Financial and Managerial Accounting, 9th Edition
4-1
CHAPTER 4
ACCOUNTING FOR MERCHANDISING OPERATIONS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA, BTN, DA
Conceptual objectives
activities and cost flows.
BTN 4-1, BTN 4-2,
C1. Describe merchandising
1, 2
4-1, 4-2, 4-3
4-1, 4-2
4-3, 4-4
DA 4-1, DA 4-2
BTN 4-3, BTN 4-4
Analytical objectives:
A1. Compute and analyze the acid-
test ratio and gross margin ratio.
4-22, 4-23
4-19, 4-20,
4-21,
4-5, GL 4-3
AA 4-1, AA 4-2,
AA 4-3
Procedural objectives:
a perpetual system.
4-9
4-11, 4-12,
GL 4-1,
GL 4-2
DA 4-3, BTN 4-4
P2. Analyze and record transactions
perpetual system.
4
4-10,
4-11, 4-12, 4-13,
4-6, 4-7,
4-11, 4-12,
4-1, 4-2, SP,
GL 4-1,
GL 4-2
BTN 4-1
P1. Analyze and record transactions
6, 7, 8
4-1, 4-4, 4-5,
4-3, 4-4, 4-5,
4-1, 4-2, SP
DA 4-1, DA 4-2,
P3. Prepare adjustments and close
accounts for a merchandising
company.
5
4-14, 4-15
4-14, 4-15,
4-16
4-4, 4-5, 4-6
SP, GL 4-3
BTN 4-2
P4. Define and prepare multiple-step
and single-step income
statements.
3, 7
4-16, 4-17, 4-18,
4-19, 4-20, 4-21,
4-17, 4-18,
4-19
4-3, 4-5, SP,
GL 4-3, ES
DA 4-3, AA 4-3
(Appendix 4A)
recognition rules.
(Appendix 4B)
using the gross method and net
method. (Appendix 4C)
4-30, 4-31
4-28, 4-29
P5.A Record and compare
merchandising transactions
4-24, 4-25, 4-26,
4-27
4-22, 4-23,
4-24,
BTN 4-2
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
Reporting Income
0:30
Income Statement
0:36
Financial and Managerial Accounting, 9th Edition
BTN refers to Beyond the Numbers
GL refers to General Ledger Problems
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints
and Exercise Presentations. These are indicated in the Related Assignment Materials grid in blue bold font.
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1
4-1
Merchandise Accounts and Computations
1:58
4-2
Merchandise Purchases
3:22
4-3
Merchandise Sales
4:46
4-4
Recording Shrinkage and Closing Entries
3:02
4-5
Multiple-and Single-Step Income Statements
2:33
COMPREHENSIVE 1
4-6
Single-and Multiple-Step Income Statements,
Closing Entries, and Analysis Using Acid-Test
and Gross Margin Ratios
Req 1
0:46
Req. 2-3
3:21
Req. 4
1:57
Req. 5
1:43
Seller and Buyer
4-8
Estimating Discounts, Returns, and Allowances
4:35
Concept Overview Videos
LO
Title
Time
C1
Describe merchandising activities and cost flows.
Merchandisers
0:45
Financial and Managerial Accounting, 9th Edition
4-3
Reporting Inventory
0:29
Operating Cycle for a Merchandiser
0:43
Cost of Goods Sold
0:33
Cost Flow Example
0:59
Inventory Systems
0:45
A1
Compute and analyze the acid-test ratio and gross margin ratio.
Acid-Test Ratio
1:08
Acid-Test Ratio—Background Information
1:09
Acid-Test Ratio Illustration
1:22
Gross Margin Ratio
1:04
Gross Margin Ratio Illustration
1:45
P1
Analyze and record transactions for merchandise purchases using a perpetual
system.
Purchases without Cash Discounts
0:26
Credit Terms and Cash Discounts
1:39
Purchases with Cash Discounts
2:40
Purchases with Returns and Allowances
1:55
Purchases and Transportation Costs
2:31
Itemized Costs of Purchases
1:22
P2
Analyze and record transactions for merchandise sales using a perpetual
system.
Sales without Cash Discounts
1:09
Sales with Cash Discounts
2:06
Sales with Returns
1:57
Sales with Allowances
0:27
P3
Prepare adjustments and close accounts for a merchandising company.
Adjusting Entries for Inventory Shrinkage
0:59
Overview of Closing Entries
0:30
Closing Entries Illustration
1:09
P4
Define and prepare multiple-step and single-step income statements.
Multiple-Step Income Statement
0:53
Multiple-Step Income Statement Illustration
3:06
Single-Step Income Statement
0:28
Classified Balance Sheet
0:30
P5A
Record and compare merchandising transactions using both periodic and
perpetual inventory systems.
Periodic versus Perpetual Inventory Systems
1:50
Periodic Inventory System
1:04
Purchases Transactions
1:06
Sales Transactions
1:02
Adjusting Entries
0:34
P6B
Prepare adjustments for discounts, returns, and allowances per revenue
recognition rules.
