO 1
 Merchandising Operations

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.

5-6 LO 1
 Merchandising Operations

Flow of Costs
Periodic System
◆ Do not keep detailed records of the goods on hand.

◆ A physical inventory count is made to determine the cost

of goods on hand.

◆ 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
5-7 LO 1
LEARNING Record purchases under a perpetual
OBJECTIVE
2
inventory system.

◆ Made using cash or credit (on account).

◆ Normally record when

goods are received from
the seller.

◆ Purchase invoice should

support each credit
purchase.

Illustration 5-6
Sales invoice used as purchase
invoice by Sauk Stereo

5-8 LO 2
 Recording Purchases of Merchandise
Illustration 5-6
Illustration: Sauk Stereo (the
buyer) uses as a purchase
invoice the sales invoice
prepared by PW Audio Supply,
Inc. (the seller). Prepare the
journal entry for Sauk Stereo for
the invoice from PW Audio
Supply.

May 4 Inventory 3,800

Accounts Payable 3,800

5-9 LO 2
 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.
5-10 LO 2
 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
 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 of the
purchase was for cash. purchase price.

5-12 LO 2
 Purchase Discounts

Credit terms may permit buyer to claim a cash discount

for prompt payment.

Advantages: Example: Credit terms

may read 2/10, n/30.
◆ Purchaser saves money.

◆ Seller shortens the operating cycle by converting the

accounts receivable into cash earlier.

5-13 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.

5-14 LO 2
 Illustration 5-14

Multiple-
Step

Key Items:
◆ Net sales

Illustration 5-14
5-15
LO 5
 Illustration 5-14

Multiple-
Step

Key Items:
◆ Net sales
◆ Gross profit

Illustration 5-14
5-16
LO 5
 Illustration 5-14

Multiple-
Step

Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses

Illustration 5-14
5-17
LO 5
 Multiple-
Step

Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Nonoperating
activities

Illustration 5-14
5-18
LO 5
 Multiple-
Step

Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Nonoperating
activities

Illustration 5-13
Illustration 5-14
5-19
LO 5
 Multiple-
Step

Key Items:
◆ Net sales
◆ Gross profit
◆ Operating
expenses
◆ Nonoperating
activities
◆ Net income

Illustration 5-14
5-20
LO 5
 Do it

5-21
5-22
 Forms of Financial Statements

Single-Step Income Statement

◆ Subtract total expenses from total revenues

◆ Two reasons for using the single-step format:

1. Company does not realize any profit until total revenues

exceed total expenses.

2. Format is simpler and easier to read.

5-23 LO 5
 Single-Step Income Statement

Illustration 5-15

5-24 LO 5
 Determining Cost of Goods Sold Under a
Periodic System
◆ No running account of changes in inventory.

◆ Ending inventory determined by physical count.

◆ Calculate cost of goods sold by subtracting ending

inventory from the goods available for sale.

LO 7 Explain the recording of purchases and sales of

5-25
inventory under a periodic inventory system.
 Determining Cost of Goods Sold Under a
Periodic System
Illustration 5B-2

5-26
LO 7
 The End

5-27