- Describe a Service Business
- Describe a Merchandising Business
- Describe the 2 types of Merchandising Operations
- How does a Merchandising Business report income? What is unique compared to a service business?
- Describe the Operating cycle for a Merchandising Operation.
- Describe the new Balance Sheet account for a Merchandising Operation.
- Describe the new Income Statement account for a Merchandising Operation.
- Describe the two main types of inventory systems used? Which will be the focus of this class?
Objective 2-Accounting for Merchandise Purchases
- What is the source document for a Purchase of Merchandise? What is found on this source document
- Discounts on Merchandise Purchases
- What is a Purchase Discount?
- What is meant by 2/10, n/30?
- Purchase Discount Illustration:
- Ice Storm purchased a truckload of snow blowers for $60,000 with terms 3/15, n/30
- If Ice Storm pays within 15 days, how much do they pay?
- If Ice Storm pays after 15 days, how much do they pay?
- Purchase Returns and Allowances
- What are purchase returns?
- What is a purchase allowance?
Class Example-Purchases, Discounts and Returns
- On June 3, Bob Purchased 250 Computers at a cost of $100,000, paying for the purchase immediately.
- On June 7, Bob Purchased 500 TV’s on account for $25,000 with terms 1/15, net EOM.
- On June, 10 Bob returned 5 defective TV’s.
- On June 21, Bob paid for the remaining TV’s.
Transportation Costs and Ownership Transfer
FOB Shipping Point
- When does title pass?
- Who pays the freight?
- What is the entry made by the buyer?
- What is the entry made by the seller?
FOB Destination
- When does title pass?
- Who pays the freight?
- What is the entry made by the buyer?
- What is the entry made by the seller?
Class Example-Purchase with Transportation Charges and Discount
On June 22, Bob purchased merchandise on account, with terms 1/10, net EOM. The invoice shows the purchase price of $3,000 and transportation charges of $300. The goods were shipped FOB shipping point. The invoice was paid on June 28. Record the transactions.
Objective 3- Accounting for Merchandise Sales
- What are the 2 entries to make when a merchandising business sells its products?
- Sale of Merchandise for Cash
- Illustration: June 12, Bingo Bob sold 10 phones to Happy Valley School for $125 each for cash. His cost for the phones was $500.
- Sale of Merchandise on Account
- Illustration: June 15, Bob sold 20 TV’s to Lumpy’s Motel for $200 each on account with terms 2/10, n/30. Merchandise costs $2,200.
- Sales Discounts
- What is a sales discount?
- Why would a business give a sales discount?
- What does 2/10, n/30 mean?
- Illustration: June 24, Bob received payment for the June 15 sale.
- Customer Returns and Allowances
- What is a sales return?
- What is a sales allowance?
- Illustration: June 17, Lumpy’s Motel returned a non-defective TV to Bingo Bob. TVs sold for $200 and cost $110 each
- Illustration: June 17, Lumpy’s Motel returned a defective TV to Bingo Bob. The TVs were sold for $200 each and cost $110 each. The effective TV was worth ½ the cost.
- Illustration: June 17, instead of returning the defective TV, Lumpy’s Motel agrees to a $100 reduction in price and keeps the TV.
- If the customer keeps the merchandise and give them an allowance (deduction in what they owe) of $900, we would record the following:
Objective 4- Adjusting and Closing Entries for Merchandising Operations
- Adjustment for Shrinkag.
- What is shrinkage?
- Illustration: After the physical count of inventory was made, it was determined that
- we were short $10,000. Record the adjustment for shrinkage.
- Adjustments for Discounts and Returns/Allowances
- Why are these adjustments required?
- Closing Entries
- What is different about the closing entries for a Merchandising Operation compared to a Service Business?
Objective 5- Financial Statements for Merchandising Operations
- Multi-Step Income Statement
Net Sales=
Gross Profit=
Income from Operations=
Net Income=
Class Example-Multi-step Income Statement
Miller Mart Adjusted Trial Balance
December 31, 2018
| Debit | Credit | |
| Cash | 1,000 | |
| Accounts Receivable | 800 | |
| Merchandise Inventory | 375 | |
| Prepaid Rent | 150 | |
| Equipment | 3,700 | |
| Accounts Payable | 900 | |
| Salaries Payable | 250 | |
| Cindy Miller, Capital | 4,200 | |
| Cindy Miller, Drawing | 500 | |
| Sales | 10,300 | |
| Sales Discount | 200 | |
| Sales Returns and All. | 100 | |
| Cost of Goods Sold | 3,975 | |
| Store Salaries Expense | 3,250 | |
| Advertising Expense | 600 | |
| Rent Expense | 500 | |
| Depreciation Expense | 500 |
Using the Adjusted Trial Balance above, prepare a Multi-step Income Statement for the fiscal year ending December 31, 2018 for Miller Mart.
Balance Sheet for a Merchandising Operation
What is the main difference between the Balance Sheet of a Merchandising Operation and a Service Business?
Decision Analysis
Acid Test Ratio=Cash + ST Investments + Current Receivables/Current Liabilities
Why is this ratio useful?
What does a business person compare this ratio to?
What is a good benchmark for this ratio?
Calculate and analyze the Acid Test Ratio for Miller Mart (class example):
Decision Analysis
Gross Margin Ratio=Net Sales-CGS/Net Sales
Why is this ratio useful?
What does a business person compare this ratio to?
What is a good benchmark for this ratio?