1. Merchandising
Activities
Chapter
6
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2. Learning Objective
LO1
To describe the
operating cycle of a
merchandising
company.
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3. Operating Cycle of a Merchandising
Company
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2. Sale of merchandise
on account
Cash
Inventory
Accounts
Receivable

4. Comparing Merchandising Activities with
Manufacturing Activities
Merchandising
Company
Purchase
inventory in
ready-to-sell
condition.
Manufacturing
Company
Manufacture
inventory and
have a longer
and more
complex
operating cycle.
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5. Retailers and Wholesalers
Retailers sell
merchandise directly
to the public.
Wholesalers buy
merchandise from
several different
manufacturers and
then sell this
merchandise to
several retailers.
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McGraw-Hill/Irwin

6. Learning Objective
LO2
To understand the
components of a
merchandising
company’s income
statement.
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7. Income Statement of a
Merchandising Company
Computer City
Condensed Income Statement
For the Year Ended December 31, 2007
$ 900,000
540,000
$ 360,000
270,000
Revenue from sales
Less: Cost of goodssold
Gross profit
Less: Expenses
Net income $ 90,000
Cost of
goods sold
represents
the expense
of goods
that are
sold to
customers.
Gross profit is a useful means of measuring
the profitability of sales transactions.
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8. Accounting System Requirements
for Merchandising Companies
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Although general ledger accounts provide
useful information, they do not provide
much of the detailed information needed in
the daily business operations.
General Ledger
Accounts Receivable
Who
owes us
money?
Date Debit Credit Balance
2007
June 1 10,000 10,000
15 3,000 7,000

9. © The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin
Accounting System Requirements
for Merchandising Companies
Subsidiary Ledger
Date
Heather Jacobs
Debit Credit Balance
2007
June 1 7,000 7,000
15 2,000 5,000
General Ledger
Date
Accounts Receivable
Debit Credit Balance
2007
June 1 10,000 10,000
15 3,000 7,000
Subsidiary Ledger
Date
Jake Sparks
Debit Credit Balance
2007
June 1 3,000 3,000
15 1,000 2,000
Control Account
Subsidiary Ledgers

10. Two Approaches Used in Accounting for
Merchandise Inventories
Perpetual
Inventory
System
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Periodic
Inventory
System

11. Learning Objective
LO3
To account for
purchases and sales of
merchandise in a
perpetual inventory
system.
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12. Perpetual Inventory Systems
The inventory account is continuously
updated to reflect items on hand.
Let’s look
at some
entries!
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13. Perpetual Inventory Systems
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account.
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14. Perpetual Inventory Systems
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
10  $30 =$300
Cost
Retail
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McGraw-Hill/Irwin

15. Perpetual Inventory Systems
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.
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McGraw-Hill/Irwin

16. Perpetual Inventory Systems
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.
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17. Taking a Physical Inventory
In order to ensure
the accuracy of
their perpetual
records, most
businesses take a
complete physical
count of the
merchandise on
hand at least
once a year.
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18. Taking a Physical Inventory
Reasonable amounts of inventory shrinkage are viewed as
a normal cost of doing business. Examples include
breakage, spoilage and theft.
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On December 31, Worley Co. counts its inventory.
An inventory shortage of $2,000 is discovered.

19. Learning Objective
LO4
To explain how a
periodic inventory
system operates.
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20. Periodic Inventory System
No effort is made to keep up-to-date
records of either inventory or cost of
goods sold.
Let’s look
at some
entries!
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McGraw-Hill/Irwin

21. Periodic Inventory System
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account.
Notice that no entry is
made to Inventory.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

22. Periodic Inventory System
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.
Retail
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

23. Periodic Inventory System
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.
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McGraw-Hill/Irwin

24. Periodic Inventory System
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.
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McGraw-Hill/Irwin

25. © The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin
Computing Cost of Goods Sold
The accounting records of Party
Supply show the following:
Inventory, Jan. 1 $ 14,000
Purchases (during year) 130,000
At December 31, Party Supply
counted the merchandise on hand
at $12,000.
Calculate Party Supply’s cost of goods sold
for the year.

26. Computing Cost of Goods Sold
Inventory (beginning of the year) $ 14,000
Add: Purchases 130,000
Cost of goods available for sale 144,000
Less: Inventory (end of year) 12,000
Cost of goods sold $132,000
Cost of Goods Sold can be
calculated as follows:
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27. Creating a Cost of Goods Sold
Account
Now, Party Supply must
create the Cost of Goods
Sold account.
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28. Creating a Cost of Goods Sold
Account
Now, Party Supply must
record the ending inventory
amount.
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29. Learning Objective
LO6
To account for
additional merchandise
transactions related to
purchases and sales.
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30. Credit Terms and Cash Discounts
2/10, n/30
Read as: “Two ten, net thirty”
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When manufacturers and wholesalers
sell their products on account, the
credit terms are stated in the invoice.

