CHAPTER 5
ACCOUNTING FOR MERCHANDISING
OPERATIONS
LEARNING OBJECTIVES
1. IDENTIFY THE DIFFERENCES BETWEEN SERVICE AND
MERCHANDISING COMPANIES.
2. EXPLAIN THE RECORDING OF PURCHASES UNDER
A PERPETUAL INVENTORY SYSTEM.
3. EXPLAIN THE RECORDING OF SALES REVENUES
UNDER A PERPETUAL INVENTORY SYSTEM.
A MERCHANDISING COMPANY.
5. DISTINGUISH BETWEEN A MULTIPLE-STEP AND A
SINGLE-STEP INCOME STATEMENT.
*6. PREPARE A WORKSHEET FOR A MERCHANDISING
COMPANY.
*7. EXPLAIN THE RECORDING OF PURCHASES AND
SALES OF INVENTORY UNDER A PERIODIC INVENTORY
SYSTEM.
CHAPTER REVIEW
Merchandising Operations
1. (L.O. 1) A merchandising company is an enterprise that buys and sells merchandise as their
2. The primary source of revenue for a merchandising company is sales revenue. Expenses are divided
3. Sales less cost of goods sold is called the gross profit. For example, if sales are $5,000 and cost
of goods sold is $3,000, gross profit is $2,000.
5. Operating expenses are expenses incurred in the process of recognizing sales revenue.
Operating Cycles
6. The operating cycle of a merchandising company is as follows:
Flow of Costs
7. A merchandising company may use either a perpetual or a periodic inventory system in deter–
mining cost of goods sold.
of goods sold is determined only at the end of an accounting period.
Purchase Transactions
8. (L.O. 2) Under the perpetual inventory system, purchases of merchandise for sale are recorded in
Payable is credited.
9. FOB shipping point means that goods are placed free on board the carrier by the seller, and the
buyer must pay the freight costs. FOB destination means that goods are placed free on board at
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 5-3
10. When the purchaser pays the freight, Inventory is debited and Cash is credited. When the seller
pays the freight, Freight-Out (Delivery Expense) is debited and Cash is credited. This account is
classified as an operating expense by the seller.
11. A purchaser may be dissatisfied with the merchandise received because the goods may be
Inventory is credited.
12. When the credit terms of a purchase on account permit the purchaser to claim a cash discount for
is no purchase discount, and the net amount of the bill is due within 30 days.
13. When an invoice is paid within the discount period, the amount of the discount is credited to
Sales Transactions
14. (L.O. 3) In accordance with the revenue recognition principle, companies record sales
15. All sales transactions should be supported by a business document. Cash register documents
16. A sale on credit is recorded as follows:
Accounts Receivable ……………………………………………………………. XXXX
Sales Revenue ……………………………………………………………… XXXX
Cost of Goods Sold ……………………………………………………………… XXXX
Inventory ……………………………………………………………………… XXXX
Cash ………………………………………………………………………………….. XXXX
Accounts Receivable ……………………………………………………. XXXX
Sales Returns and Allowances
17. A sales return results when a customer is dissatisfied with merchandise and is allowed to return
selling price.
18. To give the customer a sales return or allowance, the seller normally makes the following entry if
the sale was a credit sale (the second entry is made only if the goods are returned):
Sales Returns and Allowances ……………………………………………. XXXX
Accounts Receivable …………………………………………………… XXXX
Inventory ………………………………………………………………………….. XXXX
Cost of Goods Sold …………………………………………………….. XXXX
19. Sales Returns and Allowances is a contra revenue account and the normal balance of the
account is a debit.
Sales Discounts
within 30 days. Sales Discounts is a contra revenue account and the normal balance of this
account is a debit.
21. Both Sales Returns and Allowances and Sales Discounts are subtracted from Sales Revenue in
The Accounting Cycle
22. (L.O. 4) Each of the required steps in the accounting cycle for a service company applies to a
merchandising company.
Adjusting Entries and Closing Entries
23. A merchandising company generally has the same types of adjusting entries as a service com-
income to Income Summary.
Multiple-Step vs. Single-Step Income Statement
24. (L.O. 5) A multiple-step income statement shows several steps in determining net income:
(1) cost of goods sold is subtracted from net sales to determine gross profit and (2) operating
nonoperating sections for:
a. Revenues and expenses that result from secondary or unrelated operations, and
b. Gains and losses that are unrelated to the company’s operations.
