Kế toán, kiểm toán - Merchandising operations and the multiple - Step income statement

Merchandising Operations and the Multiple-Step Income StatementKimmel ● Weygandt ● KiesoFinancial Accounting, Eighth Edition5CHAPTER OUTLINEDescribe merchandising operations and inventory systems.1LEARNING OBJECTIVESRecord purchases under a perpetual inventory system.2Record sales under a perpetual inventory system.3Prepare a multiple-step income statement and a comprehensive income statement.4Determine cost of goods sold under a periodic inventory system.5Compute and analyze gross profit rate and profit margin.6Merchandising CompaniesBuy and Sell Goods WholesalerConsumerThe primary source of revenues is referred to as sales revenue or sales.RetailerLEARNING OBJECTIVEDescribe merchandising operations and inventory systems.1LO 1 Income MeasurementCost of goods sold is the total cost of merchandise sold during the period.Not used in a Service business.Net Income (Loss)LessLessEqualsEqualsSalesRevenueCost of Goods SoldGross ProfitOperating ExpensesILLUSTRATION 5-1 Income measurement process for a merchandising companyMerchandising CompanyLO 1 OPERATING CYCLESILLUSTRATION 5-2Operating cycles for a service company and a merchandising companyLO 1 Companies use either a perpetual inventory system or a periodic inventory system to account for inventory.FLOW OF COSTSILLUSTRATION 5-3Flow of costsLO 1 Perpetual SystemMaintain detailed records of the cost of each inventory purchase and sale.Records continuously show inventory that should be on hand for every item.Company determines cost of goods sold each time a sale occurs.FLOW OF COSTSLO 1 Do not keep detailed records of the goods on hand.Cost of goods sold determined by count at the end of the accounting period.Calculation of Cost of Goods Sold:Beginning inventory $ 100,000Add: Purchases, net 800,000Goods available for sale 900,000Less: Ending inventory 125,000Cost of goods sold $ 775,000Periodic SystemFLOW OF COSTSLO 1 Traditionally used for merchandise with high unit values.Shows the quantity and cost of the inventory that should be on hand at any time.Provides better control over inventories than a periodic system.Advantages of the Perpetual SystemFLOW OF COSTSLO 1 INVESTOR INSIGHTImprove Stock AppealInvestors are often eager to invest in a company that has a hot new product. However, when snowboard maker Morrow Snowboards, Inc. issued shares of stock to the public for the first time, some investors expressed reluctance to invest in Morrow because of a number of accounting control problems. To reduce investor concerns, Morrow implemented a perpetual inventory system to improve its control over inventory. In addition, it stated that it would perform a physical inventory count every quarter until it felt that its perpetual inventory system was reliable.LO 1 Morrow Snowboards, Inc.Merchandising Operations and Inventory SystemsIndicate whether the following statements are true or false. If false, indicate how to correct the statement.DO IT!1LO 1 False (service company)The primary source of revenue for a merchandising company results from performing services for customers. The operating cycle of a service company is usually shorter than that of a merchandising company. Sales revenue less cost of goods sold equals gross profit.Ending inventory plus the cost of goods purchased equals cost of goods available for sale.TrueTrueFalse (Beg. Inventory + COGS)ILLUSTRATION 5-5Sales invoice used as Purchase invoice by Sauk StereoMade using cash or credit (on account).Normally record when goods are received from the seller.Purchase invoice should support each credit purchase.LEARNING OBJECTIVERecord purchases under a perpetual inventory system.2LO 2 Illustration: Sauk Stereo (the buyer) uses as a purchase invoice the sales invoice prepared by PW Audio Supply, Inc. (the seller). Prepare the journal entry for Sauk Stereo for the invoice from PW Audio Supply.Inventory 3,800May 4Accounts Payable 3,800Record Purchase of MerchandiseILLUSTRATION 5-5LO 2 Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.Ownership of the goods remains with the seller until the goods reach the