Corporate Financial Accounting Chapter 5 PDF

Corporate Financial Accounting, 17e Chapter 5: Accounting for Merchandising Businesses Warren/Jones/Tayler, Corporate Financial Accoun...

Corporate Financial Accounting, 17e Chapter 5: Accounting for Merchandising Businesses Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1  Chapter Objectives By the end of this chapter, you should be able to: Obj. 1 Distinguish between the activities and financial statements of service and merchandising businesses. Obj. 2 Describe and illustrate the accounting for merchandise transactions. Obj. 3 Describe and illustrate the adjusting process for a retail business. Obj. 4 Describe and illustrate the financial statements and closing entries for a retail business. Obj. 5 Describe and illustrate the use of the asset turnover ratio in evaluating a company’s operating performance. Obj. 6 Appendix 1: Describe and illustrate the gross and net methods of accounting for sales discounts. Obj. 7 Appendix 2: Describe and illustrate the periodic inventory system. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Nature of Merchandising Businesses (Learning Objective 1) Merchandising businesses do not produce or manufacture products. A merchandising business sells merchandise that it purchases from other companies and can be classified as a wholesaler or a retailer. A wholesaler sells merchandise to other companies rather than to the final consumer. A retailer purchases its merchandise from other companies and sells directly to the final consumer. The transactions between companies are called business-to-business (B2B) transactions and transactions between retailers and final consumers are called business-to-consumer (B2C) transactions. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Exhibit 1 – The Operating Cycle for a Merchandising Business Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  Financial Statements (1 of 2) The differences between service and merchandising businesses are also reflected in their financial statements. These differences are illustrated in the following condensed income statements: Service Business Merchandising Business Fees earned $ XXX Sales $ XXX Operating expenses (XXX) Cost of goods sold (XXX) Operating income $ XXX Gross profit $ XXX Operating expenses (XXX) Operating income $ XXX Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Financial Statements (2 of 2) The revenue activities of a service business involve providing services to customers. For a merchandising business, the revenues from selling merchandise are reported as sales, and its cost is recognized as an expense. This expense is called the cost of goods sold or cost of merchandise sold. − The cost of goods sold is subtracted from sales to arrive at gross profit. − Gross profit is the profit before deducting operating expenses. − Operating expenses are subtracted from gross profit to arrive at operating income. Merchandise on hand (not sold) at the end of an accounting period is called inventory or merchandise inventory. − Inventory is reported as a current asset on the balance sheet. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  Discussion Activity 1 Sometimes the line between a pure service business and a merchandiser can be blurry. In groups of 2 to 4 students, brainstorm businesses that are merchandisers that also provide services to customers and service businesses that are also merchandisers. Why would a company choose to be both at the same time? Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Discussion Activity 1 Debrief It is likely that your group found lots of examples that are hybrids: both a merchandiser and a service business. Here are a few examples: Disney: It offers the service of entertainment at its theme parks, and it also sells large quantities of licensed merchandise online, at the theme parks, and in retail stores. Firestone Auto Centers: It offers various repair and maintenance services on customer autos, and it also sells tires and other auto accessories. CVS: Many of its stores offer urgent medical care (MinuteClinic) and, of course, it has a large inventory of merchandise for sale. What companies did you think of? Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  Merchandise Transactions (Learning Objective 2) Merchandise transactions are recorded in accounts using the rules of debit and credit. Since merchandise transactions differ from those of a service business, a new chart of accounts is used, as shown in Exhibit 2. The accounts related to merchandise transactions are highlighted in blue. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Exhibit 2 – Chart of Accounts for NetSolutions (1 of 2) Balance Sheet Accounts Balance Sheet Accounts 100 Assets 200 Liabilities 110 Cash 210 Accounts Payable 112 Accounts Receivable 211 Salaries Payable 115 Inventory 212 Unearned Rent 116 Estimated Returns Inventory 213 Customer Refunds Payable 117 Office Supplies 214 Estimated Coupons Payable 118 Prepaid Insurance 215 Notes Payable 120 Land 300 Stockholders’ Equity 123 Store Equipment 310 Common Stock 124 Accumulated Depreciation—Store 311 Retained Earnings Equipment 312 Dividends 125 Office Equipment 126 Accumulated Depreciation—Office Equipment Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Exhibit 2 – Chart of Accounts for NetSolutions (2 of 2) Income Statement Accounts Income Statement Accounts 400 Revenues 531 Rent Expense 410 Sales 532 Depreciation Expense—Office Equipment 500 Costs and Expenses 533 Insurance Expense 510 Cost of Goods Sold 534 Office Supplies Expense 520 Sales Salaries Expense 539 Misc. Administrative Expense 521 Advertising Expense 600 Other Revenue 522 Depreciation Expense—Store Equipment 610 Rent Revenue 523 Delivery Expense 700 Other Expense 529 Miscellaneous Selling Expense 710 Interest Expense 530 Office Salaries Expense Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  Subsidiary Ledgers (1 of 2) A large number of individual accounts with a common characteristic can be grouped together in a separate ledger, called a subsidiary ledger. The primary ledger, which contains all of the balance sheet and income statement accounts, is then called the general ledger. Each subsidiary ledger is represented in the general ledger by a summarizing account, called a controlling account. Most companies also record similar transactions in separate journals, which generate purchase, sales, and inventory reports. − These separate journals are called special journals. