Chapter 4
Accounting for Merchandising
Operations
QUESTIONS
1. Merchandising companies report Merchandise Inventory on the balance sheet,
do not.
2. Additional accounts of a merchandising company likely include Merchandise
3. A company can have a net loss if its expenses (absent cost of goods sold) are
4. A cash discount can be offered to encourage customers to promptly pay. This
5. For a perpetual inventory system, inventory shrinkage is determined by taking a
6. Cash discounts are granted in return for early payment and reduce the amount paid
7. Sales discount is a term used by a seller to describe a cash discount granted to a
8. A manager is concerned about the quantity of its purchase returns because the
9. The sender (maker) of a debit memorandum records a debit in an account of the
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10. The single-step income statement format presents cost of goods sold and expenses
11. Polaris calls its inventory account “Inventories, net.” A detailed calculation of cost
12. Arctic Cat titles its cost of goods sold account “Cost of goods sold.” Arctic Cat
13. Piaggio titles its cost of goods sold account “Cost for materials.”
14. KTM reports a separate gross margin figure on its consolidated income statement.
QUICK STUDIES
Quick Study 4-1 (10 minutes)
Quick Study 4-2 (5 minutes)
Quick Study 4-3 (15 minutes)
Nov. 5 Merchandise Inventory ………………………………. 6,000
Accounts Payable ………………………………. 6,000
To record credit purchase [(600 x $10].
Quick Study 4-4 (10 minutes)
Apr. 1 Accounts Receivable ………………………………. 3,000
Sales ………………………………………………. 3,000
To record credit sale.
1 Cost of Goods Sold …………………………………. 1,800
Merchandise Inventory ……………………. 1,800
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Quick Study 4-5 (10 minutes)
(a)
(b)
(c)
(d)
Sales …………………………..……..….
$150,000
$550,000
$38,700
$255,700
Sales discounts ………………….….
(5,000)
(17,500)
(600)
(4,800)
Sales returns and allowances …….
(20,000)
(6,000)
(5,100)
(900)
Net sales …………………………….….
125,000
526,500
33,000
250,000
Cost of goods sold ……………..….
(79,750)
(329,589)
(24,453)
(126,500)
Gross profit ………………………..…
$ 45,250
$196,911
$ 8,547
$123,500
Gross margin ratio:
(Gross profit / Net sales) …….. 36.2% 37.4% 25.9% 49.4%
Interpretation of gross margin ratio for case a: The ratio of 36.2% implies
that for each dollar in net sales the company earns 36.2 cents in gross
profit. The company must still deduct other expenses that it incurs in
running the business when computing net income.
Quick Study 4-6 (10 minutes)
July 31 Cost of Goods Sold ……………………………… 1,900
Merchandise Inventory ………………… 1,900
To adjust for shrinkage based on
physical count [$37,800 – $35,900].
Quick Study 4-7 (10 minutes)
July 31 Sales …………………………………………………….. 160,200
Income Summary …………………………... 160,200
Quick Study 4-8 (10 minutes)
in current liabilities as they come due. An acid-test ratio less than one usually
suggests some concern and encourages further analysis of liquidity.
Quick Study 4-9 (10 minutes)
Similarities: Both the acid-test ratio and current ratio are used to assess
liquidity. Both ratios are computed with current liabilities as the denominator.
Differences: The current ratio includes all current assets in the numerator.
The acid-test ratio includes current assets less inventories and prepaids in its
Quick Study 4-10 (10 minutes)
Quick Study 4-11A (5 minutes)
a. Periodic inventory system
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Quick Study 4-12A (10 minutes)
Nov. 5 Purchases ………………………………………………….. 6,000
Accounts Payable ……………………………….. 6,000
To record credit purchase [(600 x $10].
Quick Study 4-13A (10 minutes)
Apr. 1 Accounts Receivable …………………………………. 3,000
Sales …………………………………………………. 3,000
To record credit sale.
