6-1

Chapter

6 MERCHANDISING
ACTIVITIES

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Operating
Operating Cycle
Cycle of
of aa Merchandising
Merchandising
6-2

Company
Company

1. er
s he

Pu ch
Cash

m
le f t

rc an
ab o

ha di
iv on

se se
ce ti
re lec

of
C ol
3.

Accounts
Receivable
Inventory
2. Sale of merchandise
on account

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-3

Comparing
Comparing Merchandising
Merchandising Activities
Activities with
with
Manufacturing
Manufacturing Activities
Activities

Manufacture
Purchase inventory and
inventory in have a longer
ready-to-sell and more
condition. complex
operating cycle.

Merchandising Manufacturing
Company Company
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-4

Retailers
Retailers and
and Wholesalers
Wholesalers

Wholesalers buy
merchandise from
several different
manufacturers and
then sell this Retailers sell
merchandise to merchandise directly
several retailers. to the public.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Income
Income Statement
Statement of
of aa Merchandising
Merchandising
6-5

Company
Company
Computer Barn Cost of
Condensed Income Statement goods sold
For the Year Ended December 31, 2005 represents
Revenue from sales $ 900,000 the expense
Less: Cost of goods sold 540,000 of goods
Gross profit $ 360,000 that are
Less: Expenses 270,000
sold to
Net income $ 90,000
customers.
Gross profit is a useful means of measuring
the profitability of sales transactions.
© The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
 Accounting
Accounting Systems
Systems Requirements
Requirements for
for
6-6

Merchandising
Merchandising Companies
Companies
Although general ledger accounts provide
useful information, they do not provide
much of the detailed information needed in
the daily business operations.

General Ledger
Accounts Receivable Who
Date Debit Credit Balance
Who
2001
owes
owes us
us
June 1 10,000 10,000 money?
money?
15 3,000 7,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Accounting
Accounting Systems
Systems Requirements
Requirements for
for
6-7

Merchandising
Merchandising Companies
Companies
Control Account General Ledger
Accounts Receivable
Subsidiary Ledgers Date Debit Credit Balance
2001
June 1 10,000 10,000
Subsidiary Ledger 15 3,000 7,000
Jake Sparks
Date Debit Credit Balance
2001
June 1 3,000 3,000
15 1,000 2,000
Subsidiary Ledger
Heather Jacobs
Date Debit Credit Balance
2001
June 1 7,000 7,000
15
McGraw-Hill/Irwin 2,000 5,000 © The McGraw-Hill Companies, Inc., 2005
 6-8

Two
Two Approaches
Approaches Used
Used in
in Accounting
Accounting for
for
Merchandise
Merchandise Transactions
Transactions

Perpetual Periodic
Inventory Inventory
System System

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-9

Perpetual
Perpetual Inventory
Inventory Systems
Systems

The inventory account is continuously

updated to reflect items on hand.

Let’s look
at some
entries!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-10

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-11

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.

10  $30
10 $30 == $300
$300

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-12

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.

Retail

Cost
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-13

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-14

Perpetual
Perpetual Inventory
Inventory Systems
Systems
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-15

Taking
Taking aa Physical
Physical Inventory
Inventory

In order to ensure
the accuracy of
their perpetual
records, most
businesses take a
complete physical
count of the
merchandise on
hand at least once
a year.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-16

Taking
Taking aa Physical
Physical Inventory
Inventory
Reasonable amounts of inventory shrinkage are viewed as
a normal cost of doing business. Examples include
breakage, spoilage and theft.
On December 31, Worley Co. counts its inventory.
An inventory shortage of $2,000 is discovered.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Closing
Closing Entries
Entries in
in aa Perpetual
Perpetual Inventory
Inventory
6-17

System
System
Close Revenue accounts
(including Sales) to The closing
Income Summary. entries are the
same!
Close Expense accounts
(including Cost of Goods
Sold) to Income Summary.

 Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-18

Next is the
periodic
inventory
system!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-19

Periodic
Periodic Inventory
Inventory Systems
Systems

No effort is made to keep up-to-date

records of either inventory or cost of
goods sold.

Let’s look
at some
entries!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-20

Periodic
Periodic Inventory
Inventory Systems
Systems
On September 5, Worley Co. purchased 100
laser lights for resale for $30 per unit from
Electronic City on account.

Notice
Notice that
that no
no entry
entry is
is
made
made toto Inventory.
Inventory.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-21

Periodic
Periodic Inventory
Inventory Systems
Systems
On September 10, Worley Co. sold 10 laser
lights for $50 per unit on account to ABC
Radios.

