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ACCT 1006Accounting and Financial ManagementWeekRecording, Analysing,Managing and ReportingMerchandisingOperations - 1Learning Objectives/Outcomes Identify the differences between a service business and a merchandising business Explain the recording of purchases under a perpetual inventory system. E...

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ACCT 1006 Accounting and Financial Management

Week3 Recording, Analysing, Managing and Reporting Merchandising Operations - 1

Learning Objectives/Outcomes

1. Identify the differences between a service business and a merchandising business 2. Explain the recording of purchases under a perpetual inventory system. 3. Explain the recording of sales revenues under a perpetual inventory system. 4. Prepare a fully classified statement of profit or loss. 5. Record the closing entries for merchandising entities (perpetual only this week, refer to appendix 5C). 6. Use ratios to analysis profitability. Readings: Chapter 4 (appendix not required until Wk 9) The University of Sydney

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LO1 - MERCHANDISING OPERATIONS – Merchandising businesses differ from a service business in that they buy and resell inventory – Inventory are all the goods held for sale in the normal course of operations – _______________ is longer than a service business due to the purchase of inventory and its eventual sale – Revenues are referred to as ________ revenue – Expenses are divided into two categories: – _____________ – direct costs associated with inventory sold – the cost from its supplier plus any additional costs necessary to get merchandise into inventory and ready for sale. – _____________ – indirect expenses in running the business The University of Sydney

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MERCHANDISING OPERATIONS continued Profit measurement process for a merchandising business

Sales revenue

Less

Cost of sales

Equals

Gross profit

Less

Operating Equals expenses

The University of Sydney

Profit (loss)

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Inventory systems

– A merchandising business must choose between a ________ or a ________ system for maintaining inventory records. – This week we will focus on the perpetual system.

The University of Sydney

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Inventory Systems – Perpetual System – Every time there is a movement of inventory into or out of the organisation, we recognise a journal entry – Requires a comprehensive inventory management and recording system which shows the value of inventory that should be on hand at any point in time – Potential problems => Theft, damage, recording errors – So ___________ at least once per year are still critical! – e.g. car dealerships, furniture stores, supermarkets, department stores – Modern technology (e.g. bar codes and optical scanners) makes the perpetual system common today • An example of an Inventory Stock Card….. The University of Sydney

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Inventory Systems – Perpetual System – Inventory Record Date Explanation

Purchases Qty

1/1

Beginning Bal

15/1

Purchases

21/1

Sales

23/1

Purchase Returns

24/1

Sales Returns

10

Unit $

650

Cost of Sales Total

Qty

650

Total

6500 3

(1)

Unit $

650*

1950

(650)

(1)

650*

(650)

Inventory Balance Qty

Unit $

Total

4

650

2800

14

650

9100

11

650

7150

10

650

6500

11

650

7150

1300

* Not of course, the price we sell it for! We’ll spend more time on inventory records next week in chapter 5 The University of Sydney

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The Periodic Inventory Systems – Periodic system – Inventory system in which the cost of day to day inventory sold is not recognised as an expense… • ‘Cost of Sales’ is determined at end of accounting period through the following equation: • Cost of Sales = Inventory on hand at the beginning of the year* + Purchases – Purchase Returns and Allowances – Inventory on hand at the end of the year* – Detailed records are ______ maintained, it is a simple accounting technique requiring few day to day journal entries, and so used widely by small businesses e.g. convenience stores, cafes. * As

ascertained by undertaking a physical ______________

The University of Sydney

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Perpetual Inventory System demonstrated

– In the following examples the inventory recording process will be demonstrated showing a series of transactions between Janine's Supplies Ltd and Tim Ltd. – Janine's Supplies Ltd sells inventories to Tim Ltd.

The University of Sydney

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LO2 - Perpetual Inventory System RECORDING PURCHASES OF INVENTORIES Example: – Purchase of inventory on credit – Tim Ltd purchased inventory from Janine's Supplies Ltd for $3,800 on May 5th – the entry by Tim Ltd would be: May 5

3 800 3 800

(To record goods purchased on account from Janine's Supplies Ltd)

The University of Sydney

Page 10

Perpetual Inventory System Purchases returns and allowances

– A purchase ________ is the return of goods by the customer – The customer will receive a refund in the form of either credit or cash – A purchase __________ occurs where the customer keeps the goods and a reduction in price is granted Journal entry is the same for both

The University of Sydney

Page 11

Perpetual Inventory System Purchases returns and allowances continued Example: Purchase Return – Tim Ltd returned goods costing $300 to Janine's Supplies Ltd on May 8th – The entry by Tim Ltd would be: May 8

300 300

(To record return of goods received from Janine's Supplies Ltd)