buyer.Freight costs incurred by the seller are an operating expense.LO 2FREIGHT COSTSILLUSTRATION 5-6Shipping termsIllustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Public Freight Company $150 for freight charges, the entry on Sauk Stereo’s books is:Inventory 150May 6Cash 150Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would be:Freight-out 150May 4Cash 150FREIGHT COSTSLO 2 Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash.May choose to keep the merchandise if the seller will grant a reduction of the purchase price.Purchase ReturnPurchase AllowancePURCHASE RETURNS AND ALLOWANCESLO 2 Illustration: Assume Sauk Stereo returned goods costing $300 to PW Audio Supply on May 8.Accounts Payable 300May 8Inventory 300PURCHASE RETURNS AND ALLOWANCESLO 2 PURCHASE RETURNS AND ALLOWANCESReview QuestionIn a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting:Purchases Purchase Returns Purchase Allowance InventoryLO 2 Credit terms may permit buyer to claim a cash discount for prompt payment.Advantages:Purchaser saves money.Seller shortens the operating cycle by converting the accounts receivable into cash earlier.Example: Credit terms may read 2/10, n/30.PURCHASE DISCOUNTSLO 2 2% discount if paid within 10 days, otherwise net amount due within 30 days.1% discount if paid within first 10 days of next month.2/10, n/301/10 EOMNet amount due within the first 10 days of the next month.n/10 EOMPURCHASE DISCOUNTSLO 2 Accounts Payable 3,500May 14Cash 3,430Inventory 70(Discount = $3,500 x 2% = $70)Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry Sauk Stereo makes on May 14 to record the payment.PURCHASE DISCOUNTSLO 2 Accounts Payable 3,500June 3Cash 3,500Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of $3,500 on June 3, the journal entry would be:PURCHASE DISCOUNTSLO 2 Should discounts be taken when offered?Example: 2% for 20 days = Annual rate of 36.5%($3,500 x 36.5% x 20) ÷ 365 = $70PURCHASE DISCOUNTSLO 2 $3,8008th - Return$300Balance4th - Purchase $3,5807014th - Discount1506th – Freight-inPURCHASING TRANSACTIONSLO 2 Purchase TransactionsOn September 5, De La Hoya Company buys merchandise on account from Junot Diaz Company. The purchase price of the goods paid by De La Hoya is $1,500. On September 8, De La Hoya returns defective goods with a selling price of $200. Record the transactions on the books of De La Hoya Company. SOLUTIONDO IT!2Inventory 1,500 Accounts Payable 1,500LO 2 Sept. 5Accounts Payable 200 Inventory 200Sept. 8Sales may be made on credit or for cash.Sales revenue, like service revenue, is recorded when the performance obligation is satisfied.Performance obligation is satisfied when the goods are transferred from the seller to the buyer.Sales invoice should support each credit sale.ILLUSTRATION 5-5LEARNING OBJECTIVERecord sales under a perpetual inventory system.3LO 3 Journal Entries to Record a SaleAccounts Receivable or Cash XXXSales Revenue XXX#1Cost of Goods Sold XXXInventory XXX#2Selling PriceCostRecording SalesLO 3 Accounts Receivable 3,800May 4Sales Revenue 3,800Illustration: PW Audio Supply records the sale of $3,800 on May 4 to Sauk Stereo on account (Illustration 5-5) as follows (assume the merchandise cost PW Audio Supply $2,400).Cost of Goods Sold 2,4004Inventory 2,400Recording SalesLO 3 LO 3 “Flip side” of purchase returns and allowances.Contra revenue account to Sales Revenue (debit).Sales not reduced (debited) because:Would obscure importance of sales returns and allowances as a percentage of sales. Could distort comparisons.SALES RETURNS AND ALLOWANCESLO 3 Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a $300 selling price (assume a $140 cost). Assume the goods were not defective.Sales Returns and Allowances 300May 8Accounts Receivable 300Inventory 1408Cost of Goods Sold 140SALES RETURNS AND ALLOWANCESLO 3 Sales Returns and Allowances 300Accounts Receivable 300Inventory 50Cost of Goods Sold 50Illustration: Assume the returned goods were defective and had a scrap value of $50, PW Audio would make the following entries:May 88SALES RETURNS AND ALLOWANCESLO 3 Review QuestionThe cost of goods sold is determined and recorded each time a sale