5. Merchandising Operations PDF

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Taught by Glen Rechtschaffen...

Description

LO1: Merchandising Operations Inventory  

Inventories are intended to be sold for profit Supplies are intended to be used for profit

Inventories are current assets held 1. For sale in the ordinary course of business 2. In the process of production for such sale 3. In the form of materials or supplies to be consumed in the production process Inventories:  Are an economic resource- the right to sell the good  Will provide future economic benefits- cash from selling the inventory

Merchandising  

Merchandising companies buy & sell goods The primary source of revenues is referred to as sales revenue or sales

LO2: Inventory Systems Perpetual System     

Perpetual = continually being updated all the time Widespread use due to technological feasibility "Merchandise Inventory" and "Cost of Goods Sold" are perpetually updated as transactions occur Periodic inventory accounts still required to make sure records match up, in case of theft/damage Better control over inventory using this system

Periodic System 

Periodic = calculated periodically (at the end of the period)

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Used by small businesses with low cost items "Merchandise Inventory" and "Cost of Goods Sold" are updated at the end of the accounting period, after inventory is counted & costed "Inventory" account important to work out COGS

LO3: Buyer's Records Gross vs Net Method Gross Method   

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Initially records the purchase at gross price (the normal price) After, it depends whether payment is made within discount period or after If payment made within discount period, accounts payable is debited for the gross price, cash is credited for the difference of gross price & discount received and merchandise inventory is credited for the discount received (new value of merchandise inventory) If discount opportunity is missed, the journal entry is made for the full payment like normal

Net Method   

Initially records the purchase at net price (i.e. gross price less potential discount) If payment made within discount period, accounts payable is debited for the net price & cash is credited If discount opportunity is missed, accounts payable is debited for the net price, discounts lost are debited for the lost discount and cash is credited for the gross price

Inventory Purchases X/Y, n/Z  X = discount in %  Y = how many days buyer has to take the discount (otherwise no discount)  Z = if not claiming discount, how many days the buyer must pay within  E.g. 2/7, n/30 = discount at 2% if paid within 7 days, otherwise buyer must pay in 30 days  Gross method = no discount  Net method = discount

Freight Costs

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FOB = Free on Board FOB Shipping Point = buyer owns goods once delivered to carrier FOB Destination = buyer owns goods once delivered to them Sometimes the seller pays & sometimes the buyer pays A contract determines who pays freight & when ownership to the goods passes If buyer pays, freight costs are part of inventory costs

Purchases Returns & Allowances  

Purchase return - buyer may not be happy with inventory so returns to supplier e.g. wrong shipment/damage goods Purchase allowance - supplier gives the buyer a reduction in price because of their dissatisfaction

Purchase Discounts Paying within the discount period

Paying after the discount period

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Discounts Lost = temporary account (financing cost), an expense Every time discounts are lost = good internal control check

Cost of Merchandise Inventory 

The cost of inventory includes: o purchase costs (invoice) o costs of conversion (making inventory into the way you want to sell them, such as manufacturing, labour & overheads for transformation) o costs incurred in bringing the inventories to their present location (freight/shipping, insurance incurred during shipment, non-refundable taxes)

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costs incurred in maintaining the condition of the inventories (in-house alterations & storage prior to sale) Not part of cost of inventory: o Finance expenses (interest & discounts lost) o GST (is refundable) but small businesses may add cost of GST as they are not registered for a refund Deductions from cost: o Returns o Allowances o Discounts

LO4: Seller's Records Inventory Sales 

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Under the perpetual system, the seller always makes two entries: 1. To record the sale of goods & receivable owed 2. To record the cost of goods sold & merchandise inventory used Entries are journalised as if there are 2 events The seller has no control of payments (you will not know when customers will pay so there is no net method)

Sales Returns & Allowances  

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Buyer returns goods or asks for an allowance If goods are returned, two entries are required: 1. Reduce receivable & sales revenue recorded earlier 2. Record the increase in inventory & reduce the cost of goods sold If goods are not returned & the seller grants an allowance, only the first entry is required To highlight mistakes, a temporary account is used (Sales Returns & Allowances)

Sales Discounts  

What is granted when buyer pays within the discount period? Sales Discount = Temporary account, like an expense account

Freight Costs Freight costs incurred by the seller are an operating expense not COGS

LO5: Preparing a Statement of Comprehensive Income

LO6: Evaluating Profitability Gross Profit Ratio Gross Profit Net Sales  

Gross profit = Net sales - COGS Net sales = Revenue from sales of merchandise - (Sales returns & allowances + Sales discounts)

Operating Expense Ratio Operating Expenses Net Sales  

Operating expenses = excludes COGS, financing expenses, losses & income tax evasion Net sales = Revenue from sales of merchandise - (Sales returns & allowances + Sales discounts)

Profit Margin Ratio

Profit Net Sales  

Profit = profit after tax Net sales = Revenue from sales of merchandise - (Sales returns & allowances + Sales discounts)

Return on Assets EBIT Average Assets   

EBIT = profit before interest & taxes Average assets = (Beginning + Ending total assets)/2 ROA measures operating performance independent of stakeholder claims

LO7: The Goods & Services Tax   

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GST is a value-added tax on domestic consumption within NZ Can be claimed back (current receivable) or paid back (current payable) Generally, most businesses: o Collect GST from customers when they sell their products; this amount is due to the government- a current payable o Pay GST to suppliers when they buy their products; this amount may be claimed back from the government- a current receivable o Looking at how much you owe & how much you are owed, the difference is either a refund or a payment by the government This way, tax is levied on the value added by a business at each stage of the production & distribution chain o Supplier pays GST to government o Supplier adds value to the g/s through production/manufacturing etc. o Consumer pays for the new g/s with higher value o The difference goes to the government as value is added at each step Because the final consumer cannot claim GST back from the government, the consumer winds up with all the tax GST rate in NZ: 15% GST is paid for in full amount for prepayments

LO8: Accounting for GST If the invoice is GST inclusive, then divide by 1.15 to get the non-GST portion of the invoice E.g.  Good = $100

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GST = $15 Total = $115 115/1.15 = 100.0 NOT $115 x 0.85 = $97.75

Exceptions to GST  

Businesses with sales revenue of less than $60,000 need not be GST registered (they do not charge GST to customers & cannot claim back GST) Some g/s are exempt e.g. financial transactions (loans, securities transactions, interest, dividends, bank fees)

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Some activities are "zero-rated" e.g. exports of g/s (domestic consumption tax so no GST if selling overseas, GST is paid to country's government for imports), sales of land/buildings between GST registered businesses Employees' wages Non-accrual type adjusting journal entries such as depreciation

Accounting Implications 

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If the business is GST registered o GST is neither an expense or a revenue o Most assets, liabilities, expenses & revenues are stated without GST. Accounts receivable/payable are exceptions o The GST clearing account does not have a normal balance o GST does not appear on the Statement of Comprehensive Income (can be debit asset or credit - liability) If the business is not GST registered, then GST paid increases the cost of assets & the amount of expenses...