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  Subsidiary Ledgers (2 of 2) Common subsidiary ledgers include: − The accounts receivable subsidiary ledger, or customers ledger, lists the individual customer accounts in alphabetical order.  The controlling account in the general ledger is Accounts Receivable. − The accounts payable subsidiary ledger, or creditors ledger, lists individual creditor accounts in alphabetical order.  The controlling account in the general ledger is Accounts Payable. − The inventory subsidiary ledger, or inventory ledger, lists individual inventory by item (bar code) number.  The controlling account in the general ledger is Inventory. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13  Purchases Transactions (1 of 3) In a perpetual inventory system, each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger. In a periodic inventory system, the inventory does not show the amount of merchandise available for sale and the amount sold. Instead, a listing of inventory on hand, called a physical inventory, is prepared at the end of the accounting period. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  Purchases Transactions (2 of 3) Under the perpetual inventory system, cash purchases of merchandise are recorded as follows: The T account postings for the preceding journal entry are as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15  Purchases Transactions (3 of 3) Purchases of inventory on account are recorded as follows: The T account postings for the preceding journal entry are as follows: The terms of purchases on account are normally indicated on the invoice or bill that the seller sends the buyer. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  Exhibit 3 – Invoice Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  Exhibit 4 – Credit Terms Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Purchases Discounts (1 of 6) B2B (business-to-business) purchases may include a discount by the supplier (vendor) to encourage the buyer to pay before the end of the credit period. − For example, a supplier may offer 2/10, n/30, which means a 2% discount if the buyer pays within 10 days of the invoice date. If the buyer does not take the discount, the total invoice amount is due within 30 days. Discounts taken by the buyer for early payment of an invoice are called purchases discounts. − Purchases discounts taken by a buyer reduce the cost of the merchandise purchased. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  Purchases Discounts (2 of 6) Assume that in order to pay the invoice on January 15, NetSolutions borrows $2,940, which is $3,000 less the discount of $60 ($3,000 × 2%). If an annual interest rate of 6% and a 365-day year are also assumed, the interest on the loan of $2,940 for the remaining 20 days of the credit period is $9.67 ($2,940 × 6% × 20 ÷ 365). The net savings to NetSolutions of taking the discount is $50.33, computed as follows: Discount of 2% on $3,000 $60.00 Interest for 20 days at a rate of 6% on $2,940 (9.67) Savings from taking the discount $50.33 Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  Purchases Discounts (3 of 6) The savings can also be seen by comparing the interest rate on the money saved by taking the discount and the interest rate on the money borrowed to take the discount. The interest rate on the money saved in the prior example is estimated by converting 2% for 20 days to a yearly rate, as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  Purchases Discounts (4 of 6) Under the perpetual inventory system, the buyer initially debits Inventory for the amount of the invoice. When paying the invoice within the discount period, the buyer credits Inventory for the amount of the discount. − In this way, Inventory shows the net cost to the buyer. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  Purchases Discounts (5 of 6) To illustrate, NetSolutions would record the Alpha Technologies invoice and its payment at the end of the discount period as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  Purchases Discounts (6 of 6) Assume that NetSolutions does not take the discount, but instead pays the invoice on February 4. In this case, NetSolutions would record the payment as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  Purchases Returns and Allowances (1 of 4) A buyer may request an allowance for merchandise that is returned (purchases return) or a price allowance (purchases allowance) for damaged or defective merchandise, which is called purchases returns and allowances. − The buyer normally sends the seller a debit memorandum to notify the seller of reasons for the return (purchase return) or to request a price reduction (purchase allowance). − A debit memorandum, often called a debit memo, informs the seller of the amount the buyer proposes to debit to the account payable due the seller and states the reasons for the return or the request for the price allowance. The buyer may use the debit memo as the basis for recording the return or allowance or wait for approval from the seller (creditor). − The buyer debits Accounts Payable and credits Inventory. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  Exhibit 5 – Debit Memo Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  Purchases Returns and Allowances (2 of 4) To illustrate, NetSolutions records the return of the inventory indicated in the debit memo as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  Purchases Returns and Allowances (3 of 4) Before paying an invoice, a buyer may return inventory or be granted a price allowance for an invoice with a purchase discount. Assume the following data concerning a purchase of inventory by NetSolutions on May 2: May 2. Purchased $5,000 of inventory on account from Delta Data Link, terms 2/10, n/30. 4. Returned inventory with an invoice amount of $1,000 that was purchased on May 2. 12. Paid for the purchase of May 2 less the return and discount. NetSolutions would record these transactions as shown on the next slide. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 Purchases Returns and Allowances (4 of 4) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29  Cash Sales (1 of 4) A retail business may sell merchandise for cash. Cash sales are normally entered on a cash register and recorded in the accounts. Assume that on March 3, NetSolutions sells merchandise for $1,800. These cash sales are recorded as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  Cash Sales (2 of 4) Using the perpetual inventory system, the cost of goods sold and the decrease in inventory are also recorded. In this way, the inventory account indicates the amount of inventory on hand (not sold). Assume that the cost of goods sold on March 3 is $1,200. The entry to record the cost of goods sold and the decrease in the inventory is as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31  Cash Sales (3 of 4) Sales may be made using debit cards, sometimes called bank cards. Debit card sales are recorded as cash sales. Sales may also be made to customers using credit cards such as Mastercard or Visa. − Credit card sales are normally processed by a clearinghouse that contacts the bank that issued the card. − The issuing bank then electronically transfers cash directly to the retailer’s bank account. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32  Cash Sales (4 of 4) If a retailer allows customers to use debit or credit cards to pay for purchases, the retailer may be charged processing fees by the clearinghouse or issuing bank. Such fees are periodically recorded as an expense. Assume that a company pays credit card processing fees of $4,150 on October 31. These fees would be recorded as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  Sales on Account (1 of 3) A retail business may sell merchandise on account. The seller records such sales as a debit to Accounts Receivable and a credit to Sales. Assume that NetSolutions sold merchandise on account to Digital Technologies for $18,000, terms n/30. The cost of the merchandise sold was $10,800. NetSolutions would record the sale on account as shown on the next slide. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  Sales on Account (2 of 3) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35  Sales on Account (3 of 3) NetSolutions would record the receipt of Digital Technologies’ payment on April 9 as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36 Sales Incentives, Promotions, and Discounts (1 of 11) Retailers frequently offer sales incentives, promotions, and discounts. Discounts may also be offered to encourage customers to pay early. Such incentives and promotions often take the form of coupons and rebates.  A coupon provides the customer a discount when purchasing a product(s).  A rebate provides the customer a refund after the product is purchased. The accounting for a coupon or rebate depends upon its terms and how it can be redeemed by the customer. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 Sales Incentives, Promotions, and Discounts (2 of 11) A coupon has no value and the retailer has no obligation until a customer purchases merchandise and presents the coupon. − As a result, no liability (journal entry) is recorded by the retailer when the coupon is issued. Instead, the retailer reduces sales (revenue) by the amount of the coupon at the time of sale. − These types of coupons are referred to as point-of-sale coupons. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38  Sales Incentives, Promotions, and Discounts (3 of 11) Assume Welborn Stores offers a coupon on its website for $3 off the customer’s next purchase of $15 or more. Assume that Becky Lewis purchases $45 of merchandise, submits the $3 coupon, and pays cash. The $3 coupon reduces the revenue from the sale from $45 to $42 ($45 − $3 coupon). Assuming the merchandise cost Welborn Stores $27, the sale would be recorded as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 Sales Incentives, Promotions, and Discounts (4 of 11) In contrast, assume that a coupon is issued when customers purchase merchandise. In this case, when the retailer sold the merchandise, it incurred a future obligation (liability) to the customer. As a result, the retailer must estimate the dollar value of coupons that will be redeemed, reduce sales, and record a related liability. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 Sales Incentives, Promotions, and Discounts (5 of 11) Assume that to stimulate summer sales Grande Stores prints a coupon on the bottom of its May 20Y6 sales receipts for $3 off the customer’s next purchase of over $20. The coupons may be redeemed June 1–August 31, 20Y6. During May, Grande Stores sold merchandise for $40,000,000, which generated 6,000,000 sales receipts. The cost of the merchandise sold was $21,500,000. Grande Stores estimates that 20% of the coupons will be redeemed before they expire on August 31. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 Sales Incentives, Promotions, and Discounts (6 of 11) If Grande Stores accepts only cash, Visa, or Mastercard, it would record its May 20Y6 sales as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 Sales Incentives, Promotions, and Discounts (7 of 11) As of May 31, 20Y6, Grande Stores has incurred a current liability, called Estimated Coupons Payable, to its May customers who may redeem its $3 coupons. Since it is estimated that only 20% of its May customers will redeem a coupon, 1,200,000 coupons (6,000,000 sales receipts × 20%) are estimated to be redeemed. Because each coupon is for $3, the estimated coupon liability is $3,600,000 (1,200,000 coupons × $3). This estimated liability reduces the gross sales of $40,000,000 to $36,400,000 ($40,000,000 − $3,600,000). Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43 Sales Incentives, Promotions, and Discounts (8 of 11) When customers redeem the coupons, Estimated Coupons Payable is decreased. Assume that during June, Grande Stores sold $52,500,000 of merchandise that cost $28,100,000 and that 800,000 of the May coupons were redeemed. Grande Stores would record its June sales as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44  Sales Incentives, Promotions, and Discounts (9 of 11) Grande Stores would record its July and August sales in a similar manner. Since the May coupon liability is based on an estimate, Estimated Coupons Payable may have a balance on August 31, 20Y6. Assume that on August 31, 20Y6, Estimated Coupons Payable has a credit balance of $175,000. Since the coupon period has expired, Grande Stores does not have any further coupon liability to its customers. As a result, the Estimated Coupons Payable credit balance of $175,000 should be added back to Sales as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45 Sales Incentives, Promotions, and Discounts (10 of 11) If on August 31, 20Y6, Estimated Coupons Payable had a debit balance of $50,000, Grande Stores would have underestimated the percent of coupons that were redeemed. As a result, Grande Stores would decrease its Sales by making the following entry on August 31: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46 Sales Incentives, Promotions, and Discounts (11 of 11) The accounting for rebates is similar to that for coupons. Instant rebates, which are redeemed at the time of purchase, reduce the revenue at the time of sale. Mail-in rebates require the retailer to estimate the dollar value of rebates that will be redeemed, reduce sales, and record a related liability. