Chapter 4: Accounting for a Merchandising Business
Discussion Questions: Key Points
1. Inventory, Cost of Goods Sold, Sales, Sales Discounts, Sales Returns and Allowances. Students might identify gross profit, but this is not an account, it is a subtotal.
2. A perpetual system allows the company to know more about the inventory items that are selling well and not selling well. It allows companies to monitor inventory more closely to avoid stock-outs or excessive holding costs. It can also help companies to more effectively prevent and detect theft of inventory through closer monitoring.
3. Subsidiary ledgers are used to keep track of detailed information that would be too cumbersome for a general ledger. For example, individual accounts receivable and payable would be noted in a subsidiary ledger.
4. The terms 2/10, n/30 mean that the purchasing company gets a two percent discount if it pays within 10 days, otherwise the full amount is due within 30 days. You should advise them to take advantage of all early payment discounts because by delaying payment by 20 days it is costing two percent. Given that there are approximately 18 twenty-day periods in a year, that translates into a 36 percent interest rate.
5. Four accounts are involved. A/R is debited and Sales is credited while Cost of Goods Sold is debited while Inventory is credited.
6. Sales returns and allowances is a contra-revenue account. It would appear on the income statement along with sales (subtracting from it) in order to arrive at a net sales subtotal.
7. Debit memos are most commonly used to decrease accounts payable. Credit memos are most commonly used to decrease accounts receivable. Both documents would be used with the return of defective merchandise. The purchaser would use a debit memorandum to reduce accounts payable (with a debit) on items that were returned so that they would not pay for the returned items. The seller of merchandise would use a credit memorandum to reduce receivables (with a credit) so that they would not bill the customer for items that were returned.
8. Free on board or “f.o.b.” terms describe where the goods change hands and who is responsible for the shipping charges. It is important to understand f.o.b. terms because shipping charges can significantly affect the total price paid to acquire items. If a merchandiser does not take shipping charges on merchandise received into account when setting prices, suitable profit might not be earned. Also, if goods are damaged in transit, it is important to know which party is responsible for making the situation right.
9. A single step income statement arrives at net income in a single-step of subtracting expenses from revenues. A multi-step income statement arrives at several subtotals along the way to calculating net income. A multi-step income statement is appropriate for a merchandising or a manufacturing company.
10. Several factors could account for the shrinking difference between what a company sells its goods for and what it costs to acquire.. It could be that competitors have entered the market, lowering the prices that could be charged. It could be that recessionary forces have made consumers of the product more price-conscious. Later periods of a product’s life cycle are generally associated with lower prices. All of the above assumed a single product being sold. If a company sells multiple products, moving from high mark-up items to lower mark-up items would have a similar effect.
Short Exercises
(5-10 min.) S 4-1
a. A physical count of goods on hand at year end is required. / c. Both periodic and perpetual inventoryb. Inventory records are continuously updated. / b. Perpetual inventory
c. Purchases of inventory are recorded in an asset account at the time of purchase. / b. Perpetual inventory
d. Bar code scanners are often utilized when using this inventory system. / b. Perpetual inventory
e. It is necessary to calculate the cost of goods sold at the end of the year with this inventory system. / a. Periodic inventory
(5-10 min.) S 4-2
JournalDATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Dec / 31 / Cost of Goods Sold / 1,700
Inventory / 1,700
Adjust inventory to physical count
(5-10 min.) S 4-3
Req 1
JournalDATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Mar / 1 / Inventory / 40,000
Accounts Payable – Pacific Trail / 40,000
Purchase inventory on account
Mar / 8 / Accounts Payable – Pacific Trail / 40,000
Cash ($40,000 × .98) / 39,200
Inventory ($40,000 × .02) / 800
Record payment of inventory
purchases within the discount period.
Req 2
Final cost of Inventory = Inventory $40,000 – discount taken $800 = $39,200.
(5-10 min.) S 4-4
Req 1
a. $8,000 - $1,100 = $6,900
($8,000 - $1,100) x .98 = $6,762
(5-10 min.) S 4-5
JournalDATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. / Inventory / 8,000
Accounts Payable – Pool Warehouse / 8,000
b. / Accounts Payable – Pool Warehouse / 1,100
Inventory / 1,100
c. / Accounts Payable – Pool Warehouse / 6,900
Cash ($6,900 × .98) / 6,762
Inventory ($6,900 × .02) / 800
(5-10 min.) S 4-6
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. / Inventory / 8,700
Accounts Payable / 8,700
Purchase inventory on account
b. / Inventory / 175
Cash / 175
Paid freight charges to have inventory delivered
c. / Accounts Payable / 8,700
Cash ($8,700 × .98) / 8,526
Inventory ($8,700 × .02) / 174
Record payment of inventory purchases
less returns within the discount period.