Financial and Managerial Accounting, 9th Edition
4-4
Expected Sales Discounts
1:58
Expected Returns and Allowances
3:09
P7C
Record and compare merchandising transactions using the gross method and
net method.
Gross and Net Methods
Purchases Using Net Method
Sales Using Net Method
Synopsis of Chapter Revisions
Content complies with revenue recognition rules according to GAAP.
Added four new Quick Studies.
Added one new Exercise.
Updated analysis assignments: Company Analysis, Comparative Analysis, and Extended Analysis.
Financial and Managerial Accounting, 9th Edition
4-5
Chapter Outline
I. Merchandising Activities
A. Merchandise refers to products, also called goods, which a company buys to resell. Merchandisers
can be either wholesalers (those that buy from manufacturers and sell to retailers) or retailers (those
C. Reporting Inventory for a Merchandiser
A merchandiser’s balance sheet is the same as a service business with the exception of one
additional current asset called:
1. Merchandise inventory, or Inventory, refers to products that a company owns and intends to sell.
2. The cost of this asset includes the cost incurred to buy the goods, ship them to the store, and
make them ready for sale.
1. Perpetual inventory system—updates accounting records for each purchase and each sale of
inventory. Technological advances and competitive pressures have drastically increased the use
of this method.
2. Periodic inventory system—updates the accounting records for purchases and sales of inventory
only at the end of a period.
II. Merchandise Purchases
The invoice serves as a source document for the event.
2. Trade Discounts—deductions from list price (catalog price) to determine the invoice price (actual
selling price). Trade discounts are not entered into accounts.
A. Purchases without Cash Discounts.
Buyers view cash discounts as purchase discounts and sellers view them as sales discounts.
B. Purchase with Cash Discounts
1. Credit Terms describe cash discounts offered to purchasers by the seller for payment within a
specified period of time called the discount period.
Financial and Managerial Accounting, 9th Edition
7. Payment after Discount Period—debit Accounts Payable and credit Cash.
C. Purchases with Returns and Allowances
4. Entry on buyer’s books—debit Accounts Payable or Cash (if refund given) and credit Inventory.
1. Purchases allowances refers to a reduction in the cost of defective merchandise that a buyer
acquires.
D. Purchases and Transportation Costs—the point at which ownership is transferred (called FOB or free
on board). Two alternative points of title transfer are:
1. FOB shipping point—title transfers at shipping point and buyer pays shipping costs.
2. FOB destination—title transfers at destination and seller pays shipping costs.
a. Operating expense for seller
E. Itemized Costs of Purchases—the net cost of purchased merchandise according to the cost
principle is recorded in the Inventory account. Inventory is debited (increased) for invoice and
for management to evaluate and control.
III. Merchandise Sales—involves sales, sales discount, sales returns and allowances, and cost of
goods sold
A. Each sale of merchandise transaction involves two entries: the revenue entry and the cost
entry.
B. Sales without Cash Discounts—Revenue side: Inflow of Assets. Debit Accounts Receivable
(or Cash) and credit Sales. Cost side: Outflow of Assets: debit Cost of Goods Sold and credit
Inventory.
C. Sales with Cash Discounts
1. Sales on Credit—revenue side using the gross method is a debit Accounts Receivable and a
Financial and Managerial Accounting, 9th Edition
4-7
4. Sales Discounts is a contra revenue account—subtraction from Sales.
Sales with Returns and Allowances
5. Sales returns—merchandise that a customer returned to the seller after a sale.
9. Returned goods not defective—if inventory can be resold, seller debits Inventory and
credits Cost of Goods Sold.
10. Returned goods are defective—debit Inventory for estimated value; debit Loss from
Defective Merchandise (difference between cost and estimated value) and credit Cost
of Goods Sold (for cost).
11. Sales Returns and Allowances is a contra revenue account that is subtracted from Sales.
buyer’s Accounts Receivable.
IV. Adjusting and Closing for Merchandisers
A. Adjusting Entries for Merchandisers
Generally same as discussed for a service business with an additional adjustment needed to
update inventory to reflect any loss of inventory referred to as shrinkage.
1. Shrinkage determined by comparing a physical count of the inventory with recorded
quantities.
Financial and Managerial Accounting, 9th Edition
4-8
C. Closing Entries for Merchandisers—similar to a service business, except there are additional
V. More on Financial Statement Formats—Common formats include multiple-step and single-step.
C. Classified Balance Sheet—reports merchandise inventory as a current asset, usually after accounts
A. Multiple-Step Income Statement—details of net sales and expenses. Has three main parts:
1. Gross profit—net sales minus cost of goods sold.
receivable, according to how quickly they can be converted to cash.