Retail

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-22

Periodic
Periodic Inventory
Inventory Systems
Systems
On September 15, Worley Co. paid Electronic
City $3,000 for the September 5 purchase.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-23

Periodic
Periodic Inventory
Inventory Systems
Systems
On September 22, Worley Co. received $500
from ABC Radios as payment in full for their
purchase on September 10.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-24

Computing
Computing Cost
Cost of
of Goods
Goods Sold
Sold
The
The accounting
accounting records
records of
of Party
Party
Supply
Supply show
show the
the following:
following:
Inventory,
Inventory, Jan.
Jan. 1,
1, 2005
2005 $$ 14,000
14,000
Purchases
Purchases (during
(during 2005)
2005) 130,000
130,000

At
At December
December 31,
31, 2005,
2005, Party
Party
Supply
Supply counted
counted the
the merchandise
merchandise
on
on hand
hand at
at $12,000.
$12,000.

Calculate Party Supply’s cost of goods sold

McGraw-Hill/Irwin for 2005. © The McGraw-Hill Companies, Inc., 2005
 6-25

Computing
Computing Cost
Cost of
of Goods
Goods Sold
Sold

Cost of Goods Sold can be

calculated as follows:
Inventory (beginning of the year) $ 14,000
Add: Purchases 130,000
Cost of goods available for sale 144,000
Less: Inventory (end of year) 12,000
Cost of goods sold $ 132,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-26

Creating
Creating aa Cost
Cost of
of Goods
Goods Sold
Sold Account
Account

Now, Party Supply must

create the Cost of Goods
Sold account.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-27

Creating
Creating aa Cost
Cost of
of Goods
Goods Sold
Sold Account
Account

Now, Party Supply must

record the ending inventory
amount.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-28

Completing
Completing the
the Closing
Closing Process
Process
Close Revenue accounts
(including Sales) to The closing
Income Summary. entries are the
same!
Close Expense accounts
(including Cost of Goods
Sold) to Income Summary.

 Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-29

Selecting
Selecting an
an Inventory
Inventory System
System
Factors
FactorsSuggesting
Suggestingaa Factors
FactorsSuggesting
Suggestingaa
Perpetual
PerpetualInventory
InventorySystem
System Periodic
PeriodicInventory
InventorySystem
System
Large company
Large company withwith Small company, run
Small company, run by by
professional management.
professional management. owner.
owner.
Management
Management and employees Accountingrecords
and employees Accounting recordsofof
wanting information about
wanting information about inventories and specific
inventories and specific
items in inventory and
items in inventory and thethe product
productsales
salesnot
notneeded
neededinin
quantities of specific
quantities of specific daily operations; such
daily operations; such
products that are selling.
products that are selling. information
informationdeveloped
developed
primarily
primarily for usein
for use inannual
annual
income tax returns.
income tax returns.
Items
Items in inventory with a high Inventorywith
in inventory with a high Inventory withmany
manydifferent
different
per-unit cost.
per-unit cost. kinds of low-cost items.
kinds of low-cost items.
Low
Lowvolume
volumeof ofsales
sales High
Highvolume
volumeofofsales
sales
transactions or a
transactions or a transactions
transactions andaamanual
and manual
computerized
computerizedaccounting
accounting accounting system.
accounting system.
system.
system.
Merchandise
Merchandisestored
storedat at Lack
Lackof
offull-time
full-timeaccounting
accounting
multiple locations or in
multiple locations or in personnel.
personnel.
warehouses
warehousesseparate
separatefrom
from
sales sites.
sales sites.
All
Allmerchandise
merchandisestored
storedat
atthe
the
sales site.
sales site.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-30

Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts
When manufacturers and wholesalers
sell their products on account, the
credit terms are stated in the invoice.

2/10, n/30
Read as: “Two ten, net thirty”
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-31

Credit
Credit Terms
Terms and
and Cash
Cash Discounts
Discounts

2/10, n/30
Percentage # of Days Otherwise, # of Days
of Discount Discount Is the Full when Full
Available Amount Is Amount Is
Due Due

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-32

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost

Purchases are
recorded at their
net amounts.
Net Purchase
Method Discounts Lost
are recorded
when payment is
made outside
the discount
period.
© The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
 6-33

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-34

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost

On July 6, Play Clothes purchased $4,000 of

merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin $4,000  98%

$4,000 98% == $3,920
$3,920 © The McGraw-Hill Companies, Inc., 2005
 6-35

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost

On July 15, Play Clothes pays the full amount

due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-36

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost

On July 15, Play Clothes pays the full amount

due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-37

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost
Now, assume that Play Clothes waited until July
20 to pay the amount due in full to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-38

Recording
Recording Purchases
Purchases at
at Net
Net Cost
Cost
Now, assume that Play Clothes waited until July
20 to pay the amount due in full to Kid’s
Clothes.
Prepare the journal entry for Play Clothes.

