Chapter 04 Reporting and Analyzing Merchandising Operations
4-8
Chapter Outline
financing costs, income tax expense and other special items.
2. Both systems require separate disclosure of items when their
size, nature or frequency are important.
3. IFRS permits expenses to be presented by their function or
nature. GAAP provides no direction but the SEC requires
presentation by function.
4. Neither GAAP nor IFRS define operating income, which
results in latitude in reporting.
5. IFRS permits alternative income measures; US GAAP does
not.
C. Balance Sheet Presentation – GAAP balance sheets report
current items first, with assets listed from most liquid to least
liquid and liabilities are listed from nearest to maturity to
furthest from maturity. IFRS balance sheets present noncurrent
items first but this is not a requirement.
Notes
VII. Decision Analysis—Acid-Test and Gross Margin Ratios
A. Acid-Test Ratio
1. The acid-test ratio is used to assess the company’s liquidity or
ability to pay its current debts; it differs from the current ratio
by excluding less liquid current assets.
2. It is calculated by dividing quick assets by current liabilities;
quick assets are cash, short-term investments, and current
receivables.
3. Rule of thumb is that the acid-test ratio should have a value of at
least 1.0 to conclude that a company is unlikely to face near-term
liquidity problems.
B. Gross Margin Ratio
1. The gross margin ratio (also called gross profit ratio) is used
to assess a company’s profitability before considering
operating expenses.
2. It is calculated by dividing gross margin (net sales – cost of
goods sold) by net sales.
VIII. Periodic Inventory System (Appendix 4A)
A. Records merchandise acquisitions, discounts and returns in
temporary accounts (Purchases, Purchase Returns, Purchases
Discounts) rather than the merchandise inventory account.
B. Records only the revenue aspect of sales-related events; updates
inventory and determines cost of goods sold only at the end or the
accounting period.
C. The Merchandise Inventory account can be updated as part of the
adjusting or closing process.
Chapter 04 Reporting and Analyzing Merchandising Operations
4-9
Chapter Outline
Notes
D. Requires closing additional temporary accounts.
E. Financial statements of merchandisers using the periodic system
are similar to those of a service company. The cost of goods sold
and gross profit are included in the income statement. The balance
sheet includes merchandise inventory in current assets.
IX. Work Sheet—Perpetual System (Appendix 4B)
Differs slightly from the work sheet layout for a service company in
Chapter 3; includes additional accounts used by a merchandiser:
Merchandise Inventory, Sales, Sales Returns and Allowances, Sales
Discounts, and Cost of Goods Sold.
Chapter 04 Reporting and Analyzing Merchandising Operations
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VISUAL #4-1
COMPONENTS OF NET INCOME (FROM OPERATIONS)
Steps:
(a) Net Sales X
(b) – Cost of Goods Sold* – X
(c) Gross Profit on Sales X
(d) – Operating Expenses – X
(e) Net Income (Loss) from Operations X
COMPONENTS OF COST OF GOODS SOLD
Steps:
(a) Merchandise Inventory, Beginning of Period X
(b) + Total Cost of Merchandise Purchases + X
(c) Available for Sale X
(d) – Merchandise Inventory, End of Period – X
(e) Cost of Goods Sold X
COMPONENTS COST OF GOODS PURCHASED
Steps:
(a) Purchases X
(b) – Purchase Returns & Allowances X
and Purchases Discounts + X – X
(c) Net Purchases X
(d) + Transportation-In + X
(e) Total Cost of Merchandise Purchases X
* Perpetual inventory systems have a cost of goods sold account that
continuously accumulates costs as items are sold. In a periodic inventory system
this amount is calculated at the end of period.
Chapter 04 Reporting and Analyzing Merchandising Operations
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VISUAL #4-2
THE OUTDOOR STORE
Income Statement
For the Year Ended December 31, 20xx
Sales revenues
Sales ………………………………………..
$700,000
Less: Sales returns and allowances …………..
$ 5,000
Sales discounts ……………………….
3,000
8,000
Net sales ………………………………………
$692,000
Cost of goods sold
Merchandise inventory, January 1 …………..
40,300
Purchases ……………………………………..
462,000
Less: Purchase discounts ………. $12,000
Purchase returns and
Allowances …………………. 6,400
18,400
Net purchases …………………………………
443,600
Add: Freight–in ……………………………….
3,600
Total cost of merchandise purchased ………..
447,200
Goods available for sale ………………………
487,500
Merchandise inventory, December 31 ……….
70,000
Cost of goods sold …………………………………
417,500
Gross profit ……………………………………….
274,500
Operating expenses
Selling expenses
Sales salaries expense ………………..
76,000
Sales commission expense …………..
14,500
Depreciation expense – Display equip.
13,300
Utilities expense ……………………..
6,600
Insurance expense ……………………
4,320
Total selling expenses ……………….
114,720
General and administrative expenses
Office salaries expense ………………
32,000
Depreciation expense – building …….
10,400
Property tax expense …………………
4,800
Utilities expense ……………………..
4,400
Insurance expense ……………………
2,880
Total administrative expenses
54,480
Total operating expenses …………….
169,200
Income from operations …………………………..
105,300
Other revenues and gains
Interest revenue ……………………………….
4,000
Other expenses and losses
Interest expense ……………………………….
11,000
7,000
Net income ………………………………………..
$ 98,300
Chapter 04 Reporting and Analyzing Merchandising Operations
4-12
Chapter 4 – Alternate Demonstration Problem #1
The following data was taken from ledger account balances and
supplementary data for the Whisk Company for the year ended
December 31, 20xx:
Merchandise inventory, 1/1/20xx ……………………………………………
$ 20,000
Merchandise inventory, 12/31/20xx ………………………………………..
23,000
Purchases …………………………………………………………………………….
215,000
Purchases discounts …………………………………………………………….
6,000
Purchases returns and allowances ………………………………………..
3,000
Sales …………………………………………………………………………………….
400,000
Sales discounts …………………………………………………………………….
3,200
Sales returns and allowances ………………………………………………..
1,800
Transportation-in …………………………………………………………………..
10,000
Required:
1. Compute the total cost of merchandise purchases.
2. Compute the cost of goods sold.
3. Prepare a multiple-step income statement (only through the gross
profit line) for the year ended December 31, 20xx.
Chapter 04 Reporting and Analyzing Merchandising Operations
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Solution: Chapter 4 – Alternate Demonstration Problem #1
1.
Purchases
$215,000
Less: Purchase discounts
$6,000
Purchases returns and allowances
3,000
9,000
Net purchases
206,000
Add transportation–in
10,000
Total cost of merchandise purchases
$216,000
2.
Merchandise inventory, January 1, 20xx
$ 20,000
Total cost of merchandise purchases
216,000
Goods available for sale
236,000
Merchandise inventory, December 31, 20xx
23,000
Cost of goods sold
$213,000
3.
WHISK COMPANY
Partial Income Statement
For the Year Ended December 31, 20xx
Revenue from sales:
Gross sales
$400,000
Less: Sales discounts
$ 3,200
Sales returns and
allowances
1,800
5,000
Net sales
395,000
Cost of goods sold
213,000
Gross profit
$182,000