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47  Sales Returns, Refunds, and Allowances (1 of 7) A buyer may return merchandise that is defective, is damaged during shipment, or does not meet the buyer’s expectations. If the buyer has already paid for the merchandise, the seller may pay the buyer a cash refund. If the buyer has an outstanding accounts receivable with the seller, the buyer may request an offset against the accounts receivable. A buyer could also keep the merchandise and request a partial refund or price allowance. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48  Sales Returns, Refunds, and Allowances (2 of 7) At the end of the accounting period, a seller must estimate the amount of returns, refunds, and allowances that may have to be issued to customers in the future. Based upon this estimate, sellers record two adjusting entries: 1. The first adjusting entry decreases (debits) Sales and increases (credits) Customer Refunds Payable for the estimated refunds and allowances that will be granted to customers in the future.  Customer Refunds Payable is a current liability for refunds and allowances that will be granted to customers. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49  Sales Returns, Refunds, and Allowances (3 of 7) 2. The second adjusting entry increases (debits) Estimated Returns Inventory for merchandise that is expected to be returned and decreases (credits) Cost of Goods Sold.  Estimated Returns Inventory is a current asset for merchandise that is expected to be returned by customers. Assume that on December 31, 20Y7, NetSolutions estimates that from 20Y7 sales it will have to refund or grant customers allowances of $7,000 during 20Y8. In addition, NetSolutions estimates that $5,500 of merchandise will be returned. Based upon these estimates, NetSolutions would record the following two adjusting entries on December 31, 20Y7, shown on the next slide. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 Sales Returns, Refunds, and Allowances (4 of 7) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51  Sales Returns, Refunds, and Allowances (5 of 7) Assume that on March 4, 20Y8, Blake & Sons returned merchandise to NetSolutions with a selling price of $1,800 for a full cash refund. The merchandise originally cost NetSolutions $875. NetSolutions would record the cash refund and the return with the following two entries: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52  Sales Returns, Refunds, and Allowances (6 of 7) A buyer who has already paid for merchandise may decide to keep the merchandise and accept a partial refund from the seller. Assume that in the prior example Blake & Sons agrees to keep the merchandise in return for a partial refund of $900 from NetSolutions. In this case, NetSolutions would record the partial cash refund to Blake & Sons as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53  Exhibit 6 – Credit Memo Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54  Sales Returns, Refunds, and Allowances (7 of 7) The credit memo indicates that NetSolutions intends to reduce (credit) Blake & Sons’ accounts receivable by $900. NetSolutions would record the granting of the customer allowance as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 Exhibit 7 – Summary of Journal Entries for Customer Sales Returns, Refunds, and Allowances Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56  Freight (1 of 6) Purchases and sales of merchandise often involve freight. The ownership of the merchandise may pass to the buyer when the seller delivers the merchandise to the freight carrier. In this case, the terms are said to be FOB (free on board) shipping point, meaning that the buyer pays the freight costs from the shipping point to the final destination. Assume that on June 10, NetSolutions purchased merchandise as follows: June 10. Purchased merchandise from Magna Data, $1,200 terms FOB shipping point. 10. Paid freight of $50 on June 10 purchase from Magna Data. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 57  Freight (2 of 6) NetSolutions would record these two transactions as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 58  Freight (3 of 6) The ownership of the merchandise may pass to the buyer when the buyer receives the merchandise. In this case, the terms are said to be FOB (free on board) destination, meaning the seller pays the freight costs from the shipping point to the buyer’s final destination. Assume that NetSolutions sells merchandise as follows: June 15. Sold merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the goods sold is $480. 15. NetSolutions pays freight of $40 on the sale of June 15. NetSolutions records the sale, the cost of the sale, and the freight cost as shown on the next slide. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 59  Freight (4 of 6) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 60  Freight (5 of 6) The seller may prepay the freight, even though the terms are FOB shipping point. The seller will then add the freight to the invoice. The buyer debits Inventory for the total amount of the invoice, including the freight. Any discount terms would not apply to the prepaid freight. Assume that NetSolutions sells merchandise as follows: June 20. Sold merchandise to Planter Company on account, $800, terms FOB shipping point, n/30. NetSolutions paid freight of $45, which was added to the invoice. The cost of the goods sold is $360. NetSolutions records the sale, the cost of the sale, and the freight as shown on the next slide. