Describe a Service Business

  1. Describe a Service Business
  2. Describe a Merchandising Business
  3. Describe the 2 types of Merchandising Operations
  4. How does a Merchandising Business report income? What is unique compared to a service business?
  5. Describe the Operating cycle for a Merchandising Operation.
  6. Describe the new Balance Sheet account for a Merchandising Operation.
  7. Describe the new Income Statement account for a Merchandising Operation.
  8. 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

Accounts Receivable800
Merchandise Inventory375
Prepaid Rent150
Accounts Payable900
Salaries Payable250
Cindy Miller, Capital4,200
Cindy Miller, Drawing500
Sales Discount200
Sales Returns and All.100
Cost of Goods Sold3,975
Store Salaries Expense3,250
Advertising Expense600
Rent Expense500
Depreciation Expense500

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?

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