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Chapter 5: Merchandising Operations and the Multiple-Step Income Statement

IncomeStatementPresentation
Formats: Single step: all expenses are added together and deducted in a single step from the sum of all revenues advantage is simplicity

Single Step Income Statement


Revenues Expenses Net Income (Loss)

Multiple step: subdivides statement, with important subtotals


MULTISTEP INCOME STATEMENT

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THEMERCHANDISING PROFITOFA COMPANY

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NOTONSINGLE STEPINCOME STATEMENT

Waynes Worms is a bait shop that sells worms and other fishing supplies. Balances in the Income Statement accounts for Waynes Worms for the year ended 12/31/14 are as follows: Costofgoodssold DepreciationExpense Gainonsaleofplantasset Incometaxexpense InsuranceExpense InterestExpense InterestRevenue Netsales SalaryExpense SuppliesExpense UtilitiesExpense 74,200 2,000 500 5,000 3,600 250 50 147,700 41,000 1,500 1,800

MultistepIncomeStatementandRecordingSales

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Waynes Worms Income Statement For the Year Ending December 31, 2014

Financial Reporting for Merchandise Purchases and Sales

Inventory
Unsoldinventory:_______________;goeson_________________________ Soldinventory:CostofGoodsSold_______________;goeson_________________________

PerpetualInventorySystem
Inventoryrecordsareupdatedperpetually,thatis,everytimeinventoryisbought,sold,orreturned.Usuallycombined withbarcodesandopticalscanners.

PeriodicInventorySystem
Inventoryrecordsareupdatedperiodically,thatis,attheendoftheaccountingperiod.Todeterminehowmuch merchandisehasbeensold,periodicsystemsrequirethatinventorybephysicallycountedattheendoftheperiod. InventoryControl PerpetualInventorySystemContinuousTrackingCanEstimateShrinkage PeriodicInventorySystemNoUptoDateRecordsCantEstimateShrinkage

Costofinventoryincludesallcostsincurredinbringingtheinventorytoitsexistingconditionandlocation.

MultistepIncomeStatementandRecordingSales

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Recording Purchase Transactions

Something Special Gift Shoppe


SomethingSpecialbeginstheaccountingperiodwithinventoryof$5,000.

dr+Inventorycr

InventoryPurchases:SomethingSpecialpurchases$15,000ininventoryitemsoncredit.

1 2 1

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

Shippingcosts:Foramerchandiserwhoisshippinggoodstoacustomer,thetransferofownershipoccursatoneoftwo possibletimes: 1. FOBshippingpointthesaleisrecordedwhenthegoodsleavethesellersshippingdepartment. 2. FOBdestinationthesaleisrecordedwhenthegoodsreachtheirdestination(thecustomer).

FOB SellingPoint Destination

Whopaysforshipping?

Titletransferswhen?

TransportationCosts:SomethingSpecialpays$500cashforshippingcosts.

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

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PurchaseReturnsandAllowances:Whengoodssoldtoacustomerarriveindamagedconditionorareotherwise unsatisfactory,thecustomercan: (1)returnthemforafullrefundor (2)keepthemandaskforareductioninthesellingprice,calledanallowance. SomethingSpecialreturns2antiquereplicaclockstothesupplierandreceivesa$100reductioninthebalanceowed. 1 Analyze Assets = Liabilities + Stockholders' Equity 2 Journalize


Apurchasediscountisasalespricereductiongiventocustomersfor___________________________oftheiraccount balance.

SomethingSpecialspurchasefor$15,000hadtermsof2/10,n/30.

Discount=

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

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SummaryofInventoryTransactions

BeginningInventory NetPurchases

CostofGoodsAvailableforSale

ThisinformationrelatestoLewisCo. 1. OnApril5,purchasedmerchandisefromMcCarthyCompanyfor$14,000,terms2/10,n/30. 2. OnApril6,paidfreightcostsof$700onmerchandisepurchasedfromMcCarthy. 3. OnApril7,purchasedequipmentonaccountfor$30,000. 4. OnApril8,returnedsomeofApril5merchandisetoMcCarthyCompany,whichcost$3,600. 5. OnApril15,paidtheamountduetoMcCarthyCompanyinfull.