(5-10 min.) S 4-7
JournalDATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. / Accounts Receivable – Sonny’s Spas / 55,000
Sales Revenue / 55,000
Cost of Goods Sold / 30,250
Inventory / 30,250
b. / Cash ($55,000 × .98) / 53,900
Sales Discount ($55,000 × .02) / 1,100
Accounts Receivable – Sonny’s Spas / 55,000
(5-10 min.) S 4-8
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
May / 17 / Accounts Receivable / 750.00
Sales Revenue / 750.00
Cost of Goods Sold / 460.00
Inventory / 460.00
Record sale of inventory on account.
21 / Sales Returns and Allowances / 225.00
Accounts Receivable / 225.00
Inventory / 140.00
Cost of Goods Sold / 140.00
Record receipt of returned goods.
26 / Cash [($750 – 225) × .98] / 514.50
Sales Discount [($750 – 225) × .02] / 10.50
Accounts Receivable ($750 - $225) / 525.00
Record payment received within the
discount period.
(5-10 min.) S 4-9
Req 1 / Net Sales Revenue:Sales Revenue……………………………..…. / $ 750.00
Less: Sales Returns and Allowances ………. / (225.00)
Sales Discounts [($750 − $225) ×.02]... / (10.50)
Net Sales Revenue……………………………. / $ 514.50
Req 2 / Net Sales Revenue: / $ 514.50
Less: Cost of Goods Sold…………………………… / (320.00)
Gross profit……………………………………………. / $ 194.50
(5-10 min.) S 4-10
Req 1
a. / Cash / $ 5,200Accounts Receivable / 6,000
Inventory / 37,000
Supplies / 3,400
Prepaid Rent / 6,200
Total Current Assets / $ 57,800
b. / Accounts Payable / $ 19,500
Wages Payable / 1,500
Unearned Revenue / 2,000
Total Current Liabilities / $ 23,000
c. / Equipment / $ 33,000
Less: Accumulated Depreciation, Equipment / (4,500) / $28,500
Building / $ 87,000
Less: Accumulated Depreciation, Building / (24,000) / 63,000
Book Value of Plant Assets / $ 91,500
d. / Total Long-Term Liabilities (Note Payable, Long Term) / $28,000
(10-15 min.) S 4-11
Req. 1
ADR, Inc.Income Statement
Year Ended August 31, 2010
Net sales revenue / $28,000
Less: Cost of goods sold / 19,500
Gross profit / 8,500
Less: Operating expense / 3,700
Net income / $ 4,800
(10-15 min.) S 4-12
Balance Sheet
August 31, 2010
Assets
Current assets:
Cash / $ 3,500
Accounts Receivable / 2,900
Inventory / 1,700
Prepaid Rent / 800
Total current assets / 8,900
Fixed assets:
Equipment, net / 6,100
Total assets / $15,000
Liabilities
Current liabilities:
Accounts Payable / $ 4,500
Wages Payable / 1,100
Accrued Liabilities / 1,900
Total current liabilities / 7,500
Long-term liabilities:
Long-Term Notes Payable / 2,300
Total liabilities / 9,800
Stockholder’s equity
Total stockholder’s equity / 5,200
Total liabilities and stockholder’s equity / $15,000
(10-15 min.) S 4-13
Gross Profit Percentage / = / Gross Profit / = / ($28,000 - $19,500) / = / 0.304 or 30.4%Net Sales Revenue / $28,000
Current Ratio / = / Current Assets / = / ($3,500 + $2,900 + $1,700 + $800) / = / 1.19
Current Liabilities / $4,500 + $1,100 + $1,900)
Exercises
(5-10 min.) E 4-14A
Req 1
JournalDATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Dec / 31 / Cost of Goods Sold / 1,800
Inventory / 1,800
Adjust inventory to physical count
Req 2
The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged.
(10-15 min.) E 4-15A
JournalDATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Jun / 15 / Inventory / 4,300
Accounts Payable / 4,300
18 / Inventory / 350
Cash / 350
20 / Accounts payable / 900
Inventory / 900
28 / Accounts Payable ($4,300 - $900) / 3,400
Cash ($3,400 × .97) / 3,298
Inventory ($3,400 × .03) / 102
(10-15 min.) E 4-16A
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Mar / 3 / Inventory / 4,850
Accounts Payable / 4,850
Purchased Inventory on account.
6 / Accounts payable / 600
Inventory / 600
Returned damaged inventory to supplier.