occurs in: periodic inventory system only. a perpetual inventory system only. both a periodic and perpetual inventory system. neither a periodic nor perpetual inventory system.SALES RETURNS AND ALLOWANCESLO 3 ACCOUNTING ACROSS THE ORGANIZATIONThe Point of No Returns?In most industries, sales returns are relatively minor. But returns of consumer electronics can really take a bite out of profits. Recently, the marketing executives at Costco Wholesale Corp. faced a difficult decision. Costco has always prided itself on its generous return policy. Most goods have had an unlimited grace period for returns. A new policy will require that certain electronics must be returned within 90 days of their purchase. The reason? The cost of returned products such as high-definition TVs, computers, and iPods cut an estimated 8¢ per share off Costco’s earnings per share, which was $2.30. Source: Kris Hudson, “Costco Tightens Policy on Returning Electronics,” Wall Street Journal (February 27, 2007), p. B4.LO 3 Offered to customers to promote prompt payment of the balance due.Contra revenue account (debit) to Sales Revenue.SALES DISCOUNTSLO 3 Cash 3,430May 14Accounts Receivable 3,500Sales Discounts 70* [($3,800 – $300) X 2%]*Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14.SALES DISCOUNTSLO 3 On September 5, De La Hoya Company buys merchandise on account from Junot Diaz Company. The selling price of the goods is $1,500, and the cost to Diaz Company was $800. On September 8, De La Hoya returns goods with a selling price of $200 and a cost of $105. Record the sale on the books of Junot Diaz Company.SOLUTIONAccounts Receivable 1,500 Sales Revenue 1,500Sept. 5Cost of Goods Sold 800 Inventory 800Sept. 5Sales TransactionsDO IT!3LO 3 On September 5, De La Hoya Company buys merchandise on account from Junot Diaz Company. The selling price of the goods is $1,500, and the cost to Diaz Company was $800. On September 8, De La Hoya returns goods with a selling price of $200 and a cost of $105. Record the return on the books of Junot Diaz Company.SOLUTIONSales Returns and Allowances 200 Accounts Receivable 200Sept. 8Inventory 105 Cost of Goods Sold 105Sept. 8Sales TransactionsDO IT!3LO 3 Subtract total expenses from total revenuesTwo reasons for using the single-step format: Company does not realize any type of profit or income until total revenues exceed total expenses. Form is simple and easy to read.SINGLE-STEP INCOME STATEMENTLEARNING OBJECTIVEPrepare a multiple-step income statement and a comprehensive income statement.4LO 4 Illustration 5-7SINGLE-STEP INCOME STATEMENTILLUSTRATION 5-7Single-step income statementsLO 4 Highlights the components of net income. Three important line items: gross profit, income from operations, and net income.MULTIPLE-STEP INCOME STATEMENTLO 4 Key Line ItemsMULTIPLE-STEP INCOME STATEMENTILLUSTRATION 5-8Multiple-step income statementsLO 4 Key Items:SalesILLUSTRATION 5-11MULTIPLE-STEPLO 4 Key Items:SalesGross ProfitILLUSTRATION 5-11MULTIPLE-STEPLO 4 Key Items:SalesGross ProfitOperating ExpensesILLUSTRATION 5-11MULTIPLE-STEPLO 4 Key Items:SalesGross ProfitOperating ExpensesNonoperating ActivitiesILLUSTRATION 5-11MULTIPLE-STEPLO 4 Key Items:SalesGross ProfitOperating ExpensesNonoperating ActivitiesILLUSTRATION 5-11MULTIPLE-STEPLO 4 Key Items:SalesGross ProfitOperating ExpensesNonoperating ActivitiesNet IncomeILLUSTRATION 5-11MULTIPLE-STEPLO 4 Review QuestionThe multiple-step income statement for a merchandiser shows each of the following features except: gross profit. cost of goods sold.a sales revenue section.investing activities section.MULTIPLE-STEP INCOME STATEMENTLO 4 ETHICS INSIGHTDisclosing More DetailsAfter Enron, increased investor criticism and regulator scrutiny forced many companies to improve the clarity of their financial disclosures. For example, IBM began providing more detail regarding its “Other gains and losses.” It had previously included these items in its selling, general, and administrative expenses, with little disclosure. For example, previously if IBM sold off one of its buildings at a gain, it included this gain in the selling, general, and administrative