Chapter 05

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Mechanical & Industrial Engineering
Leslie A.Sinclair

Special Issues for Merchantschapter five5Your goals for this merchandising chapter are to learn aboutMerchandising businesses and related sales recognition issuesPurchase recognition issues for the merchandising businessAn alternative inventory system The perpetual methodEnhancements of the income statementThe control structure The illustrations in earlier chapters were all based on service THE businesses like law firms and architectsService businesses MERCHANDISING are a large component of an advanced economy However OPERATION a lot of money is also spent in stores or on the internet Such SALESbusinesses are generally referred to as merchants and theirgoal is to purchase inventory and resell it at a higher price to customers This chapterfocuses on the merchandising business Measuring income involves unique considerations The most obvious issue is the computation and presentation of an amount called gross profit Gross profit is the difference between sales and cost of goods sold and is reported on the income statement as an intermediate amount Observe the income statement for Chair Depot below The gross profit number indicates that the company is selling merchandise for more than cost Of operating expenses advertising salaries and rent course the company also incurred other Nevertheless the gross profit was sufficient to easily cover those costs and leave a tidy profit to boot chair depot The presentation of the gross profit income Statement information is important for users of the For the Year ending december 31 20X3financial statementsIf the gross profit rate Sales200000is small the business might have trouble making a profit even if sales improved Cost of goods sold120000The reverse is true if the gross profit rate Gross Profit80000is strong improved sales can markedly Expensesimprove the bottomline net income especially if operating expenses like rent Advertising6000etc dont change with increases in sales Salaries9000Separating the gross profit number from 500020000Rentthe other income statement components is an important part of reporting for the Net income60000merchandising operation60CHAPTER5The Sales account is a revenue account used for sales of merchandise Sales are initially recorded SaLeSvia one of the following entries depending on whether the sale is for cash or is a sale on account CASH SALE0105X5Cash4000Sales4000Sold merchandise for cashSALE ON ACCOUNT0105X5Accounts Receivable4000Sales4000Sold merchandise on accountOccasionally a customer returns merchandise When that occurs the following entry should be SaLeS retUrNS madeaNd aLLoWaNceS0109X5Sales Returns and Allowances1000Accounts Receivable1000Customer returned merchandise previously purchased on accountNotice that the above entry included a debit to Sales Returns and Allowances rather than canceling the sale The Sales Returns and Allowances account is a contrarevenue account that is deducted from sales sales less sales returns and allowances is sometimes called net sales This approach allows interested parties to easily track the level of sales returns in relation to overall sales Important information isrevealed about the relative level of returns thereby providing a measure of customer satisfaction or dissatisfaction Sales returns on account are typically documented by the creation of an instrument known as a credit memorandum The credit memorandum indicates that a customers Account Receivable balance has been credited reduced and that payment for the returned goods is not expected If the transaction involved a cash refund the only difference in the entry would involve a credit to Cash instead of Accounts ReceivableThe calculation of net sales would be unaffectedchair depot income Statement For the Year ending december 31 20X3Sales200000Less Sales returns and allowances10000Net sales190000Cost of goods sold114000Gross profit76000ExpensesAdvertising6000Salaries9000Rent50002000056000Net Income
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