The University of Sydney

Page 12

Perpetual Inventory System Freight costs – Cost of freight is added to the cost of inventory where cost is charged to buyer (the sales invoice will indicate who pays the cost of transporting goods to the buyer’s place of business) – Cost is allocated to _________ account and is considered part of the cost of purchasing inventory but because of the difficulty of allocating freight costs to individual inventory items when several items are delivered at the same time, a freight-in account is often kept and the amount of freight-in is incorporated into cost of sales in the Statement of profit or loss. Example: – Tim Ltd pays We Deliver Freight Co. $150 for freight charges – the entry by Tim Ltd would be: May 6

150 150

(To record payment of freight on goods purchased) The University of Sydney

Page 13

Perpetual Inventory System Freight costs continued – Freight costs incurred by the seller are an operating expense to the seller – These costs are included as part of delivery or __________ expenses (included in Selling Expenses on the Stmt of profit or loss) Example: – Janine's Supplies Ltd paid freight charges $150 for goods sold – the entry by Janine's Supplies would be: May 5

150 150

(To record payment of freight on goods sold) The University of Sydney

Page 14

Perpetual Inventory System Purchase discounts

– Settlement discounts are discounts given to encourage prompt payment of accounts receivable – _________________ is treated as an expense, and – _________________ as income (savings of outflows) – Accounting entries are initially based on gross amount receivable/payable from date of sale, with discount allowed or received recognised on settlement (if in the discount period) – An example of a settlement discount is expressed as “2/10 n30” but what does this mean? – we will give you a 2% discount if you settle within 10 days otherwise you have 30 days to pay

The University of Sydney

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Perpetual Inventory System Purchase discounts – Discount Received is a discount the business has _________ from a supplier due to the prompt payment of inventory purchased from them. Treated as “______________” (saving of outflows). Example: – Tim Ltd settles account outstanding of $3 500 and receives discount of $70 on May 12th – The entry by Tim Ltd would be: May 12

(To record payment within the discount period) The University of Sydney

Page 16

Perpetual Inventory System Purchase discounts continued – Trade discounts are a % reduction in the list price of inventory sold and are ______ recorded in the records of either the buyer or the seller, the net amount is recorded. They are not contingent on any further action on the part of the buyer. Example: – List price quoted is $5 000 and trade discount given of 10% – The entry by Tim Ltd would be: May 5 Inventory Accounts Payable (To record purchase of inventory on account with a trade discount of $500) The University of Sydney

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LO3 - Perpetual Inventory System RECORDING SALES OF INVENTORY

Sale to a customer - Two entries are required: 1. To record the sale of goods 2. To record the cost of the inventory sold

Example: – On May 5th Janine's Supplies Ltd sold $3800 to Tim Ltd on credit. Cost of the inventory sold was $2400.

The University of Sydney

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RECORDING SALES OF INVENTORY continued Example: the entry by Janine's Supplies would be: 1. Sale of the goods on credit for $3 800 May 5

(To record credit sale to Tim Ltd per invoice no. 731)

2. Cost of goods sold was $2 400 May 5

(To record cost of inventories sold to Tim Ltd ) The University of Sydney

Page 19

Sales returns and allowances

Return of goods by a customer - two entries are required by the merchandising firm: 1. To record sales return at selling price 2. To record return to inventory at cost price Example 1: – Janine's Supplies Ltd records credit for goods returned by customer Example 2: – Goods returned by customer are faulty

The University of Sydney

Page 20

Perpetual Inventory System Sales returns and allowances continued Example 1 - the entry by Janine's Supplies would be:

–

Sales return at selling price of $300 May 5 Sales Returns and Allowances Accounts Receivable

300 300

(To record credit granted to Tim Ltd for returned goods)

–

Return (increase) to inventory at cost price of $140 May 5 ______________ Cost of Sales

140 140

(To record cost of goods returned) The University of Sydney

Page 21

Perpetual Inventory System Sales returns and allowances continued Example 2 (faulty goods) - the entry by Janine's Supplies would be:

–

Sales return at selling price of $300

May 5 Sales Returns and Allowances Accounts Receivable

300 300

(To record credit granted to Tim Ltd for returned goods)

- Increase in expense account of $140 May 5 ____________________ Cost of Sales

140 140

(To record cost of faulty goods returned) The University of Sydney

Page 22

Perpetual Inventory System Sales discounts – ________________ this is a discount the business has permitted a customer to take in return for the prompt payment of inventory they had purchased. Treated as an ____________. Example: – On May 12th Tim Ltd pays Janine's Supplies within the discount period and receives a discount of 2% (remember the entry by Tim Ltd) – The entry by Janine's Supplies would be: May 12 Cash _____________ Accounts Receivable (To record collection within 2/7 n/30 discount period) The University of Sydney

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ACTIVE LEARNING OPPORTUNITY

– On 1 March Joyce Ltd sold inventory on account for _______ to Jim Ltd terms _______. Cost of inventory sold was _________. – On 6 March Jim Ltd paid the amount owed. – Record the entries on the 1st and 6th of March in the records of: – Joyce Ltd – Jim Ltd The University of Sydney