expense line item, thus reducing that expense. This made it appear that the company had done a better job of controlling operating expenses than it actually had. As another example, when eBay recently sold the remainder of its investment in Skype to Microsoft, it reported a gain in “Other revenues and gains” of $1.7 billion. Since eBay’s total income from operations was $2.4 billion, it was very important that the gain from the Skype sale not be buried in operating income.IBMLO 4 Comprehensive income statement presents items that are not included in the determination of net income.Items excluded from net income but included in comprehensive income are either reported in a combined statement of net income and comprehensive income, or in a separate comprehensive income statement. COMPREHENSIVE INCOME STATEMENTILLUSTRATION 5-12Combined statement of netincome and comprehensiveincomeLO 4 The following information is available for Art Center Corp. for the year ended December 31, 2017.Other revenues and gains $ 8,000 Sales revenue $462,000 Other expenses and losses 3,000 Operating expenses 187,000 Cost of goods sold 147,000 Sales discounts 20,000 Other comprehensive income 10,000 Prepare a multiple-step income statement and comprehensive income statement for Art Center Corp. The company has a tax rate of 25%. This rate also applies to other comprehensive income.Multiple-Step Income StatementDO IT!4LO 4 LO 4 Prepare a multiple-step income statement and comprehensive income statement for Art Center Corp. (statement heading omitted).Prepare a multiple-step income statement and comprehensive income statement for Art Center Corp.LO 4 Periodic Inventory SystemNo running account of changes in inventory.Ending inventory determined by physical count.Cost of goods sold not determined until the end of the period.LEARNING OBJECTIVEDetermine cost of goods sold under a periodic inventory system.5ILLUSTRATION 5-13Basic formula for cost of goodssold using the periodic systemLO 5 Periodic Inventory SystemILLUSTRATION 5-14Cost of goods sold for a merchandiser using a periodic inventory systemLO 5 Beginning Inventory $ 18,000Purchases $ 162,500Purchase Returns and Allowances - 5,200Purchase Discounts - 3,400Freight-In + 6,100 160,000 (a)Goods Available for Sale 178,000Ending Inventory - 20,000Cost of Goods Sold $ 158,000 (b)Aerosmith Company’s accounting records show the following at the yearend December 31, 2017. Purchase Discounts $ 3,400 Freight-In 6,100 Purchases 162,500 Beginning Inventory 18,000 Ending Inventory 20,000 Purchase Returns and Allowances 5,200Assuming that Aerosmith Company uses the periodic system, compute (a) cost of goods purchased and (b) cost of goods sold.SOLUTIONCOGS—Periodic SystemDO IT!5LO 5 May be expressed as a percentage by dividing the amount of gross profit by net sales.GROSS PROFIT RATEA decline in the gross profit rate might have several causes. Selling products with a lower “markup.” Increased competition may result in a lower selling price. Company forced to pay higher prices to its suppliers without being able to pass these costs on to its customers.LEARNING OBJECTIVECompute and analyze gross profit rate and profit margin.6LO 6 Why does REI’s gross profit rate differ so much from that of Dick’s Sporting Goods and the industry average?GROSS PROFIT RATEILLUSTRATION 5-16Gross profit rateLO 6 The profit margin measures the percentage of each dollar of sales that results in net income.How do the gross profit rate and profit margin ratio differ? Gross profit rate measures the margin by which selling price exceeds cost of goods sold. Profit margin ratio measures the extent by which selling price covers all expenses (including cost of goods sold).PROFIT MARGINLO 6 How does REI compare to its competitors? Its profit margin was lower than Dick’s in 2014 and was less than the industry average. Thus, its profit margin does not suggest exceptional profitability.PROFIT MARGINILLUSTRATION 5-18Profit marginLO 6 PEOPLE, PLANET, AND PROFIT INSIGHTSelling GreenHere is a question an executive of PepsiCo Inc. was asked: Should PepsiCo market green? The executive indicated that the company should, as he believes it’s the No. 1 thing consumers all over the world care about. Here are some of his thoughts on this issue: “Sun Chips are part of the food business I run. It’s a ’healthy snack.’ We decided that Sun Chips, if it’s a healthy snack, should be made in facilities that have a net-zero footprint. In other words, I want off the electric grid everywhere we make Sun Chips. We did that. Sun Chips should be made in a facility that puts back more water than it uses. It does that. And we partnered with our suppliers and came out with the world’s first compostable chip package. Now, there was an issue with this package: It was louder than the(continued)LO 6 PEOPLE, PLANET, AND PROFIT INSIGHTSelling GreenNew York subway, louder than jet engines taking off. What would a company that’s committed to green do: walk away or stay committed? If your people are passionate, they’re going to fix it for you as long as you stay committed. Six months later, the compostable bag has half the noise of our current package. So the view today is: we should market green, we should be proud to do it . . . it has to be a 360 process, both internal and external. And if you do that, you can monetize environmental sustainability for the shareholders.” Source: “Four Problems—and Solutions,” Wall Street Journal (March 7, 2011), p. R2.LO 6 Earnings have high quality if they provide a full and transparent depiction of how a company performed.A measure significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition. A measure significantly greater than 1 suggests that a company is using conservative accounting techniques which cause it to delay the recognition of income.KEEPING AN EYE ON CASHLO 6 Rachel Rose, Inc. reported the following in its 2017 and 2016 income statements. 2017 2016Net sales $80,000 $120,000Cost of goods sold 40,000 60,000Operating expenses 14,000 28,000Income tax expense 8,000 12,000Net income $18,000 $ 20,000Determine the company’s gross profit rate and profit margin.Gross Profit Rate and Profit MarginDO IT!($80,000 − $40,000)$80,000= 50%($120,000 − $60,000)$120,000= 50%201720166LO 6 Rachel Rose, Inc. reported the following in its 2017 and 2016 income statements. 2017 2016Net sales $80,000 $120,000Cost of goods sold 40,000 60,000Operating expenses 14,000 28,000Income tax expense 8,000 12,000Net income $18,000 $ 20,000Determine the company’s gross profit rate and profit margin.Gross Profit Rate and Profit MarginDO IT!$18,000 ÷ $80,000 = 22.5%$20,000 ÷ $120,000 = 16.7%201720166LO 6 Record revenues when sales are made.Do not record cost of merchandise sold on the date of sale. Physical inventory count determines: Cost of merchandise on hand and Cost of merchandise sold during the period. Record purchases in Purchases account. Purchase returns and allowances, Purchase discounts, and Freight costs are recorded in separate accounts.RECORDING MERCHANDISE TRANSACTIONSLEARNING OBJECTIVEAPPENDIX 5A: Record purchases and sales of inventory under a periodic inventory system.*7LO 7 Illustration: On the basis of the sales invoice (Illustration 5-5) and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the $3,800 purchase as follows.Purchases 3,800May 4Accounts Payable 3,800RECORDING PURCHASE OF MERCHANDISELO 7 Illustration: If Sauk pays Public Freight Company $150for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauk’s books is:Freight-in (Transportation-in) 150May 6Cash 150FREIGHT COSTSLO 7 Accounts Payable 300May 8Purchase Returns and Allowances 300Illustration: Sauk Stereo returns $300 of goods to PW Audio Supply and prepares the following entry to recognize the return.Purchase Returns and AllowancesLO 7 Accounts Payable 3,500May 14Purchase Discounts 70Cash 3,430Illustration: On May 14 Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2% cash discount allowed by PW Audio for payment within 10 days. Sauk Stereo records the payment and discount as follows.Purchase DiscountsLO 7 No entry is recorded for cost of goods sold at the time of the sale under a periodic system.Illustration: PW Audio Supply, records the sale of $3,800 of merchandise to Sauk Stereo on May 4 (sales invoice No. 731, Illustration 