CONCEPTUAL
Merchandisers buy products and
resell them. Examples of merchandisers include Walmart, Home
Depot, The Limited, and Barnes & Noble. A merchandiser’s
costs on the income statement include an amount for cost
of goods sold. Gross profit, or gross margin, equals sales minus
cost of goods sold.
The current asset section of
a merchandising company’s balance sheet includes merchandise inventory, which refers to the products a merchandiser sells and
are available for sale at the balance sheet date. Cost of merchandise
purchases flows into Merchandise Inventory and from there
to Cost of Goods Sold on the income statement. Any remaining inventory
is reported as a current asset on the balance sheet.
ANALYTICAL
The acid-test ratio is computed as quick assets
(cash, short-term investments, and current receivables) divided by current
liabilities. It indicates a company’s ability to pay its current liabilities
with its existing quick assets. An acid-test ratio equal to or greater than 1.0 is often adequate.
The gross margin ratio is computed as
gross margin (net sales minus cost of goods sold) divided by net
sales. It indicates a company’s profitability before considering other
expenses.
PROCEDURAL
For a perpetual inventory system, purchases of
inventory (net of trade discounts) are added to the Merchandise Inventory account. Purchase discounts and
purchase returns and allowances are subtracted from Merchandise Inventory,
and transportation-in costs are added to Merchandise Inventory.
A merchandiser records sales at
list price less any trade discounts. The cost of items sold is transferred
from Merchandise Inventory to Cost of Goods Sold. Refunds or credits
given to customers for unsatisfactory merchandise are recorded in Sales
Returns and Allowances, a contra account to Sales. If merchandise is returned and restored to inventory,
the cost of this merchandise is removed from Cost of Goods Sold and
transferred back to Merchandise Inventory. When cash discounts from the sales price are offered and customers
pay within the discount period, the seller records this in Sales
Discounts, a contra account to Sales.
With a perpetual system, it is often
necessary to make an adjustment for inventory shrinkage. This is computed by
comparing a physical count of inventory with the Merchandise
Inventory balance. Shrinkage is normally charged to Cost of
Goods Sold. Temporary accounts closed to Income Summary for a
merchandiser include Sales, Sales Discounts, Sales Returns and Allowances, and Cost
of Goods Sold.
Multiple-step income statements include
greater detail for sales and expenses than do single-step income statements.
They also show details of net sales and report expenses in categories
reflecting different activities.
A perpetual inventory system continuously tracks
the cost of goods available for sale and the cost of goods sold. A
periodic system accumulates the cost of goods purchased during the period
and does not compute the amount of inventory or the cost of goods sold
until the end of a period. Transactions involving the sale and purchase of
merchandise are recorded and analyzed under both the periodic and perpetual inventory systems. Adjusting
and closing entries for both inventory systems are illustrated and
explained.
Guidance
Answers to Decision Maker and Decision Ethics
Entrepreneur
For terms of 3/10, n/90,
missing the 3% discount for an additional 80 days equals an implied annual
interest rate of 13.69%, computed as
(365 days ÷ 80 days) ×3%. Since you can
borrow funds at 11% (assuming no other processing costs),
it is better to borrow and pay within the discount
period. You save 2.69% (13.69% - 11%) in interest costs by paying early.
Payables Manager
Your decision is whether to comply with prior policy or to create a
new policy and not abuse discounts
offered by suppliers. Your first step should be to meet with your superior to find out
if the late payment policy is the actual
policy and, if so, its rationale. If it is the policy to pay late, you must apply your own sense of
ethics. One point of view is that
the late payment policy is unethical. A deliberate plan to make late payments means the
company lies when it pretends to make
payment within the discount period. Another view is that the late payment policy is acceptable. In some
markets, attempts to
take discounts through late payments are accepted as a continued phase of “price
negotiation.” Also, your company’s suppliers can respond by billing your company
for the discounts not accepted because of late payments. However, this is a dubious viewpoint, especially since the
prior manager proposes that you dishonestly
explain late payments as computer or mail problems and since some suppliers have complained.
Supplier
A current ratio of 2.1 suggests sufficient current assets
to cover current liabilities. An acid-test ratio of 0.5 suggests, however, that quick assets can
cover only about one-half of current liabilities. This implies that the
retailer depends on money from
sales of inventory to pay current
liabilities. If sales of inventory decline or profit margins decrease, the
likelihood that this retailer will default on its
payments increases. Your decision is probably not to extend credit. If you do extend credit,
you are likely to
closely monitor the retailer’s financial condition. (It is better to hold unsold inventory
than uncollectible receivables.).
Finansial Officer
Your company’s net profit margin is about equal to the industry
average and suggests typical industry performance. However, gross margin
reveals that your company is
paying far more in cost of goods sold or receiving far less in sales price than competitors.
Your attention must be directed to finding
the problem with cost of goods sold, sales, or both. One positive note is that your company’s expenses
make up 19% of sales
(36% - 17%). This favorably
compares with competitors’ expenses
that make up 28% of sales (44% - 16%).
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