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 61  Freight (6 of 6) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 62  Exhibit 8 – Freight Terms Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 63 Exhibit 9 – Recording Inventory Transactions Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 64  Exhibit 10 – Illustration of Inventory Transactions for Seller and Buyer (1 of 2) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 65  Exhibit 10 – Illustration of Inventory Transactions for Seller and Buyer (2 of 2) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 66  Sales Taxes and Trade Discounts Sales of merchandise often involve sales taxes. Also, the seller may offer buyers trade discounts. Almost all states levy a tax on sales of merchandise. The liability for the sales tax is incurred when the sale is made. − At the time of a cash sale, the seller collects the sales tax. − When a sale is made on account, the seller charges the tax to the buyer by debiting Accounts Receivable. − The seller credits the sales account for the amount of the sale and credits the tax to Sales Tax Payable. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 67  Sales Taxes (1 of 2) The seller would record a sale of $100 on account, subject to a tax of 6%, as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 68  Sales Taxes (2 of 2) On a regular basis, the seller pays to the taxing authority (state) the amount of the sales tax collected. The seller records such a payment as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 69  Trade Discounts Wholesalers may offer special discounts off list prices to government agencies or businesses that order large quantities. − Such discounts are called trade discounts. Sellers and buyers do not normally record the list prices of merchandise and trade discounts in their accounts. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 70  Knowledge Check Activity 1 On May 15 of the current year, Newport Beach Goods, a retail store, receives an invoice from one of its vendors, Suntime Umbrellas, Inc., for $2,800. The payment terms are 1/15, n/30. Newport Beach Goods pays the invoice on May 29. How much will it pay? a. $2,800 b. $2,744 c. $2,772 d. $2,828 Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 71  Knowledge Check Activity 1: Answer On May 15 of the current year, Newport Beach Goods, a retail store, receives an invoice from one of its vendors, Suntime Umbrellas, Inc., for $2,800. The payment terms are 1/15, n/30. Newport Beach Goods pays the invoice on May 29. How much will it pay? Answer: c. $2,772 The payment terms of 1/15, n/30 indicate Newport Beach Goods can take a 1% discount if it pays within 15 days. Since it is paying within the 15-day window, it can take the 1% discount: $2,800 × 99% = $2,772. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 72  The Adjusting Process (Learning Objective 3) The following adjusting entries for a retail business differ from those of a service business: − Inventory Shrinkage − Customer Returns and Allowances Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 73  Inventory Shrinkage (1 of 3) Under the perpetual inventory system, the inventory account is continually updated for purchase and sales transactions. As a result, the balance of the inventory account is the amount of merchandise available for sale at that point in time. However, retailers normally experience some loss of inventory due to shoplifting, employee theft, or errors. Thus, the physical inventory on hand at the end of the accounting period is usually less than the balance of Inventory. This difference is called inventory shrinkage or inventory shortage. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 74  Inventory Shrinkage (2 of 3) NetSolutions’ inventory on December 31, 20Y8, is as follows: Account balance of Inventory $ 63,950 Physical inventory on hand 62,150 Inventory shrinkage $ 1,800 At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 75  Inventory Shrinkage (3 of 3) After the preceding entry is recorded, the balance of Inventory agrees with the physical inventory on hand at the end of the period. Since inventory shrinkage cannot be totally eliminated, it is considered a normal cost of operations. If the amount of the shrinkage is unusually large, it may be disclosed separately on the income statement. − In such cases, the shrinkage may be recorded in a separate account, such as Loss from Inventory Shrinkage. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 76 Customer Returns, Refunds, and Allowances (1 of 3) Sellers are required to estimate customer returns, refunds, and allowances at the end of the accounting period. Based upon these estimates, two adjusting journal entries are recorded. − The first adjusting entry debits Sales and credits Customer Refunds Payable for estimated customer refunds and allowances. − The second adjusting entry debits Estimated Returns Inventory and credits Cost of Goods Sold for merchandise that is expected to be returned. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 77 Customer Returns, Refunds, and Allowances (2 of 3) Assume these unadjusted balances for NetSolutions as of December 31, 20Y8: Unadjusted Balances December 31, 20Y8 Debit Credit Sales $715,409 Cost of Goods Sold $523,505 Estimated Returns Inventory 300 Customer Refunds Payable 800 Estimated cost of merchandise returned for 20Y8 sales $ 5,000 Estimated percent of refunds of 20Y8 sales 1% Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 78 Customer Returns, Refunds, and Allowances (3 of 3) On December 31, 20Y8, NetSolutions would record the following two adjusting entries: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 79 Exhibit 11 – Adjusted Trial Balance (1 of 2) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 80 Exhibit 11 – Adjusted Trial Balance (2 of 2) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 81  Knowledge Check Activity 2 At the end of the reporting period, an adjusting entry is recorded to write off the reduction of inventory due to shrinkage. If the amount of inventory shortage is considered normal and customary, the adjusting entry will include a debit to: a. Cost of Goods Sold b. Inventory c. Loss from Inventory Shrinkage d. Lost Inventory Expense Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 82  Knowledge Check Activity 2: Answer At the end of the reporting period, an adjusting entry is recorded to write off the reduction of inventory due to shrinkage. If the amount of inventory shortage is considered normal and customary, the adjusting entry will include a debit to: Answer: a. Cost of Goods Sold When the inventory shrinkage is considered normal, the amount is debited to Cost of Goods Sold. If the amount of inventory shrinkage is large and unusual, the company will record a debit to a distinct account called Loss from Inventory Shrinkage. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 83  Financial Statements and Closing Entries for a Retail Business (Learning Objective 4) Although merchandising transactions affect the balance sheet in reporting inventory, they primarily affect the income statement. An income statement for a retail business is normally prepared using either a multiple-step or single-step format. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 84 Exhibit 12 – Multiple-Step Income Statement Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 85  Sales, Cost of Goods Sold, and Gross Profit Sales to customers for cash and on account are reported in the sales section. Cost of goods sold are reported next and may also be reported as cost of merchandise sold or cost of sales. The excess of sales over cost of goods sold is gross profit. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 86  Operating Income (1 of 2) Operating income, sometimes called income from operations, is determined by subtracting operating expenses from gross profit. Operating expenses are normally classified as either selling expenses or administrative expenses. − Selling expenses are incurred directly in the selling of merchandise. − Administrative expenses, sometimes called general expenses, are incurred in the administration or general operations of the business. Each selling and administrative expense may be reported separately. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 87  Operating Income (2 of 2) Many companies report selling, administrative, and operating expenses as single line items, shown as follows for NetSolutions: Gross profit $ 187,950 Operating expenses: Selling expenses $70,820 Administrative expenses 34,890 Total operating expenses (105,710) Operating income $ 82,240 Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 88  Other Revenue and Expense (1 of 2) Other revenue and expense items are not related to the primary operations of the business. − Other revenue is revenue from sources other than the primary operating activity of a business. − Other expense is an expense that cannot be traced directly to the normal operations of the business. Other revenue and other expense are offset against each other on the income statement. − If the total of other revenue exceeds the total of other expense, the difference is added to operating income to determine net income. − If the reverse is true, the difference is subtracted from operating income. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 89  Other Revenue and Expense (2 of 2) The other revenue and expense items of NetSolutions are reported as follows: Operating income $82,240 Other revenue and expense: Rent revenue $ 600 Interest expense (2,440) (1,840) Net income $80,400 Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 90 Exhibit 13 – Single-Step Income Statement Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 91 Exhibit 14 – Statement of Stockholders’ Equity Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 92  Exhibit 15 – Balance Sheet (1 of 2) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 93  Exhibit 15 – Balance Sheet (2 of 2) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 94  The Closing Process (1 of 3) The closing entries for a retail business are similar to those for a service business. The two closing entries for a retail business are as follows: − Closing Entry 1. Debit each revenue account for its balance, credit each expense account for its balance, and credit the retained earnings account for net income.  Debit the retained earnings account for a net loss.  Cost of Goods Sold is a temporary account and is closed like an expense account. − Closing Entry 2. Debit the retained earnings account for the balance of the dividends account and credit the dividends account. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 95  The Closing Process (2 of 3) The two closing entries for NetSolutions are as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 96  The Closing Process (3 of 3) After the closing entries are posted to the accounts, a post-closing trial balance is prepared. The only accounts that appear on the post-closing trial balance are the asset, contra asset, liability, and stockholders’ equity accounts with balances. − These are the same accounts shown on the end-of-period balance sheet. If the two totals of the trial balance columns are not equal, an error has occurred that must be found and corrected. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 97 Exhibit 16 – Post-Closing Trial Balance Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 98  Knowledge Check Activity 3 There are some differences between the single-step income statement and the multiple-step income statement. Which of the following items would not be shown on the single-step income statement? a. Cost of goods sold b. Gross profit c. Sales d. Administrative expenses Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 99  Knowledge Check Activity 3: Answer There are some differences between the single-step income statement and the multiple-step income statement. Which of the following items would not be shown on the single-step income statement? Answer: b. Gross profit Gross profit is not shown on the single-step income statement, as it emphasizes total revenues and total expenses in a more concise view. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 100 Analysis for Decision Making: Asset Turnover Ratio (1 of 3) (Learning Objective 5) The asset turnover ratio measures how effectively a business is using its assets to generate sales. − A high ratio indicates an effective use of assets. The asset turnover ratio is computed as follows: Sales Asset Turnover Ratio = Average Total Assets The denominator is the average of the total assets at the beginning and end of the year. