Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 06—Merchandising Activities
Financial and Managerial Accounting, 18e 6-1
6 MERCHANDISING ACTIVITIES
Chapter Summary
The introduction of merchandising provides a rich set of challenges for the student. These
range from the problem of how to best account for the acquisition and sale of inventory to the
development of accounting information to support the operating decisions of owners and
managers.
The chapter opens with an introduction to the nature of a merchandising business. This
discussion centers on the operating cycle of the merchandising business and introduces the new
concepts found on the income statement of a merchandiser. The nature and use of subsidiary
ledgers is next introduced. Our intent is to demonstrate to the student that a single information
system can be designed to serve multiple objectives. In this case, the accounting system provides
the information required to meet financial reporting obligations, and through the use of
subsidiary ledgers, produces the information required to serve the needs of company personnel in
conducting daily business operations.
The core of the chapter explains the use of the perpetual and periodic inventory systems.
Emphasis is placed on three topics: recording the acquisition of merchandise inventory,
recording the sale of merchandise, and the determination of the cost of goods sold for
presentation on the income statement. The relative merits of the two inventory systems are
discussed in closing the section.
Numerous modifications to the accounting system designed to improve its efficiency are
covered in some detail. We begin with a brief introduction to the nature of special journals. This
is followed by an extensive discussion of additional transactions relating to purchases and sales.
Topics covered include: recording purchases by the net and gross price methods, recording
purchase returns, transportation costs, recording sales discounts and sales returns and allowances,
delivery expenses, and accounting for sales taxes.
The chapter concludes by demonstrating the use of gross profit in evaluating the
performance of a merchandising company.
Learning Objectives
1. Describe the operating cycle of a merchandising company.
2. Understand the components of a merchandising company’s income statement.
3. Account for purchases and sales of merchandise in a perpetual inventory system.
4. Explain how a periodic inventory system operates.
5. Discuss the factors to be considered in selecting an inventory system.
6. Account for additional merchandising transactions related to purchases and sales.
7. Define special journals and explain their usefulness.
Chapter 06—Merchandising Activities
6-2 Instructor’s Resource Manual
8. Measure the performance of a merchandising business.
Brief Topical Outline
A. Merchandising companies
1. The operating cycle of a merchandising company
a. Comparing merchandising activities with manufacturing activities
b. Retailers and wholesalers
2. Income statement of a merchandising company
3. Accounting system requirements for merchandising companies
4. Two approaches used in accounting for merchandise inventories
B. Perpetual inventory systems
1. Purchases of merchandise
2. Sales of merchandise
3. Payment of accounts payable to suppliers
4. Collection of accounts receivable from customers
5. Taking a physical inventory—see International Case in Point (page 258)
6. Closing entries in a perpetual inventory system—see Your Turn (page 258)
C. Periodic inventory systems
1. Operation of a periodic inventory system
a. Data for an illustration
b. Recording purchases of merchandise
c. Computing the cost of goods sold
d. Recording inventory and cost of goods sold
2. Closing process in a periodic inventory system
a. Creating a cost of goods sold account
b. Completing the closing process
3. Comparison of perpetual and periodic inventory systems
a. Who uses perpetual systems?—see International Case in Point (page 262)
b. Who uses periodic systems?
4. Selecting an inventory system
a. The trend in today’s business world—see Your Turn (page 263)
D. Transactions relating to purchases
1. Credit terms and cash discounts
a. Recording purchases at gross invoice price
2. Returns of unsatisfactory merchandise
3. Transportation costs on purchases
E. Transactions relating to sales
1. Sales returns and allowances
2. Sales discounts—see Ethics, Fraud, & Corporate Governance (page 270)
3. Delivery expenses
4. Accounting for sales taxes
F. Modifying an accounting system—see Pathways Connection (page 269)
1. Special journals provide speed and efficiency
G. Concluding remarks
Chapter 06—Merchandising Activities
Financial and Managerial Accounting, 18e 6-3
Topical Coverage and Suggested Assignments
Class
Meetings on
Chapter
Topical
Outline
Coverage
Discussion
Questions*
Brief
Exercises*
Exercises*
Problems*
Critical
Thinking
Cases*
1
A – B
1, 2, 3,
1, 2
2, 3, 4
1, 2, 5
1
2
C – D
6, 7
4, 6
6, 7, 8, 13
4
3
E – H
9, 13 15
10, 11
5, 9, 10, 11
4, 6
*Homework assignment (to be completed prior to class)
Comments and Observations
Teaching Objectives for Chapter 6
Our objectives in presenting this chapter are to:
1. Describe the operating cycle of a merchandising company.
2. Understand the components of a merchandising company’s income statement.
3. Account for purchases and sale of merchandise using a perpetual inventory system.
4. Describe accounting for purchases and sale of merchandise using a periodic inventory
system.