Quick Study 4-14 (20 minutes)
1. Multiple-step income statement
adidas Group
Income Statement (€ millions)
For Year Ended December 31, 2011
Net sales ……………………………………………………………. €13,344
Cost of sales ……………………………………………………… 7,000
Gross profit ……………………………………………………….. 6,344
2. Single-step income statement
adidas Group
Income Statement (€ millions)
For Year Ended December 31, 2011
Revenues
Net sales ……………………………………………………………. €13,344
Royalty and commission income ………………………. 93
Quick Study 4-15 (10 minutes)
a. Both U.S. GAAP and IFRS include broad and similar guidance for the
accounting of merchandise purchases and sales.
b. Under IFRS, reference to finance costs usually refers to interest expense.
c. IFRS permits alternative measures of income to be reported as part of
the income statement.
Quick Study 4-16 (10 minutes)
a)
Aug. 1 Merchandise Inventory ……………………………….. 60,000
Accounts Payable ……………………………….. 60,000
Quick Study 4-17 (10 minutes)
a)
Sept. 15 Merchandise Inventory ……………………………….. 35,000
Accounts Payable ……………………………….. 35,000
To record credit purchase.
b)
Quick Study 4-18 (15 minutes)
Computation of net income:
Krug Service Co.
Revenues ……………………………………………
Less: Expenses …………………………………..
Net income ………………………………………….
Kleiner Merchandising Co.
Sales …………………………………………………..
$ 9,500
Less: Cost of goods sold (see below*) …
7,200
Gross profit ………………………………………..
2,300
Less: Operating expenses …………………..
1,450
Net income ………………………………………….
$ 850
*Computation of cost of goods sold: _
Beginning Inventory
$ 5,000
Plus: Purchases
3,900
Goods available for sale
8,900
Less: Ending inventory
1,700
Cost of goods sold
$ 7,200
EXERCISES
Exercise 4-1 (10 minutes)
Operating cycle of a merchandiser with credit sales follows (chronological):
Exercise 4-2 (30 minutes)
Apr. 2 Merchandise Inventory ………………………………. 4,600
Accounts Payable—Lyon …………………….. 4,600
Purchased merchandise on credit.
3 Merchandise Inventory ………………………………. 300
Cash …………………………..………………………. 300
Paid shipping charges on purchased
merchandise.
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Exercise 4-3 (30 minutes)
1. BUYER– Santa Fe Company
a) Credit Purchase
Merchandise Inventory ……………………………… 24,000
Accounts Payable ………………………………. 24,000
Purchased merchandise on credit.
2. SELLER – Mesa Company
a) Credit Sale
Accounts Receivable ………………………………… 24,000
Sales ………………………………………………….. 24,000
Sold merchandise on account.
3. Amount borrowed to pay with discount ………………….. $ 23,280
Annual rate of interest …………………………..………………. x 8%
Interest per year …………………………………………………….. $1,862.40
Exercise 4-4 (30 minutes)
May 5 Accounts Receivable ………………………………… 21,000
a.
May 7 Sales Returns and Allowances ………………….. 2,800
Accounts Receivable ………………………….. 2,800
b.
May 8 Sales Returns and Allowances …………………… 600
Accounts Receivable …………………………... 600
Granted allowance for damaged merchandise.
c.
May 15 Sales Returns and Allowances …………………… 680
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Exercise 4-5 (15 minutes)
May 5 Merchandise Inventory ……………………………… 21,000
Accounts Payable ………………………………. 21,000
Purchased merchandise on credit (1,500 x $14).
a.
May 7 Accounts Payable …………………………………….. 2,800
Merchandise Inventory ……………………….. 2,800
Exercise 4-6 (20 minutes)
In today’s competitive world, organizations must concentrate on meeting their
customers’ needs and avoiding dissatisfaction. If these needs are not met
and dissatisfaction grows, the customers will deal with other companies or
entities. One measure of dissatisfaction of customers is the amount of sold
goods that are later returned. Customer dissatisfaction needs to be
understood and then dealt with promptly to encourage them to remain loyal.