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 101 Analysis for Decision Making: Asset Turnover Ratio (2 of 3) To illustrate the use of this ratio, the following data (in millions) were taken from recent annual reports of Dollar Tree, Inc.: Year 2 Year 1 Total sales $28,332 $26,321 Total assets: Beginning of year 21,722 20,696 End of year 23,022 21,722 Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 102 Analysis for Decision Making: Asset Turnover Ratio (3 of 3) The asset turnover ratio for each year is as follows: Year 2 Year 1 Asset turnover ratio* 1.27 1.24 Sales $28,332 $26,321 Average assets 22,372 21,209 [($21,722 + $23,022) ÷ 2] [($20,696 + $21,722) ÷ 2] Asset turnover $28,322 ÷ $22,372 $26,321 ÷ $21,209 *Rounded to two decimal places. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 103  Discussion Activity 2 Financial ratios, such as the asset turnover ratio, are used by investors and other parties to compare companies’ operating and financial conditions. Select a large, publicly traded company of your choice and go online to find its asset turnover ratio. Interpret the asset turnover ratio for the company you chose and share your explanation in a class discussion. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 104  Discussion Activity 2 Debrief Students will likely select a variety of publicly traded companies. Typically, a search such as “asset turnover ratio for Company X” will yield the ratio without too much effort. The ratios will vary widely. Ratios are often used as comparisons to the same company year over year, or between companies, often in the same segment. For the asset turnover ratio, it can be explained as a measure of how effectively a business is using its assets to generate sales, with a higher ratio being preferable. Was the asset turnover ratio for the company you selected what you expected? Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 105  Appendix 1: Sales Discounts (Learning Objective 6) When a company sells merchandise on account, the buyer and seller must agree on the credit period and terms prior to the delivery of the merchandise. − These credit terms are normally included on the invoice (bill) that the seller sends to the buyer after delivery of the merchandise. To encourage a buyer to pay the invoice early, a seller may offer a sales discount with such terms as 2/10, n/30. − These terms provide a customer a 2% discount off of the invoice price if the customer pays within 10 days of the date of the invoice. − If not paid within 10 days, the total invoice amount is due within 30 days. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 106  Gross Method (1 of 4) Under the gross method of recording sales discounts, a sales invoice with credit terms that include a discount for early payment is recorded at the invoice amount. If the customer pays within the discount period, Cash is debited for the amount received, the discount is recorded as a debit to Sales Discounts, and Accounts Receivable is credited for the invoice amount. − Sales Discounts is a contra (offsetting) account to Sales and is used so that managers can determine the sales discounts taken during the period. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 107  Gross Method (2 of 4) Assume that NetSolutions sold $18,000 of merchandise to Digital Technologies on March 10, 20Y8, with credit terms of 2/10, n/30. The cost of the merchandise sold was $10,800. The sale would be recorded under the gross method as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 108  Gross Method (3 of 4) Assuming Digital Technologies pays within the discount period on March 20, the payment would be recorded as follows: Instead of paying within the discount period, assume that Digital Technologies pays the gross amount of $18,000 on April 9. The payment would be recorded as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 109  Gross Method (4 of 4) Generally accepted accounting principles (GAAP) require that sellers record revenue (sales) in the amount mostly likely to be received (entitled). Thus, when a customer takes or is likely to take a discount, sales must be reported net of the discount. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 110  Net Method (1 of 5) Under the net method of recording sales discounts, a sales invoice with credit terms that include a discount for early payment is recorded at the net amount of the invoice. If the customer pays within the discount period, Cash is debited for the amount received and Accounts Receivable is credited. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 111  Net Method (2 of 5) Assume that NetSolutions sold $18,000 of merchandise to Digital Technologies on March 10, 20Y8, with credit terms of 2/10, n/30. The cost of the merchandise sold was $10,800. The sale would be recorded under the net method as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 112  Net Method (3 of 5) The sale to Digital Technologies is recorded by NetSolutions at $17,640, which is the invoice amount of $18,000 less the sales discount of $360 ($18,000 × 2%). The payment by Digital Technologies on March 19 is recorded as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 113  Net Method (4 of 5) If Digital Technologies did not pay within the discount period, NetSolutions would receive $18,000 and Sales would be credited for the amount of the discount. For example, assuming that Digital Technologies paid NetSolutions on April 9, the payment would be recorded by NetSolutions as follows: Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 114  Net Method (5 of 5) The net method records Sales at the amount received from customers, which is net of any sales discounts. − The net method is consistent with the GAAP requirement that revenue (sales) be recorded at the amount mostly likely to be received (entitled). − Sales is reported on the income statement at the sales account balance. The disadvantage of the net method is that the amount of sales discounts taken by customers is not readily available from the ledger since there is no sales discounts account. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 115 Exhibit 17 – Gross and Net Methods of Recording Sales Discounts Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 116  Appendix 2: The Periodic Inventory System (Learning Objective 7) Under the periodic inventory system, purchases are normally recorded at their invoice amount as a debit to Purchases. If the invoice is paid within the discount period, the discount is recorded as a credit in a separate account called Purchases Discounts. Likewise, purchases returns are recorded as a credit in a separate account called Purchases Returns and Allowances. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 117  Exhibit 18 – Chart of Accounts Under the Periodic Inventory System (1 of 2) Balance Sheet Accounts Balance Sheet Accounts 100 Assets 200 Liabilities 110 Cash 210 Accounts Payable 111 Notes Receivable 211 Salaries Payable 112 Accounts Receivable 212 Unearned Rent 115 Inventory 213 Customer Refunds Payable 116 Estimated Returns Inventory 214 Estimated Coupons Payable 117 Office Supplies 215 Notes Payable 118 Prepaid Insurance 300 Stockholders’ Equity 120 Land 310 Common Stock 123 Store Equipment 311 Retained Earnings 124 Accumulated Depreciation—Store Equipment 312 Dividends 125 Office Equipment 126 Accumulated Depreciation—Office Equipment Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 118  Exhibit 18 – Chart of Accounts Under the Periodic Inventory System (2 of 2) Income Statement Accounts Income Statement Accounts 400 Revenues 530 Office Salaries Expense 410 Sales 531 Rent Expense 500 Costs and Expenses 532 Depreciation Expense—Office Equipment 510 Purchases 533 Insurance Expense 511 Purchases Returns and Allowances 534 Office Supplies Expense 512 Purchases Discounts 539 Misc. Administrative Expense 513 Freight In 600 Other Revenue 520 Sales Salaries Expense 610 Rent Revenue 521 Advertising Expense 700 Other Expense 522 Depreciation Expense—Store Equipment 710 Interest Expense 523 Delivery Expense 529 Miscellaneous Selling Expense Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 119  Recording Merchandise Transactions Under the Periodic Inventory System (1 of 2) Using the periodic inventory system, purchases of inventory are not recorded in the inventory account. − Instead, purchases, purchases discounts, and purchases returns and allowances accounts are used. − The sales of merchandise are not recorded in the inventory account. − There is no detailed record of the amount of inventory on hand at any time. − At the end of the period, a physical count of inventory on hand is taken. This physical count is used to determine the cost of goods sold. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 120  Purchases and Purchases Discounts Purchases of inventory are recorded in a purchases account rather than in the inventory account. Purchases is debited for the invoice amount of a purchase. Purchases discounts are normally recorded in a separate purchases discounts account. − The balance of the purchases discounts account is reported as a deduction from Purchases for the period. − Thus, Purchases Discounts is a contra (or offsetting) account to Purchases. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 121  Purchases Returns and Allowances Purchases returns and allowances are recorded in a similar manner as purchases discounts. − A separate purchases returns and allowances account is used to record returns and allowances. Purchases returns and allowances are reported as a deduction from Purchases for the period. Thus, Purchases Returns and Allowances is a contra (or offsetting) account to Purchases. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 122  Freight In When merchandise is purchased FOB shipping point, the buyer pays for the freight. Under the periodic inventory system, freight paid when purchasing merchandise FOB shipping point is debited to Freight In, Transportation In, or a similar account. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 123  Recording Merchandise Transactions Under the Periodic Inventory System (2 of 2) The preceding periodic inventory accounts and their effect on the cost of merchandise purchased are summarized as follows: Effect on Cost Entry Normal of Merchandise Account to Increase Balance Purchased Purchases Debit Debit Increases Purchases Discounts Credit Credit Decreases Purchases Returns and Allowances Credit Credit Decreases Freight In Debit Debit Increases Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 124 Exhibit 19 – Transactions Using the Periodic Inventory System (1 of 2) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 125 Exhibit 19 – Transactions Using the Periodic Inventory System (2 of 2) Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 126  Adjusting Process Under the Periodic Inventory System (1 of 2) The adjusting process is the same under the periodic and perpetual inventory systems except for the inventory shrinkage adjustment and customer refunds and allowances. Ending inventory is determined by a physical count under both systems. Under the perpetual inventory system, the ending inventory physical count is compared to the balance of Inventory. − The difference is the amount of inventory shrinkage. − The inventory shrinkage is then recorded as a debit to Cost of Goods Sold and a credit to Inventory. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 127  Adjusting Process Under the Periodic Inventory System (2 of 2) Under the periodic inventory system, the inventory account is not kept up to date for purchases and sales. − As a result, the inventory shrinkage cannot be directly determined. − Instead, any inventory shrinkage is included indirectly in the computation of the cost of goods sold. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 128 Exhibit 20 – Determining Cost of Goods Sold Using the Periodic System Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 129  Closing Entries Under the Periodic Inventory System (1 of 3) The closing entries differ in the periodic inventory system in that there is no cost of goods sold account to close. Instead, the purchases, purchases discounts, purchases returns and allowances, and freight in accounts are closed. In addition, the inventory account is adjusted to the end-of-period physical inventory count during the closing process. The estimated returns inventory account is also adjusted for the estimated returns from the current period’s sales. Warren/Jones/Tayler, Corporate Financial Accounting, 17th Edition. © 2025 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 130  Closing Entries Under the Periodic Inventory System (2 of 3) The two closing entries under the periodic inventory system are as follows: 1. Entry one includes the following elements: a. Debit Inventory for its end-of-period balance based on the physical inventory. b. Debit Estimated Returns Inventory for the cost of the future estimated returns of the current period’s sales. c. Debit each revenue account and the following temporary periodic inventory accounts for their b