Chapter 5
Merchandising Operations
Review Questions
1. What is a merchandiser, and what is the name of the merchandise that it sells?
2. What are the two types of merchandisers? How do they differ?
Merchandisers are often identified as either wholesalers or retailers. A wholesaler is a merchandiser
3. Describe the operating cycle of a merchandiser.
The operating cycle of a merchandiser is as follows: It begins when the company purchases
4. What is Cost of Goods Sold (COGS), and where is it reported?
5. How is gross profit calculated, and what does it represent?
6. What are the two types of inventory accounting systems? Briefly describe each.
The two types of inventory accounting systems are the periodic inventory system and the perpetual
7. What is an invoice?
8. What account is debited when recording a purchase of inventory when using the perpetual inventory
system?
9. What would the credit terms of “2/10, n/EOM” mean?
The credit terms “2/10, n/EOM” means that the purchaser can deduct 2% from the total bill
10. What is a purchase return? How does a purchase allowance differ from a purchase return?
A purchase return is when businesses allow purchasers to return merchandise that is defective,
11. Describe FOB shipping point and FOB destination. When does the buyer take ownership of the
goods, and who typically pays the freight?
FOB shipping point means the buyer takes ownership (title) to the goods after the goods leave the
12. How is the net cost of inventory calculated?
13. What are the two journal entries involved when recording the sale of inventory when using the
perpetual inventory system?
The two journal entries involved when recording the sale of inventory when using the perpetual
14. When granting a sales allowance, is there a return of merchandise inventory from the customer?
Describe the journal entry(ies) that would be recorded.
15. What is freight out, and how is it recorded by the seller?
16. How is net sales revenue calculated?
Net Sales Revenue is calculated as Sales Revenue less Sales Returns and Allowances and Sales
Discounts.
17. What is inventory shrinkage? Describe the adjusting entry that would be recorded to account for
inventory shrinkage.
Inventory shrinkage is the loss of inventory that occurs because of theft, damage, and errors. The
18. What are the four steps involved in the closing process for a merchandising company?
The four-step closing process for a merchandising company are:
19. Describe the single-step income statement.
The single-step income statement is the income statement format that groups all revenues together
20. Describe the multi-step income statement.
21. What financial statement is merchandise inventory reported on, and in what section?
Merchandise inventory is shown as a current asset on the Balance Sheet.
22. What does the gross profit percentage measure, and how is it calculated?
23A. What account is debited when recording a purchase of inventory when using a periodic inventory
system?
24A. When recording purchase returns and purchase allowances under the periodic inventory system,
what account is used?
25A. What account is debited when recording the payment of freight in when using the periodic
inventory system?
26A. Describe the journal entry(ies) when recording a sale of inventory using the periodic inventory
system.
When recording sales of merchandise inventory using the periodic system you will debit Cash or
27A. Is an adjusting entry needed for inventory shrinkage when using the periodic inventory system?
Explain.
An adjusting entry is not needed for inventory shrinkage when using the periodic system. The
28A. Highlight the differences in the closing process when using the periodic inventory system rather
than the perpetual inventory system.
The two main differences in the closing entries are in the first two steps. With step 1 in the
accounts.
29A. Describe the calculation of cost of goods sold when using the periodic inventory system.
The Cost of Goods Sold account is calculated by adding Beginning Merchandise Inventory plus
Short Exercises
For all short exercises, assume the perpetual inventory system is used unless stated otherwise. Round
all numbers to the nearest whole dollar unless stated otherwise.
S5-1 Comparing periodic and perpetual inventory systems
Learning Objective 1
For each statement below, identify whether the statement applies to the periodic inventory system or
perpetual inventory system.
a. Normally used for relatively inexpensive goods.
b. Keeps a running computerized record of merchandise inventory.
c. Achieves better control over merchandise inventory.
d. Requires a physical count of inventory to determine the quantities on hand.
e. Uses bar codes to keep up-to-the-minute records of inventory.
SOLUTION
a.
Periodic
Perpetual
c.
Perpetual
Periodic
e.
