2. Accounting for Merchandising Business
Contents
Nature of Merchandising Business1
Accounting for Inventory Purchases2
Purchases and Sales Discounts3
Transportation Cost4
3. Accounting for Merchandising Business
Contents
Financials5
Analysis and Interpretation6
Class Discussions7
Presentations8
4. Nature of Merchandising Business
How do activities of an attorney and an architect,
which are service businesses, differ from those of
Wal-Mart or Kmart, which are merchandising
businesses?
These differences are best illustrated by focusing on the revenues
and expenses in the following condensed income statements.
Category 2009 Model
Fees Earned $XXX 100%
Operating Expenses -XXX 75%
Net Income $XXX 25%
Service Business
Category 2009 Model ebay
Sales $XXX 100% 100%
Cost of Merchandise Sold -XXX 70% 26%
Gross Profit $XXX 30% 74%
Operating Expenses -XXX 15% 53%
Net Income $XXX 15% 21%
Merchandising Business
Accounting for Merchandising Business
5. Wal Mart Income Statement
http://finance.yahoo.com/q/is?s=WMT&annual
75%
6%
19%
25%
100%
All numbers in $K
Accounting for Merchandising Business
6. Wal Mart Strategic Model
Accounting for Merchandising Business
• Always Low Prices (from 8% to 39% lower than competition)
• Lowest cost suppliers
• Perpetual Inventory system
• Internal Controls in place
• Employee wages below average
7. Accounting for Inventory Purchases
There are two systems that can be used to
account for merchandise purchases:
Perpetual and Periodic.
In the perpetual inventory system, each purchase and sale of
merchandise is recorded in an inventory account. As a result the
inventory balance is always up to date.
In the periodic inventory system, the current inventory balance is
not available in the accounitng records, instead a detailed listing of
the merchandise for sale (called a physical inventory) at the end of
the accounting period is prepared. This report is used to determine
the following:
1. The cost of the merchandise on hand
2. The cost of the merchandise sold during the period.
Accounting for Merchandising Business
8. Purchases and Sales Discounts
Sales Discount
Reduce sales revenue.
Purchase Discount
Is determined by the credit
terms that the buyer and the
seller agree. Most commonly
used are:
2/10 = 2% discount if paid
within 10 days.
n/30 = net amount due within
30 days.
Direct Impact to
Profit ($)
Accounting for Merchandising Business
Savings Calculation $USD
Discount of 2% on $1500 $30.00
Interest for 20 days at rate of 12% on $1470 -9.80
Savings from borrowing $20.20
9. The terms of a sale indicate when the ownership (title) of the merchandise
passes to the buyer. This point determines which party, the buyer or the
seller, must pay for the transportation cost.
SELLER
Warehouse
SHIPPING
• Title passes to buyer
• Buyer pays for freight cost
• Freight cost included to
buyer Inventory cost.
Transportation Cost
BUYER
Warehouse
DESTINATION
• Title passes to buyer
• Seller pays for freight cost
• Freight cost included to
seller operating expense.
Accounting for Merchandising Business
• Transportation cost
• Insurance
• Delivery associated risksFOB Osaka FOB Chicago
FOB
Shipping Point
FOB
Destination
10. Financials
1. COA 2. IS
3. RE 4. BS
Analysis
and
Decision
Making
COA is used to group
transactions by type
Cash, Inventory, Account
Receivables, Accounts
Payable & stock equity.
• Revenue
• Cost
• Expense
• Income
The RE
shows the
business
accumulated
profit or loss
and the
dividends
delivered to
stock holders.
2. Income Statement
The income statement shows the
performance of the Merchandise Business
in a given period.
1. Chart of Accounts
Reflects the type of merchandising
transactions.
3. Retained Earnings
Shows the net proft/loss of the business
since it started operations and the
dividends delivered to the stock holders.
4. Balance Sheet
Shows the financial position of the
business in terms of assets, liabilities and
stock equity.
The financial information is used for
the analysis and decision making.