31. Credit Terms and Cash Discounts
2/10, n/30
Percentage
of Discount
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# of Days
Discount Is
Available
Otherwise,
the Full
Amount Is
Due
# of Days
when Full
Amount Is
Due

32. Recording Purchases at Net Cost
Purchases are
recorded at their
net amounts.
Purchase
Discounts Lost
are recorded
when payment is
made outside
the discount
period.
Net
Method
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33. Recording Purchases at Net Cost
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.
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34. © The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin
Recording Purchases at Net Cost
$4,000  98%=
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

35. Recording Purchases at Net Cost
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.
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McGraw-Hill/Irwin

36. Recording Purchases at Net Cost
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.
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McGraw-Hill/Irwin

37. Recording Purchases at Net Cost
Now, assume that Play Clothes waited until
July 20 to pay the amount due in full to
Kid’s Clothes.
Prepare the journal entry for Play Clothes.
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McGraw-Hill/Irwin

38. Recording Purchases at Net Cost
Nonoperating Expense
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Now, assume that Play Clothes waited until
July 20 to pay the amount due in full to
Kid’s Clothes.
Prepare the journal entry for Play Clothes.

39. Recording Purchases at Gross
Invoice Price
Purchases are
recorded at their
gross amounts.
Purchase
discounts taken
are recorded
when payment is
made inside the
discount period.
Gross
Method
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McGraw-Hill/Irwin

40. Recording Purchases at Gross
Invoice Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

41. Recording Purchases at Gross
Invoice Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

42. Recording Purchases at Gross
Invoice Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

43. Recording Purchases at Gross
Invoice Price
Reduces Cost of
Goods Sold
$4,000  98%=
$3,920
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

44. Recording Purchases at Gross
Invoice Price
Now, assume that Play Clothes waited until
July 20 to pay the full amount due to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

45. Recording Purchases at Gross
Invoice Price
Now, assume that Play Clothes waited until
July 20 to pay the full amount due to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

46. Returns of Unsatisfactory
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The purchase
was originally recorded at net cost.
Prepare the journal entry for Play Clothes.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

47. © The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin
Returns of Unsatisfactory
Merchandise
$500  98% =$490
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The purchase
was originally recorded at net cost.
Prepare the journal entry for Play Clothes.

48. Transportation Costs on Purchases
Transportation costs related to the
acquisition of assets are part of the
cost of the asset being acquired.
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49. Now, let’s talk
about sales!
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50. Transactions Relating to Sales
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin
Computer City
Partial Income Statement
For the Year Ended December 31, 2007
Revenue
Sales
Less: Sales returns and allowances
Sales discounts
$ 8,000
4,000
$912,000
12,000
Net sales $ 900,000
Credit terms and merchandise returns
affect the amount of revenue earned by
the seller.

51. Sales
On August 2, Kid’s Clothes sold $2,000 of merchandise
to Play Clothes on credit terms 2/10, n/30. Kid’s
Clothes originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

52. Sales
On August 2, Kid’s Clothes sold $2,000 of merchandise
to Play Clothes on credit terms 2/10, n/30. Kid’s
Clothes originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

53. Sales Returns and Allowances
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise to Kid’s Clothes from the
August 2 sale. Kid’s Clothes cost for this
merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
Contra-revenue
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

54. On August 5, Play Clothes returned $500 of
unsatisfactory merchandise to Kid’s Clothes from the
August 2 sale. Kid’s Clothes cost for this
merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
Sales Returns and Allowances
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

55. Sales
On July 6, Kid’s Clothes sold $4,000 of merchandise to
Play Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

56. Sales
On July 6, Kid’s Clothes sold $4,000 of merchandise to
Play Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory
system, they must make two entries.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

57. Sales Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes from the
July 6 sale.
Prepare the journal entry for Kid’s Clothes.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

58. Sales Discounts
$4,000  98%=
$3,920
Contra-revenue
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes from the
July 6 sale.
Prepare the journal entry for Kid’s Clothes.

59. Sales Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes from the July 6 sale.
Prepare the journal entry for Kid’s Clothes.
© The McGraw-Hill Companies, Inc.,
McGraw-Hill/Irwin

60. Sales Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes from the July 6 sale.
Prepare the journal entry for Kid’s Clothes.
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McGraw-Hill/Irwin

61. End of Chapter 6
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