Recording Sales Transactions Everymerchandisesalehastwocomponents,eachofwhichrequiresanentryinaperpetualinventorysystem.

(a) drAccountsReceivable(orCash)(+A) crSalesRevenue(+R,+SE) (b) drCostofGoodsSold(+E,SE) crInventory(A)

400 350

400 350

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SalesofMerchandiseonAccount:SomethingSpecialmakescreditsalesof$20,000toExpensiveInteriorDesigns.The costofthemerchandisesoldis$7,000
1 2

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

FreightOut:JusttheflipsideofPurchaseReturnsandAllowances SomethingSpecialmakescreditsalesof$20,000toExpensiveInteriorDesigns.Thecostofthemerchandisesoldis $7,000.ThemerchandiseisshippedFOBdestination.Thecostoftheshippingis$795. Whopaystheshippingcosts?

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

Freightoutisacosttothe_____________.Itisan_________________________expenseonthesellersincomestatement.Itisnt areductionofsales.Itisntincludedatallinthecomputationofnetsales,costofgoodssold,orgrossprofit.Itdoesntaffect inventory.

SalesReturnsandAllowances:JusttheflipsideofPurchaseReturnsandAllowances

ExpensiveInteriorDesignsreturnsatablepurchasedonaccountandSomethingSpecialreturnsthetabletoits inventory.SomethingSpecialhadsoldthetablefor$800,andthecosttoSomethingSpecialforthetablewas$300.

Analyze

Assets

Liabilities

+ Stockholders' Equity

Journalize

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SalesonAccountandSalesDiscounts:Asalesdiscountisasalespricereductiongiventocustomersforprompt paymentoftheiraccountbalance.

AssumethesaleSomethingSpecialtoExpensiveDesignshadcredittermsof2/10,n/30.Thenetamountthat ExpensiveDesignersowesafterthereturnoftheonetableis$19,200(20,000800).Thediscountwouldbe$19,200* 2%=$384.ExpensiveDesignerswouldremit$18,816($19,200384)tosatisfyitsaccountinfull. Analyze 1 Assets = Liabilities + Stockholders' Equity


2 Journalize Thesalesreturnsandallowancesandsalesdiscountsintroducedinthissectionwererecordedusingcontra revenueaccounts.


SomethingSpecialmakescashsalesof$25,000tovariousclients.Thecostofthemerchandisesoldis$10,000 1 Analyze Assets = Liabilities + Stockholders' Equity

Journalize

SummaryofSales

drSales(R,SE)+cr
SalesRevenue Less:SalesReturnsandAllowances SalesDiscounts NetSales

dr+SalesRet.&All.(xR,SE)cr

dr+SalesDiscounts(xR,SE)cr
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MultistepIncomeStatementandRecordingSales

SummaryofCostofGoodsSoldandGrossProfit

dr+CostofGoodsSold(E,SE)cr

NetSales CostofGoodsSold GrossProfit

FlowofCosts

DeterminingCostofGoodsPurchasedwithaPeriodicInventorySystem: CostofGoodsPurchased Purchases Less: PurchaseReturnsandAllowances PurchaseDiscounts NetPurchases FreightIn CostofGoodsPurchased DeterminingCostofGoodsSoldwithaPeriodicInventorySystem:

CalculationofCostofGoodsSold BeginningInventory +CostofGoodsPurchased =CostofGoodsAvailableforSale EndingInventory =CostofGoodsSold

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DeterminingGrossProfit

NetSales CostofGoodsSold =GrossProfit GrossProfitRate

GrossProfitRate

GrossProfit NetSales

100

ProfitMarginRatio

ProfitMarginRatio QualityofEarningsRatio

NetIncome NetSales

QualityofEarningsRatio

NetCashProvidedbyOperatingActivities NetIncome

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