VI. Decision Analysis—Acid-Test and Gross Margin Ratios
A. Acid-Test Ratio
2. Calculated by dividing gross margin by net sales.
1. Used to assess the company’s liquidity or ability to pay its current liabilities. Differs from
current ratio in that it is based on quick assets (which excludes less liquid current assets such as
VII. Periodic Inventory System (Appendix 4A)—textbook shows comparison of periodic and perpetual
in this appendix. The following chapter notes relate only to the periodic system, because the
preceding notes outline the perpetual system.
A. A periodic inventory system records merchandise acquisitions, discounts and returns in
temporary accounts (Purchases, Purchase Returns, Purchases Discounts) rather than the
VIII. Adjusting Entries under New Revenue Recognition Rules (Appendix 4B)
A. Expected Sales Discounts—Adjusting Entry: New revenue recognition rules require the
reporting of sales at the net amount expected. Period-end adjusting entry needed to estimate sales
Financial and Managerial Accounting, 9th Edition
D. Revenue Side for Expected R&A—seller credits Sales Refund Payable, current liability reflecting
amount expected to be refunded to customers and debits Sales Returns and Allowances.
VIX. Net Method for Merchandising (Appendix 4C)
Net method initially records the invoice at an amount net of any cash discount, so cash discounts
are deducted from Inventory when initially recorded.
A. Perpetual Inventory System Purchases—debit Inventory and credit Accounts Payable for the net
amount.
1. If invoice paid within discount period, debit Accounts Payable and credit Cash for net amount.
2. If invoice paid after discount period, debit Accounts Payable for net amount, debit Discounts
Financial and Managerial Accounting, 9th Edition
4-10
Chapter 4 Alternate Demonstration Problem #1
The following data was taken from ledger account balances and supplementary data
for the Whisk Company. Whisk Company uses periodic inventory method to account
for its inventory.
Merchandise inventory, beginning ………………………………………..
$ 20,000
Merchandise inventory, ending ……………………………………………..
23,000
Purchases …………………………………………………………………………….
Purchases discounts …………………………………………………………….
Purchases returns and allowances ………………………………………..
Sales discounts…………………………………………………………………….
Sales returns and allowances ……………………………………………….
10,000
Required:
Show the computation, in Income Statement format, of net sales, cost of goods sold,
and gross profit for the year ended December 31, 2022.
Financial and Managerial Accounting, 9th Edition
Chapter 4 Solution: Alternate Demonstration Problem #1
WHISK COMPANY
Income Statement
For the Year Ended December 31, 2022
Revenue from sales:
Sales …………………………………..
$400,000
Less: Sales discounts …………
$ 3,200
Sales returns and
allowances ……………..
1,800
5,000
Net sales …………………………....
395,000
Merchandise inventory, 1/1/22
Purchases …………………………..
Less: Purchase discounts …..
allowances ……………..
216,000
Goods available for sale ……..
236,000
Merchandise inventory, 12/31/22
23,000
213,000
Gross profit from sales …………..
$182,000
Financial and Managerial Accounting, 9th Edition
4-12
Chapter 4 Alternate Demonstration Problem #2
Koda Company is a wholesale company that had the following purchase and sales transactions
related to its merchandise inventory during the month of May.
May 1
Purchased $20,000 of merchandise on account from Webber Mfg. Co.
Credit terms: 2/10, n/30. FOB shipping point
Received a credit memo for the return of $5,000 of the goods purchased
on May 1, which had arrived damaged.
15
Sold merchandise on account to Dover Company for $5,000. The cost of
the merchandise was $3,000 (cost is 60% of the retail value). Terms:
2/10, n/30; FOB Destination
Requirement 1: Record the transactions assuming Koda Company uses perpetual inventory
system
Financial and Managerial Accounting, 9th Edition
4-13
Chapter 4 Solution: Alternate Demonstration Problem #2
PERPETUAL INVENTORY SYSTEM
PERIODIC INVENTORY SYSTEM
4-1
Inventory
20,000
4-1
Purchases
20,000
Accounts Payable
20,000
Accounts Payable
20,000
2
Inventory
1,000
2
1,000
Cash
1,000
Cash
1,000
6
Accounts Payable
5,000
6
Accounts Payable
5,000
Inventory
5,000
Purchase R & A
5,000
10
Accounts Payable
15,000
10
Accounts Payable
18,000
Inventory
300
Purch. Discount
300
Cash
14,700
Cash
14,700
15
Accts Receivable
5,000
15
Accts Receivable
5,000
Sales
5,000
Sales
5,000
15
Cost of Goods Sold
3,000
Inventory
3,000
16
Delivery Expense
100
16
Delivery Expense
100
Cash
100
Cash
100
17
Sales R & A
1,000
17
Sales R & A
1,000
Accts Receivable
1,000
Accts Receivable
1,000
17
Inventory
600
Cost of Goods
sold
600
24
Cash
3,920
24
Cash
3,920
Sales Discount
Sales Discount
80
Accts Receivable
4,000
Accts Receivable
4,000