12 / Accounts Payable ($4,850 - $600) / 4,250
Cash ($4,250 - $80) / 4,170
Inventory [($4,600-600) x .02] / 80
Paid invoice in full.
(10-15 min.) E 4-17A
Req 1
JournalDATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Sep / 14 / Accounts Receivable / 2,300
Sales Revenue / 2,300
Cost of Goods Sold / 1,350
Inventory / 1,350
16 / Delivery Expense / 75
Cash / 75
20 / Sales Returns and Allowances / 900
Accounts Receivable / 900
Inventory / 540
Cost of Goods Sold / 540
23 / Cash ($1,400 × .99) / 1,386
Sales Discount ($1,400 × .01) / 14
Accounts Receivable ($2,300 - $900) / 1,400
(10-15 min.) E 4-18A
DATE /
ACCOUNTS
/ POSTREF. / Dr. / Cr.
Nov / 3 / Accounts Receivable / 1,600.00
Sales Revenue / 1,600.00
Cost of Goods Sold / 1,040.00
Inventory / 1,040.00
Record sale of inventory on account.
3 / Accounts Receivable / 85.00
Cash / 85.00
Record prepayment of shipping charges.
7 / Sales Returns and Allowances / 250.00
Accounts Receivable / 250.00
Inventory / 162.50
Cost of Goods Sold / 162.50
Record return of goods from customer.
16 / Cash ($1,600 +$85 - $250 - $27) / 1,408.00
Sales Discounts [($1,600 – $250) × .02] / 27.00
Accounts Receivable ($1,600 + $85 - $250) / 1,435.00
Record receipt of payment from customer.
(15-20 min.) E 4-19A
JournalDATE /
ACCOUNTS
/ POSTREF. / Dr. / Cr.
Apr / 3 / Inventory / 3,500
Accounts Payable / 3,500
6 / Accounts Payable / 400
Inventory / 400
8 / Inventory / 110
Cash / 110
11 / Accounts Receivable / 4,300
Sales Revenue / 4,300
Cost of Goods Sold / 2,100
Inventory / 2,100
12 / Accounts Payable ($3,500 - $400) / 3,100
Cash ($3,100 × .98) / 3,038
Inventory ($3,100 × .02) / 62
18 / Sales Returns and Allowances / 300
Accounts Receivable / 300
25 / Cash ($4,000 × .97) / 3,880
Sales Discounts ($4,000 × .03) / 120
Accounts Receivable ($4,300 - $300) / 4,000
(10-15 min.) E 4-20A
a. / Sales * / = /Net Sales + Sales Discounts
/ = / $100,400 + $2,500= / $102,900
b. / Net Sales / = / Gross Profit + Cost of Goods Sold / = / $32,100 + $68,300
= / $100,400
c. / Net Sales / = / Sales – Sales Discounts / = / $64,000 − $1,700
= / $62,300
d. / Gross Profit / = / Net Sales − Cost of Goods Sold / = / $62,300 − $44,600
= / $17,700
e. / Sales Discounts / = / Sales – Net Sales / = / $102,000 - 93,500
= / $8,500
f. / Cost of Goods Sold / = / Net Sales – Gross Profit / = / $93,500 − 28,600
= / $64,900
g / Sales / = / Net Sales + Sales Discounts / = / $86,300 + 2,100
= / $88,400
h. / Gross Profit / = / Net Sales – Cost of Goods Sold / = / $86,300 - $57,700
= / $28,600
* You must find (b) before you find (a).
(10-15 min.) E 4-21A
Req 1
Atlantis Aquatics, Inc.Income Statement
Year Ended December 31, 2010
Revenues:
Net Sales Revenue / $ 236,500
Expenses:
Cost of Goods Sold / $136,400
Selling Expenses / 26,800
General and Administrative Expenses / 18,200
Total Expenses / 181,400
Net Income / $ 55,100
Computations:
Net Sales Revenue: $243,500 - $4,800 - $2,200 = $236,500
Req 2
The single-step income statement is not recommended for Atlantis Aquatics because they are a Merchandiser. A Merchandiser should use a Multi-step income to provide more detailed information to the financial statement users.
(15-20 min.) E 4-22A
Req 1
Atlantis Aquatics, Inc.Income Statement
Year Ended December 31, 2010
Sales Revenue / $243,500
Less: Sales Returns and Allowances / $4,800
Sales Discounts / 2,200 / 7,000
Net Sales Revenue / $ 236,500
Cost of Goods Sold / 136,400
Gross Profit / 100,100
Operating Expenses:
Selling Expenses / 26,800
General and Administrative Expenses / 18,200 / 45,000
Net Income / $ 55,100
Note: There are no Other Revenue or Expense items so Operating Income is Net Income