Perpetual
S5-2 Journalizing purchase transactions
Learning Objective 2
Consider the following transactions for Partytime Toys:
Requirements
1. Journalize the purchase transactions. Explanations are not required.
2. In the final analysis, how much did the inventory cost Partytime Toys?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Oct. 8
Merchandise Inventory
141,800
Accounts Payable
141,800
Oct. 11
Accounts Payable
14,100
Merchandise Inventory
14,100
Oct. 15
Accounts Payable ($141,800 − $14,100)
127,700
Cash ($127,700 − $2,554)
125,146
Merchandise Inventory ($127,700 × 0.02)
S5-3 Journalizing purchase transactions
Learning Objective 2
Consider the following transactions for Derry Drug Store:
Requirements
1. Journalize the purchase transactions. Explanations are not required.
2. In the final analysis, how much did the inventory cost Derry Drug Store?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Jun. 2
Merchandise Inventory
23,000
Accounts Payable
23,000
Merchandise Inventory
110
Cash
Accounts Payable
6,200
Merchandise Inventory
Accounts Payable ($23,000 − $6,200)
16,800
Cash ($16,800 – $336)
16,464
Merchandise Inventory ($16,800 × 0.02)
S5-4 Journalizing sales transactions
Learning Objective 3
Journalize the following sales transactions for Paul Sportswear. Explanations are not
required.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Aug. 1
Accounts Receivable
66,000
Sales Revenue
66,000
Cost of Goods Sold
33,000
33,000
Sales Returns and Allowances
Accounts Receivable
Merchandise Inventory
Cash ($61,000 − $1,220)
59,780
Sales Discounts ($61,000 × 0.02)
Accounts Receivable ($66,000 − $5,000)
61,000
S5-5 Journalizing purchase and sales transactions
Learning Objectives 2, 3
Suppose Muddyriver.com sells 2,000 books on account for $19 each (cost of these books is $22,800),
Requirements
1. Journalize The Salem Store’s October 2016 transactions.
2. Journalize Muddyriver.com’s October 2016 transactions.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Oct. 10
Merchandise Inventory (2,000 × $19)
38,000
Accounts Payable
38,000
Accounts Payable (100 × $19)
Merchandise Inventory
Accounts Payable ($38,000 − $1,900)
36,100
Cash ($36,100 – $361)
35,739
Merchandise Inventory ($36,100 × 0.01)
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Oct. 10
Accounts Receivable (2,000 × $19)
38,000
Sales Revenue
38,000
Cost of Goods Sold
22,800
22,800
Sales Returns and Allowances (100 × $19)
Accounts Receivable
Merchandise Inventory
Cash ($36,100 − $361)
35,739
Sales Discounts ($36,000 × 0.01)
Accounts Receivable ($38,000 − $1,900)
36,100
S5-6 Adjusting for inventory shrinkage
Learning Objective 4
Carla’s Furniture’s unadjusted Merchandise Inventory account at year-end is $62,000. The physical
count of inventory came up with a total of $60,800. Journalize the adjusting entry needed to account for
inventory shrinkage.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Cost of Goods Sold ($62,000 − $60,800)
S5-7 Journalizing closing entries
Learning Objective 4
Rockwall RV Center’s accounting records include the following accounts at December 31, 2016.
Requirements
1. Journalize the required closing entries for Rockwall.
2. Determine the ending balance in the Retained Earnings account.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Sales Revenue
710,000
Interest Revenue
4,000
Income Summary
714,000
Income Summary
453,000
368,000
Income Summary
261,000
261,000
Retained Earnings
Requirement 2
Ending Balance in Retained Earnings is $252,400 ($46,400 + $261,000 – $55,000)
Use the following information to answer Short Exercises S5-8 and S5-9.
Carissa Communications reported the following figures from its adjusted trial balance for its first year of
business, which ended on July 31, 2016:
S5–8 Preparing a merchandiser’s income statement
Learning Objective 5
Prepare Carissa Communications’s multi-step income statement for the year ended
July 31, 2016.
SOLUTION
CARISSA COMMUNICATIONS
Income Statement
Year Ended July 31, 2016
Sales Revenue
$ 42,000
Less: Sales Returns and Allowances
7,400
4,300
Net Sales Revenue
$ 30,300
Cost of Goods Sold
Gross Profit
Operating Expenses:
1,300
3,100
4,400
Operating Income
7,100
Other Revenues and (Expenses):
Net Income
$ 7,080
S5–9 Preparing a merchandiser’s statement of retained earnings and balance sheet
Learning Objective 5
Requirements
1. Prepare Carissa Communications’s statement of retained earnings for the year ended July 31, 2016.
Assume that there were no dividends declared during the year and that the business began on August
1, 2015.
2. Prepare Carissa Communications’s classified balance sheet at July 31, 2016. Use
the report format.