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ACTIVE LEARNING OPPORTUNITY Joyce Ltd (seller)

The University of Sydney

Page 25

ACTIVE LEARNING OPPORTUNITY

Jim Ltd (purchaser)

The University of Sydney

Page 26

LO4 - STATEMENT OF PROFIT OR LOSS PRESENTATION Sales Revenue Sales Less: Sales returns and allowances Net sales

$480 000 20 000 $460 000

Gross Profit Net sales Less: Cost of sales Gross Profit

$460 000 316 000 $144 000

Other Income Rent revenue Interest revenue Discount received

$ 12 000 9 000 3 000

Refer to p.233/234 in textbook The University of Sydney

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Operating expenses – Selling expenses – cost of making the sale and distributing goods to customers – e.g. sales salaries, advertising, delivery expenses (freight out) – Administration expenses – cost of operating activities of the general, accounting and personnel offices – e.g. salaries, rent – Financial expenses – costs of financing the business and settlement of debts – e.g. interest expense, discounts allowed The University of Sydney

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JANINE'S SUPPLIES Ltd Statement of Profit or Loss for the year ended 30 June 20xx Operating revenue Sales revenue Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of sales Gross profit Other operating revenue Rent revenue Interest revenue Discount received

$480 000 (20 000) 460 000 (316 000) 144 000 $12 000 9 000 3 000

24 000 168 000

Operating expenses ... Continued on next slide 29

Operating expenses Selling expenses Sales salaries & commission expense Advertising expense Freight-out Rent expense – store space Depn expense – store equipment Administration expenses Office salaries expense Electricity expense Rent expense – office space Depn expense – office equipment Insurance expense Financial expenses Interest expense Discount allowed Profit before income tax Less: Income tax expense Profit after tax

$45 000 16 000 8 000 7 000 5 000

$81 000

19 000 4 000 10 000 3 000 2 000

38 000

2 000 4 000

6 000

(125 000) 43 000 (12 900) $ 30 100

30

LO5 - APPENDIX 5C Closing entries for merchandising firms – Merchandising firms have additional accounts to service firms – Sales Revenue, Sales returns and allowances – Cost of sales – Discount Received, Discount Allowed – Freight-in, Freight-out – Merchandising firms using perpetual system have different accounts to those using periodic system – We will only look at perpetual this week and close the accounts of Janine's Supplies Ltd using previous 2 slides The University of Sydney

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Closing entries 1 & 2 Date

Closing Entries 1 & 2

Account name

30 June Sales Revenue Rent Revenue

Debit

480,000 12,000

Interest Revenue

9,000

Discount Received

3,000

Profit or Loss Summary

Credit

504,000

(to close credit accounts)

The University of Sydney

Page 32

Date

Account name

30 June

Profit or Loss Summary Sales Returns & Allowances Cost of sales

Debit

Credit

473,900 20,000 316,000

Sales Salaries & Commission Expense

45,000

Advertising Expense

16,000

Freight-out

8,000

Rent Expense - store space

7,000

Depn Expense - store equipment

5,000

Office Salaries Expense Electricity Expense Rent Expense - office office

19,000 4,000 10,000

Depn Expense - office equipment

3,000

Insurance Expense

2,000

Interest Expense

2,000

Discount Allowed

4,000

Income Tax Expense

12,900

(to close debit accounts) The University of Sydney

Page 33

Perpetual Inventory System APPENDIX 5C continued

– Profit or Loss Summary account Profit or Loss Summary Closing entry 473 900 Closing entry 504 000 (various debit accounts) (various credit accounts) Balance = 30 100( profit)

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Page 34

Closing entries 3 & 4 Date

Closing Entries 3 & 4

Account name

30 June Profit or Loss Summary Retained Earnings

Debit

Credit

30,100 30,100

(to close profit to retained earnings)

30 June Retained Earnings Dividends (to close dividends to retained earnings if any)

The University of Sydney

Page 35

LO6 - EVALUATING PROFITABILITY Gross Profit Rate

• Gross profit as a percentage of sales

Higher rate suggests the average margin between selling price and inventory cost is increasing. Too high a margin may result in lost sales. The University of Sydney

Page 36

EVALUATING PROFITABILITY continued Operating Expenses to Sales Ratio • Operating expenses as a % of sales

A higher value or increasing percentage should be investigated to determine whether cost cutting is necessary. The University of Sydney

Page 37

Learning Objectives/Outcomes

1. Identify the differences between a service business and a merchandising business 2. Explain the recording of purchases under a perpetual inventory system. 3. Explain the recording of sales revenues under a perpetual inventory system. 4. Prepare a fully classified statement of profit or loss. 5. Record the closing entries for merchandising entities (perpetual appendix 5C). 6. Use ratios to analysis profitability. Readings: Chapter 4 (appendix not required until Wk 9) The University of Sydney

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