Accounting for merchandising business chapter 6

Chapter 6 notes and quiz

These range from the problem of how to best account for the acquisition and sale of inventory to the development of accounting information to support the operating decisions of owners and managers.

The chapter opens with an introduction to the nature of a merchandising business. This discussion centers on the operating cycle of the merchandising business and introduces the new concepts found on the income statement of a merchandiser. The nature and use of subsidiary ledgers is next introduced. In this case, the accounting system provides the information required to meet financial reporting obligations, and through the use of subsidiary ledgers, produces the information required to serve the needs of company personnel in conducting daily business operations.

The core of the chapter explains the use of the perpetual and periodic inventory systems. Emphasis is placed on three topics: recording the acquisition of merchandise inventory, recording the sale of merchandise, and the determination of the cost of goods sold for presentation on the income statement. The relative merits of the two inventory systems are discussed in closing the section.

Numerous modifications to the accounting system designed to improve its efficiency are covered in some detail. We begin with a brief introduction to the nature of special journals. This is followed by an extensive discussion of additional transactions relating to purchases and sales. Topics covered include: recording purchases by the net and gross price methods, recording purchase returns, transportation costs, recording sales discounts and sales returns and allowances, delivery expenses, and accounting for sales taxes.

The chapter concludes by demonstrating the use of gross profit in evaluating the performance of a merchandising company.

Today, all large businesses—and many small ones—use perpetual inventory systems. Because of the increasing use of inventory software by even the smallest business operations, the trend toward perpetual systems is certain to continue.We also find that perpetual systems are considerably easier

The periodic modelbeginning inventory + purchases − ending inventoryis not a familiar concept

Also, this model seems to undermine the very concept of accounting providing useful (in this case, timely) information to decision makers. The evaluation of merchandising operations via gross profit rates emphasizes the timeliness of the information provided by a perpetual system. A perpetual system not only provides timely information but also follows the same “flow of costs” as has been described for office supplies, prepaid insurance, and depreciable assets.

That is, when an asset is acquired, its cost is debited to an asset account; when the asset is consumed in business operations, its cost is transferred to an expense account.

10-MINUTE QUIZ C SECTION

At the end of last year, Baron’s Bazaar had merchandise costing $381,000 in inventory. During January of the current year, the company purchased merchandise costing $133,500, and sold merchandise that it had purchased at a total cost of $109,300.

a Assume that Baron’s Bazaar uses a perpetual inventory system.

The total amount debited to the Inventory account during January was:

$__133,500_____________

The balance in the Inventory account at January 31 was:

$___405,200_____________

The amount of costs transferred from the Inventory account to the Cost of Goods Sold account during January was:

$____109,300____________

b Assume that Baron’s Bazaar uses a periodic inventory system and takes a physical inventory only at year-end (December 31). (Note: $0 may be an appropriate answer to one or more of the following questions.)

1. The total amount debited to the Inventory account during January was:

$____381000____________

The balance in the Inventory account at January 31 was:

$_____271700___________

The amount of costs transferred from the Inventory account to the Cost of Goods Sold account during January was:

$____0____________

CHAPTER 6 NAME #

Phillips Co. is an office supply store. The company uses a perpetual inventory system, records purchases at net cost, and records sales revenue at full invoice price.

Record the following transactions in the company’s general journal. To conserve space, you may omit the written explanations which normally should accompany the entries.

July 1 Purchased four Lorac copying machines on account from Lorac Corp. Total invoice price was $2,500 per machine ($10,000 total); terms of 2/10, n/30. These machines are intended for resale.

3 Found one of the Lorac copiers to be defective and returned it to Lorac, thus reducing the amount owed.

9 Sold one of the Lorac copiers to Morris Realty. The sales price was $3,500, terms 2/10, n/60.

10 Paid the remaining amount owned to Lorac Corp., less the allowable discount.

19 Received full payment from Morris, less the allowable discount.

Date

General Journal

Debit

Credit

07/01

Copy Machines

10,000

Account Payable

10,000

07/03

Copy Machines

7500

Account Payable

7500

07/09

Account Receivable

3500

Sales

3500

07/10

Account payable

7500

Cash

7500

07/19

Cash

3500

Account Receivable

3500