acc 200 chapter 5 pt. 2

• The objective is to account for the sale of merchandise inventory using a perpetual inventory system.

Sales Revenue

• It is the amount a business earns from selling merchandise inventory.
• Two entries are required to record sale transactions:
• The first entry records Sales Revenue and Cash or Accounts Receivable.
• The second entry records Cost of Goods Sold and Merchandise Inventory.

Cash and Credit Card Sales

• As Smart Touch Learning makes sales, sales invoices are issued to customers.
• For example, Exhibit 5-5 illustrates the invoice for two tablets sold for cash on June 19, 2019 for $1,000, costing $700.

Sales on Account

• Smart Touch Learning sold 5 tablets for $500 each, making a $2,500 sale on account on June 15.
• The goods cost $1,750.

Sales Discounts

• Many sellers offer customers a discount for early payment.
• Sales discounts are a reduction in the amount of revenue earned on sales for early payment.
• The new revenue recognition standards require sales to be recorded at the net amount or the amount of the sale less any sales discounts.
• For example, Smart Touch Learning sold 10 tablets for $500 each on account with terms of 2/10, n/30 and the goods cost $3,500
• As of June 21, if the customer makes payment within the discount period, Smart Touch Learning will record the receipt of cash and decrease the Accounts Receivable for $4,900.
• If the customer does not pay within the discount period, the customer must pay the full $5,000 amount.
• Smart Touch Learning would record the discount lost.

Sales Returns and Allowances

• The return of goods by a customer or the granting of an allowance is called Sales Returns and Allowances.

Estimating Sales Returns

• Under the new revenue recognition standard, companies should only record sales revenue in the amount they expect to eventually realize.
• Companies must decrease sales revenue by an estimated amount of sales returns.
• Historical data can be used for this estimate.
• Smart Touch Learning had sales of $1,000,000 and cost of goods sold of $600,000 for the period.
• Smart Touch Learning estimates that approximately 4% of the merchandise sold will be returned.
• As adjusting entries:
• Sales Revenue is debited $40,000
• Refunds Payable is credited $40,000
• Estimated Returns Inventory is debited $24,000
• Cost of Goods Sold is credited $24,000

Actual Return of Inventory

• On January 20, 2020, a customer returned merchandise purchased with cash with a sales price of $2,000 and the cost of the goods was $800.
• As entries:
• Refunds Payable is debited $2,000
• Cash is credited $2,000
• Merchandise Inventory is debited $800
• Estimated Returns Inventory is credited $800

Sales Allowance

• On January 28, 2020, Smart Touch Learning grants a $100 sales allowance for goods damaged in transit.
• The goods were sold on account and remain unpaid.
• Refunds Payable is debited $100
• Accounts Receivable is credited $100

Transportation Costs—Freight Out

• Smart Touch Learning paid $30 to ship goods to a customer on June 21.
• Freight out is a delivery expense to the seller.
• Delivery Expense is debited $30
• Cash is credited $30

Adjusting and Closing Entries for a Merchandiser

• Actual inventory on hand may differ from what the books show:
• Inventory shrinkage is loss of inventory occurring from theft, damage, and errors.
• Businesses take a physical count of inventory at least once a year.
• Merchandise Inventory is adjusted based on the physical count.
• Adjusting entry = Merchandise inventory balance before adjustment - Actual merchandise inventory on hand
• Smart Touch Learning's Merchandise Inventory account shows an unadjusted balance of $31,530, but a physical count comes to only $30,000:
• Cost of Goods Sold is debited $1,530
• Merchandise Inventory is credited $1,530

Closing the Accounts of a Merchandiser

• The four-step closing process for a merchandising company are:
• Step 1: Make the revenue accounts equal zero via the Income Summary account.
• Step 2: Make expense accounts equal zero via the Income Summary account.
• Step 3: Make the Income Summary account equal zero via the Retained Earnings account (this closing entry transfers net income (or net loss) to Retained Earnings).
• Step 4: Make the Dividends account equal zero via the Retained Earnings account.
• Exhibit 5-6 presents Smart Touch Learning's adjusted trial balance and closing entries for the year.
• Closing means to zero out all temporary accounts.

Financial Statements of a Merchandiser

• Formats for income statements are:
• The single-step income statement groups all revenues together and then lists and deducts all expenses together without calculating any subtotals.
• The multi-step income statement contains subtotals to highlight significant relationships; in addition to net income, it reports gross profit and operating income.
• Operating expenses are reported in two categories:
• Selling expenses are related to marketing and selling the company's goods and services.
• Administrative expenses include expenses not related to marketing the company's goods and services.
• Other income and expenses reports revenues or expenses that are outside the normal, day-to-day operations of a business, such as a gain or loss on the sale of plant assets; or interest expense; or Sales Discounts Forfeited.
• Income tax expense reports the federal and state income taxes that are incurred by the corporation.
• The statements of retained earnings for merchandisers and service businesses are similar.
• The balance sheet for a merchandiser is very similar, except for two new assets accounts and one new liability:
• Merchandise Inventory
• Estimated Returns Inventory
• Refunds payable

Gross Profit Percentage

• Measures the profitability of each sales dollar above the cost of goods sold.
• A high gross profit percentage is desired.
• Gross profit percentage = Gross profit / Net sales revenue
• Kohl's Corporation reported gross profit percentage for year ending Jan. 2015 was 36.4%; gross profit percentage for year ending Jan. 2016 was 36.1%.