Nonoperating
NonoperatingExpense
Expense

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-39

Price
Price

Purchases are
recorded at their
gross amounts.
Gross Purchase
Method discounts taken
are recorded
when payment is
made inside the
discount period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-40

Price
Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-41

Price
Price
On July 6, Play Clothes purchased $4,000 of
merchandise on credit with terms of
2/10, n/30 from Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-42

Price
Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-43

Price
Price
On July 15, Play Clothes pays the full amount
due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

Reduces
ReducesCost
Costof
Goods
of $4,000  98%
$4,000 98% == $3,920
$3,920
GoodsSold
Sold

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-44

Price
Price
Now, assume that Play Clothes waited until July
20 to pay the full amount due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Recording
Recording Purchases
Purchases at
at Gross
Gross Invoice
Invoice
6-45

Price
Price
Now, assume that Play Clothes waited until July
20 to pay the full amount due to Kid’s Clothes.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-46

Returns
Returns of
of Unsatisfactory
Unsatisfactory Merchandise
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The
purchase was originally recorded at net cost.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-47

Returns
Returns of
of Unsatisfactory
Unsatisfactory Merchandise
Merchandise
On August 5, Play Clothes returned $500 of
unsatisfactory merchandise purchased from Kid’s
Clothes on credit terms of 2/10, n/30. The
purchase was originally recorded at net cost.
Prepare the journal entry for Play Clothes.

McGraw-Hill/Irwin $500  98%

$500 98% == $490
$490 © The McGraw-Hill Companies, Inc., 2005
 6-48

Transportation
Transportation Costs
Costs on
on Purchases
Purchases

Transportation
Transportation costs
costs related
related to
to the
the
acquisition
acquisition ofof assets
assets are
are part
part of
of the
the
cost
cost of
of the
the asset
asset being
being acquired.
acquired.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-49

Now, let’s talk

about sales!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-50

Transactions
Transactions Relating
Relating to
to Sales
Sales
Computer Barn
Partial Income Statement
For the Year Ended December 31, 2005
Revenue
Sales $ 912,000
Less: Sales returns and allowances $ 8,000
Sales discounts 4,000 12,000
Net sales $ 900,000

Credit terms and merchandise returns

affect the amount of revenue earned by
the seller.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 6-51

Sales
Sales
On August 2, Kid’s Clothes sold $2,000 of merchandise to
Play Clothes on credit terms 2/10, n/30. Kid’s Clothes
originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-52

Sales
Sales
On August 2, Kid’s Clothes sold $2,000 of merchandise to
Play Clothes on credit terms 2/10, n/30. Kid’s Clothes
originally paid $1,000 for the merchandise.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-53

Sales
Sales Returns
Returns and
and Allowances
Allowances
On August 5, Play Clothes returned $500 of unsatisfactory
merchandise to Kid’s Clothes from the August 2 sale.
Kid’s Clothes cost for this merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

Contra-revenue
Contra-revenue

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-54

Sales
Sales Returns
Returns and
and Allowances
Allowances
On August 5, Play Clothes returned $500 of unsatisfactory
merchandise to Kid’s Clothes from the August 2 sale.
Kid’s Clothes cost for this merchandise was $250.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-55

Sales
Sales
On July 6, Kid’s Clothes sold $4,000 of merchandise to Play
Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-56

Sales
Sales
On July 6, Kid’s Clothes sold $4,000 of merchandise to Play
Clothes on credit with terms of 2/10, n/30. The
merchandise originally cost Kid’s Clothes $2,000.
Because Kid’s Clothes uses a perpetual inventory system,
they must make two entries.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-57

Sales
Sales Discounts
Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes from the July 6
sale.
Prepare the journal entry for Kid’s Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-58

Sales
Sales Discounts
Discounts
On July 15, Kid’s Clothes receives the full
amount due from Play Clothes from the July 6
sale.
Prepare the journal entry for Kid’s Clothes.

