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Income Statement Balance Sheet
Inventory Systems
Perpetual Method
Gives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account.
• • The operating cycle of merchandise companies involves the purchase and subsequent sale of merchandise inventory. Purchase of inventory can either on account or by cash.
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Inventory Systems
• Perpetual provides a continuous record of: – The amount of inventory on hand. – Cost of goods sold to date.
• Periodic requires a physical count of goods to determine:
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Purchase Discounts
• Purchase discount is a deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30
Terms Time
Example
MarCo, Inc. offers a 20% trade discount on orders of 100 units or more of their popular product Racer. Each Racer has a list price of $5.00.
Quantity sold 100 Price per unit $ 5.00 Total 500 Less 20% discount (100) Invoice price $ 400
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Reporting Financial Performance
• Service organizations sell time to earn revenue.
– Examples: accounting firms, law firms, and plumbing services
Revenues
Cost of Goods Available for Sale
Less: Ending Inventory Measured at end of period by physical inventory count
Cost of Good Sold
Computed as a residual amount at end of period
At the end of accounting period
Cost of Goods Sold XX No entry Inventory (beginning) XX Purchases XX Inventory (ending) XX Cost of goods Sold XX
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Merchandise Purchases
Oct.31
Due
Purchase
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Purchase Discounts
2/10,n/30
Discount Percent Number of Days Discount Is Available
Otherwise, Net (or All) Is Due
Credit Period
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Purchase Discounts
Measured at every sale based on perpetual record
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Comparison of Periodic and Perpetual Systems
Transaction Periodic XX Perpetual Inventory XX Accounts Payable XX
Net Sales
－
Cost of Goods Sold
＝
Gross Profit
－
Expenses
＝
Net Income
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Operating Cycle of Merchandise Companies
• Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise.
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Introduction
• Scandals in stock market occur now and then. Among them, financial frauds or income manipulation are common. Income manipulation typically starts from making up sales revenues as well as purchases, for example, GuangXia (Yinchuan). • In this lesson you are required to think about,
• Assume the purchase of $4,000 inventory on October 1 was on the terms 2/10,n30. Case 1-Discount taken
Oct.11 Accounts Payable 4,000 Inventory 80 Cash 3,920 2% x (5,000 - 1,000) = 80
Oct.1
Discount Period = 10 days
Credit Period = 30 days
Oct.11
(Full amount minus 2% discount) due between Oct.1 and Oct.11 Full amount due anytime between Oct.12 and Oct.31
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Comparison of Periodic and Perpetual Systems
Transaction Merchandise retuned by customer Periodic Sales Returns & Allow. XX Accounts Receivable XX Perpetual Sales Returns & Allow. XX Accounts Receivable XX Inventory XX Cost of Goods Sold XX
– The amount of inventory on hand. – Cost of goods sold.
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Comparison of Perpetual and Periodic Systems
Source of Information Equation Beginning Inventory Add: Purchases Equals: Periodic System Carried over from prior period Accumulated in the Purchases account Perpetual System Carried over from prior period Accumulated in the inventory account Perpetual record updated at every sale
Periodic Method
Requires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account.
Case 2-Discount not taken
Oct.31 Accounts Payable Cash
Oct. 1 Inventory 5,000 Accounts Payable /cash Purchased inventory. 5,000
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Trade Discounts
Trade discounts are used by manufacturers and wholesalers to change selling prices without republishing their catalogs.
Lesson 6 Accounting for Merchandising Activities
Task Team of FUNDAMNTAL ACCOUNTING
School of Business, Sun Yat-sen University
Outline
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Merchandising activities Operating cycle of merchandising companies Merchandising cost accounts Inventory systems Merchandise purchases Sales transactions Adjusting and closing entries
Cash Sale