5. Distinguish between perpetual and periodic inventory systems.
6. Illustrate accounting for cash discounts, merchandise returns, transportation costs, and sales
taxes.
7. Demonstrate the computation and interpretation of gross profit margins.
General Comments
We continue to use the perpetual inventory system as our primary means of accounting
for inventories and the cost of goods sold. This reflects our goal of developing students’
understanding of the real-world environment in which accounting information is developed and
used. Today, all large businesses—and many small ones—use perpetual inventory systems.
Because of the increasing use of inventory software by even the smallest business operations, the
trend toward perpetual systems is certain to continue.
We also find that perpetual systems are considerably easier for students to understand.
The periodic model⎯beginning inventory + purchases − ending inventory⎯is not a familiar
concept to the introductory student. Also, this model seems to undermine the very concept of
accounting providing useful (in this case, timely) information to decision makers. The evaluation
of merchandising operations via gross profit rates emphasizes the timeliness of the information
provided by a perpetual system. A perpetual system not only provides timely information but
Chapter 06—Merchandising Activities
6-4 Instructor’s Resource Manual
also follows the same “flow of costs” as has been described for office supplies, prepaid
insurance, and depreciable assets. That is, when an asset is acquired, its cost is debited to an asset
account; when the asset is consumed in business operations, its cost is transferred to an expense
account.
In illustrating the flow of merchandise through a perpetual inventory system, we quickly
review Exercise 4, which takes only a couple of minutes, and reinforce the concepts with a
thorough review of Problem 1. We especially recommend Problem 1, because it requires
students to interpret and use the information that they have developed.
We use Exercise 13 to introduce the periodic system that illustrates not only the
mechanics of this method but also the environment in which it is most likely to be found. We
also recommend Case 1 for highlighting the environmental factors leading to a choice of
inventory system.
We also stress the need for an annual physical inventory even when a perpetual system is
in use and review the adjusting entry to record shrinkage loss. Without this discussion, some
students are confused by the fact that many businesses record sales transactions on modern point-
of-sale terminals but then are still “Closed for Taking Inventory,” or offer “Inventory Clearance
Sales” near year-end.
Chapter 06—Merchandising Activities
Financial and Managerial Accounting, 18e 6-5
Supplemental Exercises
Group Exercise
Convene as a group and select a hypothetical merchandising business that you will open,
own, and operate together. For example, you may choose a department store, sporting goods
store, grocery store, clothing boutique, or surf shop. As a group, prepare a presentation that
includes the following elements:
a. Will you be using the periodic inventory system or the perpetual inventory system?
Why?
b. How frequently will you perform a physical inventory count?
c. What sort of safeguards (i.e. internal controls) will you put into place to protect your
inventory from theft, damage, and obsolescence?
Internet Exercise
Retrieve the most recent annual report 10-K filings for American Eagle and The GAP
The GAP is GPS. Using the ticker symbol often makes the financial statement retrieval more
efficient.
a. Compare the value of each companies merchandise inventories as reported on the
face of the consolidated balance sheets.
b. Compute each company’s gross profit as a percentage of sales.
c. Which company appears to be stronger from an operating perspective?
Chapter 06—Merchandising Activities
6-6 Instructor’s Resource Manual
CHAPTER 6 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question in the space provided.
1 Which of the following businesses is most likely to use a periodic inventory system?
a An aircraft manufacturer.
b A supermarket that is part of a national chain.
c An independently owned art gallery with a manual accounting system.
d A beer bar.
2 A periodic inventory system eliminates the need for:
a Taking an annual physical inventory.
b Recording the revenue from sales transactions.
c Recording the cost of merchandise sold as sales occur.
d None of the above.
3 If management wants to know the cost and quantity of merchandise on hand at all times, the
business will probably:
a Use a periodic inventory system.
b Maintain an inventory subsidiary ledger.
c Take a complete physical inventory each day.
d Debit all purchases of merchandise directly to the Cost of Goods Sold account.
4 In a perpetual inventory system, the entry to record the cost of goods sold always includes an
entry of equal amount to the:
a Inventory account.
b Sales account.
c Purchases account.
d None of the above.
5 Prior to taking a physical inventory at year-end, the perpetual inventory records of Athena
Designs showed an inventory of $26,000, sales of $358,000, and a cost of goods sold of
$215,000. The year-end physical inventory indicated merchandise on hand costing $24,000. The
company’s gross profit for the year was:
a $334,000.
b $145,000.
c $141,000.
d Some other amount.