Contra-revenue
Contra-revenue $4,000  98%
$4,000 98% == $3,920
$3,920

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-59

Sales
Sales Discounts
Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes from the July 6 sale.
Prepare the journal entry for Kid’s Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-60

Sales
Sales Discounts
Discounts
Now, assume that it wasn’t until July 20 that
Kid’s Clothes received the full amount due
from Play Clothes from the July 6 sale.
Prepare the journal entry for Kid’s Clothes.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-61

Delivery
Delivery Expenses
Expenses

Delivery
Delivery costs
costs incurred
incurred by
by sellers
sellers are
are
debited
debited to
to Delivery
Delivery Expense,
Expense, an
an
operating
operating expense.
expense.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-62

Accounting
Accounting for
for Sales
Sales Taxes
Taxes
Businesses collect sales tax at the point of sale.
Then, they remit the tax to the appropriate
governmental agency at times specified by law.

$1,000 sale  7%
$1,000 sale 7% tax
tax == $70
$70 sales
sales tax
tax

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-63

Modifying
Modifying an
an Accounting
Accounting System
System

Most businesses use special journals

rather than a general journal to record
routine transactions that occur
frequently.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-64

Financial
Financial Analysis
Analysis

Gross
Net Sales Profit
Margins

••Trends
Trendsover
over time
time ••Gross profit Net
Grossprofit Netsales
sales
••Comparable
Comparablestore
storesales
sales ••Overall
Overall gross
gross profit
profit
margin
margin
••Sales
Salesper
persquare
squarefoot
foot of
of
••Gross
Grossprofit
profitmargins
marginsby by
selling
sellingspace
space department
departmentand and
McGraw-Hill/Irwin
products
products
© The McGraw-Hill Companies, Inc., 2005
 6-65

Exercise
Exercise 6.3
6.3

PC Connection is a leading mail order retailer of personal computers. A

recent financial report issued by the company revealed the following
information:

Merchandise inventory (beginning of the year) $69 million

Merchandise inventory (end of the year) $57 million
Net sales for the year $1.2 billion
Gross profit margin 11%

a)Compute the company’s cost of goods sold for the year.

b)Approximately how much inventory did PC Connection purchase during
the year?
c)What factors might contribute to the company’s low gross profit margin?
d)Discuss reasons why PC Connection uses a perpetual inventory system.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 6-66

Exercise
Exercise 6.4
6.4
Ranns Supply uses a perpetual inventory system. On January 1, its inventory account had a
beginning balance of $6,450,000. Ranns engaged in the following transactions during the year:

1. Purchased merchandise inventory for $9,500,000.

2. Generated net sales of $26,000,000.
3. Recorded inventory shrinkage of $10,000 after taking a physical inventory at year-end.
4. Reported gross profit for the year of $15,000,000 in its income statement.

a)At what amount was Cost of Goods Sold reported in the company’s year-end income statement?
b)At what amount was Merchandise Inventory reported in the company’s year-end balance sheet?
c)Immediately prior to recording inventory shrinkage at the end of the year, what was the balance
of the Cost of Goods Sold account? What was the balance of the Merchandise Inventory account?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Exercise
Exercise 6.5
6.5 6-67

Frisbee Hardware uses a perpetual inventory system. At year-

end, the Inventory account has a balance of $250,000, but a
physical count shows that the merchandise on hand has a cost of
only $246,000.

a)Explain the probable reason(s) for this discrepancy.

b)Prepare the journal entry required in this situation.
c)Indicate all the accounting records to which your journal entry
in part b should be posted.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Exercise
Exercise 6.7
6.7 6-68

Boston Bait Shop uses a periodic inventory system. At December 31, Year 2, the
accounting records include the following information:

Inventory (as of December 31, Year 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,800

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,600
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,200
A complete physical inventory taken at December 31, Year 2, indicates merchandise
costing $3,000 remains in stock.

a)How were the amounts of beginning and ending inventory determined?

b)Compute the amount of the cost of goods sold in Year 2.
c)Prepare two closing entries at December 31, Year 2: the first to create a Cost of
Goods Sold account with the appropriate balance and the second to bring the
Inventory account up-to-date.
d)Prepare a partial income statement showing the shop’s gross profit for the year.
e)Describe why a company such as Boston Bait Shop would use a periodic inventory
system rather than a perpetual inventory system.

