Financial Accounting
IFRS 5th Edition
Weygandt ● Kimmel
Chapter 5
Accounting for Merchandise Operations
(Part 2)
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Learning Objective 3
Record Sales Under a Perpetual
Inventory System.
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Recording Sales - Perpetual System
• Sales 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 goods are
transferred from seller to buyer.
• Sales invoice should support each credit sale.
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Sales invoice should support each
credit sale
Illustration 5.6: Sales Invoice used as purchase invoice by Sauk Stereo
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Entries to Record Sales
Journal Entries to Record a Sale
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Recording Sales Example
Illustration: PW Audio Supply records the sale of €3,800 on
May 4 to Sauk Stereo on account as follows (assume the
merchandise cost PW Audio Supply €2,400).
May 4 Accounts Receivable 3,800
Sales Revenue 3,800
4 Cost of Goods Sold 2,400
Inventory 2,400
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Sales Returns and Allowances
• “Flip side” of purchase returns and allowances
• Contra revenue account (debit) to Sales Revenue
• Sales not reduced (debited) because:
o Would otherwise obscure importance of sales
returns and allowances as a percentage of sales.
o Could distort comparisons.
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Sales Returns and Allowances
Example
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.
May 8 Sales Returns and Allowance 300
Accounts Receivable 300
8 Inventory 140
Cost of Goods Sold 140
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Sales Returns – Defective Example
Illustration: Assume the returned goods were defective
and had a scrap value of €50, PW Audio would make the
following entries:
May 8 Sales Returns and Allowance 300
Accounts Receivable 300
8 Inventory 50
Cost of Goods Sold 50
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Sales Returns and Allowances Review
Question
The cost of goods sold is determined and recorded
each time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only. (Correct)
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory
system.
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Sales Discounts
• Offered to customers to promote prompt payment
of balance due
• Contra-revenue account (debit) to Sales Revenue
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Sales Discounts Example
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.
May 14 Cash 3,430
Sales Discounts 70*
Accounts Receivable 3,500
*[(€3,800 − €300) × 2%]
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DO IT! 3: Sales Transactions
On September 5, Zhū Company buys merchandise on
account from Gāo Company. The selling price of the goods
is ¥15,000, and the cost to Gāo Company was ¥8,000. On
September 8, Zhū returns defective goods with a selling
price of ¥2,000 and a net realizable value of ¥300. Record
the transactions on the books of Gāo Company.
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DO IT! 3: Sales Transactions –
Solution
Sept. 5 Accounts Receivable 15,000
Sales Revenue 15,000
5 Cost of Goods Sold 8,000
Inventory 8,000
Sept. 8 Sales Returns and Allowances 2,000
Accounts Receivable 2,000
Sept. 8 Inventory 300
Cost of Goods Sold 300
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Learning Objective 4
Apply the Steps in the Accounting
Cycle to a Merchandising Company.
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Adjusting Entries
• Generally same as those of a service company.
• Merchandising company makes additional
adjustment so that records agree with actual
inventory on hand.
• Involves adjusting Inventory and Cost of Goods
Sold.
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Adjusting Entries Example
Illustration: Suppose that PW Audio Supply has an
unadjusted balance of €40,500 in Inventory. Through a
physical count, PW Audio Supply determines that its actual
merchandise inventory at December 31 is €40,000. The
company would make an adjusting entry as follows.