Accounting for Merchandising Business
11. Financial Analysis and Interpretation
$in millions Sears J.C. Penney
Net Sales $38,236 $23,649
Total Assets BOP 33,130 17,102
Total Assets EOP 36,137 22,088
Ratio of Net Sales to Assets X.XX X.XX
Accounting for Merchandising Business
Ratio of Net Sales to Assets =
Net Sales
Average Total Assets
The ratio of net sales to assets measures how effectively a business is
using its assets to generate sales. A high ratio indicates an effective
use of assets. The assets used in computing the ratio may be the total
assets at the ending of the year or the year average.
Use previous formula to compute the ratio for below merchandising companies:
12. Financial Analysis and Interpretation
$in millions Sears J.C. Penney
Net Sales $38,236 $23,649
Total Assets BOP 33,130 17,102
Total Assets EOP 36,137 22,088
Ratio of Net Sales to Assets 1.10 1.21
Net Sales to Assets
1.10
1.21
Sears J.C Penney
Delta 10.0%
Accounting for Merchandising Business
Ratio of Net Sales to Assets =
Net Sales
Average Total Assets
Based on these ratios J.C. Penney appears better than
Sears in utilizing its Assets to generate sales.
For J.C. Penney the $1.21 can be read as follows:
Every $1.0 invested as an asset generates $1.21 of
sales.
Wal-Mart Ratio 2.48
13. Class Discussions
What distinguishes a merchandising business from a service
business?
Can a business earn a gross profit but incurr a net loss? Explain.
What is the meaning of:
1/10, n/60
n/30
n/eom
Who pays for transportation cost when the terms of sale are:
FOB shipping point
FOB destination
During the current year, merchandise is sold for $180,000 cash and for
$520,000 on account. The cost of the merchandise sold is $420,000.
What is the amount of the gross profit
Will the income statement necessarily report a net income? Explain.
Accounting for Merchandising Business
14. Class Discussions
What distinguishes a merchandising business from a service
business? The primary differences relate to revenue activities.
Merchandising business purchase merchandise for selling to customers
Can a business earn a gross profit but incur a net loss? Yes, if
operating expenses become greater than gross profit, then the result
will be a net loss.
What is the meaning of:
1/10, n/60 1% discount within 10 days, Net due balance 60 days
n/30 Net due balance 30 days
n/eom Net due balance at end of month
Who pays for transportation cost when the terms of sale are:
FOB shipping point Buyer
FOB destination Seller
During the current year, merchandise is sold for $180,000 cash and for
$520,000 on account. The cost of the merchandise sold is $420,000.
What is the amount of the gross profit $280,000
Will the income statement necessarily report a net income? Not necessarily,
if operating expenditures become greater than gross profit, then the income
statement will report a net loss.
Accounting for Merchandising Business
Service Business:
Provide services to customers
In the fiancial statement the revenue is reported as “Fees Earned”
Incurred operating expenses are substracted from Fees Earned to arrive at “Net Incomw”
Merchandising Business:
Buying and Selling of merchandise.
The cost of merchandise sold is substracted from sales to arrive at gross profit. Because is the profit before deducting the operating expenses.
Merchandise on hand (not sold) is called merchandise inventory. Reported as a current asset in the BS.
Large retailers such as Wal-Mart, Kmart and Sears, and many small merchandising business use computarized perpetual inventory systems. Such systems normally use barcodes. An optical scanner reads the barcode to record merchandise purchase and sold.
The ability to manage the credit terms in both the Purchase and Sales discounts have a direct impact on the company profit.
FOB Shipping Point:
The buyer pays for the transportation cost from the shipping point to the destination point.
Buyer adds this purchasing cost to the inventory cost.
FOB Destination:
This term means that the seller delivers the merchandise to the buyers final destination, free of transportation charges to the buyer.
The sellers register the transportation cost as an operating expense
Give copies to the group of the Incomce Statement, Balance Sheet, Retained Earnings and Chart of Accounts.
As an excercise we can match the COA number with the IS and BS.