Chapter 06—Merchandising Activities
Financial and Managerial Accounting, 18e 6-7
CHAPTER 6 NAME #
10-MINUTE QUIZ B SECTION
At the end of last year, Helen’s, Inc. had merchandise costing $115,000 in inventory. During January of
the current year, the company purchased merchandise costing $35,000, and sold merchandise which it had
purchased at a total cost of $55,000.
Based upon the above information, place the best answer in the space provided. In questions 1 through 3,
assume that Helen’s uses a perpetual inventory system.
1 The total debited to the Inventory account during January was:
a $0.
b $35,000.
c $55,000.
d Some other answer.
2 The balance in the Inventory account at January 31 was:
a $35,000.
b $205,000.
c $95,000.
d Some other answer.
3 The amount of costs transferred from the Inventory account to the Cost of Goods Sold account
during January was:
a $0.
b $35,000.
c $55,000.
d Some other answer.
In questions 4 through 6, assume that Jerome’s, Inc. uses a periodic inventory system and takes a physical
inventory only at year-end.
4 The total debited to the Inventory account during January was:
a $0.
b $35,000.
c $55,000.
d Some other answer.
5 The balance in the Inventory account at January 31 was:
a $0.
b $105,000.
c $115,000.
d Some other answer.
6 The amount of costs transferred from the Inventory account to the Cost of Goods Sold account
during January was:
a $0.
b $35,000.
c $55,000.
d Some other answer.
Chapter 06—Merchandising Activities
6-8 Instructor’s Resource Manual
CHAPTER 6 NAME #
10-MINUTE QUIZ C SECTION
At the end of last year, Baron’s Bazaar had merchandise costing $381,000 in inventory. During January
of the current year, the company purchased merchandise costing $133,500, and sold merchandise that it
had purchased at a total cost of $109,300.
a Assume that Baron’s Bazaar uses a perpetual inventory system.
(1) The total amount debited to the Inventory account during January was:
$________________
(2) The balance in the Inventory account at January 31 was:
$________________
(3) The amount of costs transferred from the Inventory account to the Cost of Goods Sold account
during January was:
$________________
b Assume that Baron’s Bazaar uses a periodic inventory system and takes a physical inventory only
at year-end (December 31). (Note: $0 may be an appropriate answer to one or more of the
following questions.)
(1) The total amount debited to the Inventory account during January was:
$________________
(2) The balance in the Inventory account at January 31 was:
$________________
(3) The amount of costs transferred from the Inventory account to the Cost of Goods Sold account
during January was:
$________________
Chapter 06—Merchandising Activities
Financial and Managerial Accounting, 18e 6-9
CHAPTER 6 NAME #
10-MINUTE QUIZ D SECTION
Phillips Co. is an office supply store. The company uses a perpetual inventory system, records purchases
at net cost, and records sales revenue at full invoice price.
Record the following transactions in the company’s general journal. To conserve space, you may omit the
written explanations which normally should accompany the entries.
July 1 Purchased four Lorac copying machines on account from Lorac Corp. Total invoice price
was $2,500 per machine ($10,000 total); terms of 2/10, n/30. These machines are
intended for resale.
3 Found one of the Lorac copiers to be defective and returned it to Lorac, thus reducing the
amount owed.
9 Sold one of the Lorac copiers to Morris Realty. The sales price was $3,500, terms 2/10,
n/60.
10 Paid the remaining amount owned to Lorac Corp., less the allowable discount.
19 Received full payment from Morris, less the allowable discount.
Date
General Journal
Chapter 06—Merchandising Activities
6-10 Instructor’s Resource Manual
SOLUTIONS TO CHAPTER 6 10-MINUTE QUIZZES
QUIZ A
1 D
Learning Objective: 3, 4, 5
QUIZ B
QUIZ C
a
Chapter 06—Merchandising Activities
Financial and Managerial Accounting, 18e 6-11
QUIZ D*
Date
General Journal
20__
Chapter 06—Merchandising Activities
6-12 Instructor’s Resource Manual
Assignment Guide to Chapter 6
Brief
Exercises
Exercises
Problems
Cases
Net
Item Number
1-11
1-15
1
2
3
4
5
6
7
8
1
2
3
4
5
Time estimate (in minutes)
<10
<15
35
15
20
30
30
45
30
40
35
25
n/a
20
25
Difficulty rating
E
E
M
E
M
M
S
S
S
S
M
M
n/a
M
E
Learning Objectives:
1, 2
1. Describe the operating cycle of a
merchandising company.
2. Understand the components of a
merchandising company’s income
statement.
1, 3, 4, 5, 6, 7
3