SOLUTION
Requirement 1
CARISSA COMMUNICATIONS
Statement of Retained Earnings
Year Ended July 31, 2016
Retained Earnings, August 1, 2015
Net income for the year
$ 7,080
Dividends
Retained Earnings, July 31, 2016
$ 7,080
Requirement 2
CARISSA COMMUNICATIONS
Balance Sheet
July 31, 2016
Assets
Current Assets:
Cash
$ 4,100
Accounts Receivable
3,400
Merchandise Inventory
1,200
Total Current Assets
$ 8,700
Plant Assets:
Equipment, Net
Total Plant Assets
Total Assets
$ 17,200
Current Liabilities:
Accounts Payable
$ 4,900
Accrued Liabilities
2,000
Total Current Liabilities
$ 6,900
Long-term Liabilities:
Total Liabilities
Common Stock
Retained Earnings
Total Liabilities and Stockholders’ Equity
$ 17,200
S5-10 Computing the gross profit percentage
Learning Objective 6
Morris Landscape Supply’s selected accounts as of December 31, 2016, follow. Compute the gross
profit percentage for 2016.
SOLUTION
Sales Revenue
$ 141,000
Less: Sales Returns and Allowances
Sales Discounts
Net Sales
Cost of Goods Sold
Gross Profit
S5A-11 Journalizing purchase transactions—periodic inventory system
Learning Objective 7
Appendix 5A
Consider the following transactions for Garnier Packing Supplies:
Requirements
1. Journalize the purchase transactions assuming Garnier Packing Supplies uses the periodic inventory
system. Explanations are not required.
2. What is the amount of net purchases?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Apr. 10
Purchases
156,000
Accounts Payable
156,000
Accounts Payable
Purchase Returns and Allowances
Accounts Payable ($156,000 – $11,000)
145,000
Cash ($145,000 − $4,350)
140,650
Purchase Discounts ($145,000 × 0.03)
Requirement 2
The amount of net purchases = $140,650 ($156,000 − $11,000 − $4,350)
S5A-12 Journalizing sales transactions—periodic inventory system
Learning Objective 7
Appendix 5A
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Dec. 3
Accounts Receivable
44,800
Sales Revenue
44,800
Sales Returns and Allowances
Accounts Receivable
Cash ($43,900 − $1,317)
42,583
Sales Discounts ($43,900 × 0.03)
Accounts Receivable ($44,800 − $900)
43,900
S5A-13 Journalizing closing entries—periodic inventory system
Learning Objective 7
Appendix 5A
D & L Printing Supplies’s accounting records include the following accounts at
December 31, 2016.
Requirements
1. Journalize the required closing entries for D & L Printing Supplies assuming that D & L uses the
periodic inventory system.
2. Determine the ending balance in the Retained Earnings account.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Sales Revenue
295,100
Purchase Returns and Allowances
21,200
Purchase Discounts
2,600
Merchandise Inventory (ending)
99,500
Income Summary
418,400
Income Summary
348,200
189,600
122,000
Income Summary
70,200
Retained Earnings
27,100
Requirement 2
S5A-14 Computing cost of goods sold in a periodic inventory system
Learning Objective 7
Appendix 5A
X Wholesale Company began the year with merchandise inventory of $11,000. During the year, X
purchased $93,000 of goods and returned $6,700 due to damage. X also paid freight charges of $1,200
on inventory purchases. At year-end, X’s ending merchandise inventory balance stood at $17,300.
Assume that X uses the periodic inventory system. Compute X’s cost of goods sold for the year.
SOLUTION
Beginning Merchandise Inventory
$ 11,000
Net Cost of Purchases
Cost of Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
Exercises
For all exercises, assume the perpetual inventory system is used unless stated otherwise. Round all
numbers to the nearest whole dollar unless stated otherwise.
E5-15 Using accounting vocabulary
Learning Objectives 1, 2, 3
Match the accounting terms with the corresponding definitions.
SOLUTION
1.
h
2.
d
3.
j
4.
a
5.
i
6.
b
7.
g
8.
e
9.
f
c
E5-16 Journalizing purchase transactions from an invoice
Learning Objective 2
3. Oct. 1 Cash $769.35
Kingston Tires received the following invoice from a supplier (Fields Distribution, Inc.):
Requirements
1. Journalize the transaction required by Kingston Tires on September 23, 2016. Do not round numbers
to the nearest whole dollar. Assume tires are purchased on account.
2. Journalize the return on Kingston’s books on September 28, 2016, of the D39–X4 Radials, which
were ordered by mistake. Do not round numbers to the nearest whole dollar.
3. Journalize the payment on October 1, 2016, to Fields Distribution, Inc. Do not round numbers to the
nearest whole dollar.