Gross Profit and Operating Expenses
25. Gross profit is net sales less cost of goods sold. The gross profit rate is expressed as a
26. Nonoperating sections are reported in the income statement after income from operations and are
27. In a single-step income statement all data is classified into two categories: (a) Revenues (both
Classified Balance Sheet
28. A merchandising company generally has the same type of balance sheet as a service company
except inventory is reported as a current asset.
Using a Worksheet
*29. (L.O. 6) As indicated in Chapter 4, a worksheet enables financial statements to be prepared before
the adjusting entries are journalized and posted. The steps in preparing a worksheet for a
merchandising company are the same as they are for a service company except the additional
merchandising accounts are included.
Determining Cost of Goods Sold Under a Periodic System
*30. (L.O. 7) Under a periodic system separate accounts are used to record freight costs, returns,
and discounts. In addition, a running account of changes in inventory is not maintained. Instead, the
balance in ending inventory, as well as cost of goods sold for the period, is calculated at the end
of the period. The determination of cost of goods sold for Tsutsui Co. using a periodic inventory
system, is as follows:
TSUTSUI COMPANY
Cost of Goods Sold
For the Year Ended December 31, 2015
Cost of goods sold
Inventory, January 1 ………………………………. $ 28,000
Purchases…………………………………………….. $234,000
Less: Purchases returns and allowances ….. $8,200
Purchase discounts ………………………. 4,600 12,800
Net purchases ………………………………………. 221,200
Add: Freight-in ……………………………………… 10,800
Cost of goods purchased ………………………… 232,000
Cost of goods available for sale ……………….. 260,000
Inventory, December 31 ………………………….. 30,000
Cost of goods sold …………………………………. 230,000
5-6 Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only)
*31. To determine the cost of goods sold under a periodic inventory system, three steps are
required: (1) Record purchases of merchandise; (2) Determine the cost of goods purchased; and
(3) Determine the cost of goods on hand at the beginning and end of the accounting period.
*32. In determining cost of goods purchased, (a) contra-purchase accounts (purchase
returns/allowances and purchase discounts) are subtracted from purchases to produce net
purchases, and (b) freight-in is then added to net purchases.
inventory.
*34. Cost of goods sold is determined by two steps:
a. The cost of goods purchased is added to the cost of goods on hand at the beginning of the
period to obtain the cost of goods available for sale.
available for sale.
Recording Purchases and Sales of Merchandise
*35. (S.O. 7) In a periodic inventory system revenues from the sale of merchandise are recorded
*36. Under the periodic inventory system, purchases of merchandise for sale are recorded in the
Purchases account. For a cash purchase, Cash is credited; for a credit purchase, Accounts Payable
is credited.
*38. If payment is made within the discount period, the amount of the discount is credited to the
account Purchases Discounts. When an invoice is not paid within the discount period, then the
usual entry is made with a debit to Accounts Payable and a credit to Cash.
LECTURE OUTLINE
A. Merchandising Operations.
1. The primary source of revenues for merchandising companies is the sale
of merchandise, referred to as sales revenue or sales.
2. A merchandising company has two categories of expenses:
period.
b. Operating expenses are expenses incurred in the process of earning
sales revenues.
3. Gross profit is the difference between sales revenue and cost of goods sold.
4. In a perpetual inventory system, companies keep detailed records of the
INVESTOR INSIGHT
Morrow Snowboards implemented a perpetual inventory system to improve its
control over inventory. It also stated that it would perform a physical inventory
count every quarter until it felt that the perpetual inventory system was reliable.
If a perpetual system keeps track of inventory on a daily basis, why do companies
ever need to do a physical count?
B. Recording Purchases and Sales of Merchandise.
1. Under a perpetual inventory system:
accounts rather than to Inventory.
b. The company debits the Inventory account for all purchases of
merchandise and freight-in, and credits it for purchase discounts and
purchase returns and allowances. Freight terms are expressed as
either FOB shipping point or FOB destination.
Out (Delivery Expense).
c. A purchaser may return goods to the seller for credit because the
goods are damaged or defective, or of inferior quality. The return of
goods to the seller is known as a purchase return.
discount a purchase discount.
(2) In accordance with the revenue recognition principle, companies
record sales revenues when the performance obligation is
satisfied. Typically the performance obligation is satisfied when
goods transfer from the seller to the buyer.
(4) The cost of goods sold is recognized for each sale by debiting
Cost of Goods Sold and crediting Inventory.
returns and allowances.
(6) Companies record the cost of goods returned by decreasing Cost of
Goods Sold and increasing the Inventory account.
(7) A sales discount occurs when the seller offers a cash discount for
prompt payment of the balance due.
debit.