5-5) as follows.Accounts Receivable 3,800May 4Sales Revenue 3,800RECORDING SALES OF MERCHANDISELO 7 Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the $300 sales return as follows.Sales Returns and Allowances 300May 8Accounts Receivable 300Sales Returns and AllowancesLO 7 Cash 3,430May 14Accounts Receivable 3,500Sales Discounts 70Illustration: On May 14, PW Audio Supply receives payment of $3,430 on account from Sauk Stereo. PW Audio honors the 2% cash discount and records the payment of Sauk’s account receivable in full as follows.Sales DiscountsLO 7 COMPARISON OF ENTRIES—PERPETUAL VS. PERIODICLO 7 COMPARISON OF ENTRIES—PERPETUAL VS. PERIODICLO 7 KEY POINTSA Look at IFRSLEARNING OBJECTIVECompare the accounting for merchandising under GAAP and IFRS.8SimilaritiesUnder both GAAP and IFRS, a company can choose to use either a perpetual or a periodic inventory system.The definition of inventories is basically the same under GAAP and IFRS.LO 8 A Look at IFRSKEY POINTSSimilaritiesAs indicated above, the basic accounting entries for merchandising are the same under both GAAP and IFRS. Both GAAP and IFRS require that income statement information be presented for multiple years. For example, IFRS requires that 2 years of income statement information be presented, whereas GAAP requires 3 years.LO 8 A Look at IFRSKEY POINTSDifferencesUnder GAAP, companies generally classify income statement items by function. Classification by function leads to descriptions like administration, distribution, and manufacturing. Under IFRS, companies must classify expenses either by nature or by function. Classification by nature leads to descriptions such as the following: salaries, depreciation expense, and utilities expense. If a company uses the functional-expense method on the income statement, disclosure by nature is required in the notes to the financial statements.LO 8 A Look at IFRSKEY POINTSDifferencesPresentation of the income statement under GAAP follows either a single-step or multiple-step format. IFRS does not mention a single-step or multiple-step approach. Under IFRS, revaluation of land, buildings, and intangible assets is permitted. The initial gains and losses resulting from this revaluation are reported as adjustments to equity, often referred to as other comprehensive income. The effect of this difference is that the use of IFRS result in more transactions affecting equity (other comprehensive income) but not net income.LO 8 A Look at IFRSLOOKING TO THE FUTUREThe IASB and FASB are working on a project that would rework the structure of financial statements. A main goal of this new approach is to provide information that better represents how businesses are run. This approach draws attention away from just one number—net income. It will adopt major groupings similar to those currently used by the statement of cash flows (operating, investing, and financing), so that numbers can be more readily traced across statements. For example, the amount of income that is generated by operations would be traceable to the assets and liabilities used to generate the income. Finally, this approach would also provide detail, beyond that currently seen in most statements (either GAAP or IFRS), by requiring that line items be presented both by function and by nature. LO 8 IFRS PracticeWhich of the following would not be included in the definition of inventory under IFRS?Photocopy paper held for sale by an office-supply store.Stereo equipment held for sale by an electronics store.Used office equipment held for sale by the human relations department of a plastics company.All of the above would meet the definition.A Look at IFRSLO 8 IFRS PracticeWhich of the following would not be a line item of a company reporting costs by nature?Depreciation expense.Salaries expense.Interest expense.Manufacturing expense.A Look at IFRSLO 8 IFRS PracticeWhich of the following would not be a line item of a company reporting costs by function?Administration.Manufacturing.Utilities expense.Distribution.A Look at IFRSLO 8 “Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. 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