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 Exercise
Exercise 6.12
6.12 6-69

Sky Probe sells state-of-the-art telescopes to individuals and organizations interested in studying
the solar system. At December 31 last year, the company’s inventory amounted to $250,000.
During the first week of January this year, the company made only one purchase and one sale.
These transactions were as follows:

Jan. 2 Sold one telescope costing $90,000 to Central State University for cash, $117,000.
Jan. 5 Purchased merchandise on account from Lunar Optics, $50,000. Terms, net 30 days.

a)Prepare journal entries to record these transactions assuming that Sky Probe uses the perpetual
inventory system. Use separate entries to record the sales revenue and the cost of goods sold for
the sale on January 2.
b)Compute the balance of the Inventory account on January 7.
c)Prepare journal entries to record the two transactions, assuming that Sky Probe uses the periodic
inventory system.
d)Compute the cost of goods sold for the first week of January assuming use of a periodic
inventory system. Use your answer to part b as the ending inventory.
e)Which inventory system do you believe that a company such as Sky Probe would probably use?
Explain your reasoning.

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 6-70

Problem
Problem 6.3
6.3
Shown below is information from the financial reports of Knauss Supermarkets for the past few
years.

2011 2010 2009

Net sales (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,495 $5,184 $4,800
Number of stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448 445 430
Square feet of selling space (in millions) . . . . . . . . . . . . . . . . . . . 11.9 11.1 10.0
Average net sales of comparable stores (in millions) . . . . . . . . . . $ 10.8 $ 11.0 $ 11.4

Instructions
a. Calculate the following statistics for Knauss Supermarkets (round your answers to one decimal
place):
1.The percentage change in net sales from 2009 to 2010 and 2010 to 2011. Hint: The percentage
change is computed by dividing the dollar amount of the change between years by the amount of
the base year. For example, the percentage change in net sales from 2009 to 2010 is computed by
dividing the difference between 2009 to 2010 net sales by the amount of 2009 net sales, or ($5,184
$4,800) $4,800 8% increase.
2.The percentage change in net sales per square foot of selling space from 2009 to 2010 and 2010
to 2011.
3.The percentage change in comparable store sales from 2009 to 2010 and 2010 to 2011.
b. Evaluate the sales performance of Knauss Supermarkets.
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 6-71

Problem
Problem 6.4
6.4
Lamprino Appliance uses a perpetual inventory system. The following are three recent
merchandising transactions:

June 10 Purchased 10 televisions from Mitsu Industries on account. Invoice price, $300 per unit, for
a total of $3,000. The terms of purchase were 2/10, n/30.
June 15 Sold one of these televisions for $450 cash.
June 20 Paid the account payable to Mitsu Industries within the discount period.

Instructions
a. Prepare journal entries to record these transactions assuming that Lamprino records purchases of
merchandise at: 1. Net cost 2. Gross invoice price
b. Assume that Lamprino did not pay Mitsu Industries within the discount period but instead paid
the full invoice price on July 10. Prepare journal entries to record this payment assuming that the
original liability had been recorded at:
1. Net cost
2. Gross invoice price
c. Assume that you are evaluating the efficiency of Lamprino’s bill-paying procedures. Which
accounting method—net cost or gross invoice price—provides you with the most useful
information? Explain.

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 Problem
Problem 6.5
6.5 6-72

The following is a series of related transactions between Siogo Shoes, a shoe wholesaler, and Sole Mates, a chain
of retail shoe stores:

Feb. 9 Siogo Shoes sold Sole Mates 100 pairs of hiking boots on account, terms 1/10, n/30.
The cost of these boots to Siogo Shoes was $60 per pair, and the sales price was $100 per pair.
Feb. 12 United Express charged $80 for delivering this merchandise to Sole Mates. These charges were split
evenly between the buyer and seller and were paid immediately in cash.
Feb. 13 Sole Mates returned 10 pairs of boots to Siogo Shoes because they were the wrong size. Siogo Shoes
allowed Sole Mates full credit for this return.
Feb. 19 Sole Mates paid the remaining balance due to Siogo Shoes within the discount period. Both companies
use a perpetual inventory system.

Instructions
a. Record this series of transactions in the general journal of Siogo Shoes. (The company records
sales at gross sales price.)
b. Record this series of transactions in the general journal of Sole Mates. (The company records purchases of
merchandise at net cost and uses a Transportation-in account to record transportation
charges on inbound shipments.)
c. Sole Mates does not always have enough cash on hand to pay for purchases within the discount period.
However, it has a line of credit with its bank, which enables Sole Mates to easily borrow money for short periods
of time at an annual interest rate of 11 percent. (The bank charges interest only for the number of days until Sole
Mates repays the loan.) As a matter of general policy, should Sole Mates take advantage of 1/10, n/30 cash
discounts even if it must borrow the money to do so at an annual rate of 11 percent? Explain fully—and illustrate
any supporting computations.

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 6-73

End
End of
of Chapter
Chapter 66

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