Dec. 31 Cost of Goods Sold 500
Inventory (€40,500 − €40,000) 500
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Closing Entries
Dec. 31 Sales Revenue 480,000
Income Summary 480,000
(Close credit balance accounts)
31 Income Summary 450,000
Cost of Goods Sold 316,000
Salaries and Wages Expense 64,000
Utilities Expense 17,000
Advertising Expense 16,000
Sales Returns and Allowances 12,000
Sales Discounts 8,000
Depreciation Expense 8,000
Freight-Out 7,000
Insurance Expense 2,000
(Close debit balance accounts)
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Closing Entries Continued
Dec. 31 Income Summary 30,000
Retained Earnings 30,000
(To close net income to retained
earnings)
31 Retained Earnings 15,000
Dividends 15,000
(To close dividends to retained
earnings)
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Summary of Merchandising Entries
Illustration 5.8 (Partial): Daily recurring and adjusting and closing entries
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Summary of Merchandising Entries -
Events
Illustration 5.8 (Partial): Daily recurring and adjusting and closing entries
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DO IT! 4: Closing Entries
The trial balance of Celine’s Sports Wear Shop at
December 31 shows Inventory €25,000, Sales Revenue
€162,400, Sales Returns and Allowances €4,800, Sales
Discounts €3,600, Cost of Goods Sold €110,000, Rent
Revenue €6,000, Freight-Out €1,800, Rent Expense
€8,800, and Salaries and Wages Expense €22,000.
Prepare the closing entries for the above accounts.
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DO IT! 4: Closing Entries – Solution
Dec. 31 Sales Revenue 162,400
Rent Revenue 6,000
Income Summary 168,400
Dec. 31 Income Summary 151,000
Cost of Goods Sold 110,000
Sales Returns and Allowances 4,800
Sales Discounts 3,600
Freight-Out 1,800
Rent Expense 8,800
Salaries and Wages Expense 22,000
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Learning Objective 5
Prepare Financial Statements for a
Merchandising Company.
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Income Statement
• Primary source of information for evaluating a
company’s performance.
• Format is designed to differentiate between various
sources of income and expense.
Illustration 5.9: Computation of net sales
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Income Statement Example
Gross Profit
On the basis of the sales data for PW Audio Supply (net
sales of €460,000) and cost of goods sold under the
perpetual inventory system (assume €316,000), PW Audio
Supply’s gross profit is €144,000, computed as shown.
Net Sales €460,000
Cost of goods sold 316,000
Gross profit €144,000
Illustration 5.10: Computation of gross profit
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Gross Profit Rate
• We also can express a company’s gross profit as a
percentage, called the gross profit rate.
• Analysts generally consider the gross profit rate to be
more useful than the gross profit amount.
• The rate expresses a more meaningful (qualitative)
relationship between net sales and gross profit.
Gross Profit ÷ Net Sales = Gross Profit Rate
€144,000 ÷ €460,000 = 31.3%
Illustration 5.11: Gross profit rate formula and computation
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Operating Expenses
Incurred in the process of earning sales revenue. Operating
expense for PW Audio Supply include the following.
Operating expenses
Salaries and wages expense € 64,000
Utilities expense 17,000
Advertising expense 16,000
Depreciation expense 8,000
Freight-out 7,000
Insurance expense 2,000
Total operating expenses €114,000
Illustration 5.12: Operating expenses
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Other Income and Expense
Various revenues and gains and expenses and losses that
are unrelated to the company’s main line of operations.
Other Income
Interest revenue from notes receivable and marketable securities.
Dividend revenue from investments in ordinary shares.
Rent revenue from subleasing a portion of the store.
Gain from the sale of property, plant, and equipment.
Other Expense
Casualty losses from such causes as vandalism and accidents.
Loss from the sale or abandonment of property, plant, and equipment.
Loss from strikes by employees and suppliers.
Illustration 5.13: Examples of other income and expense
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Other Expense
Other Expense
• Casualty losses from such causes as vandalism and
accidents
• Loss from sale or abandonment of property, plant,
and equipment
• Loss from strikes by employees and suppliers
Interest expense, if material, must be disclosed on the
face of the income statement.
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Income Statement – PW Audio
Supply
Key Items:
• Sales
• Gross Profit
• Operating Expenses
• Other Income and
Expense
• Net Income
Illustration 5.14: Income statement
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Comprehensive Income Statement
• Presents items not included in the determination of net
income.
• Items included in comprehensive income are either reported
in a combined statement of net income and comprehensive
income, or in a separate comprehensive income statement.
Illustration 5.15: Separate statement of net income and comprehensive income
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Classified Statement of Financial
Position
Illustration 5.16: Assets section of a classified statement of financial position
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