1. " The only place where success comes
before work is in dictionary" Vidal Sassoon

2. No Cellphone

3. Principles Of Accounting (1)
Chapter 5
Merchandising
Operations
Mohamed Mahmoud
mmahmoud@eelu.edu.eg
Tel: (+202) 33318449

4. Objectives :
1. Perpetual System and Periodic System
2. Single-step and multiple-step income statement
3. Gross Profit Rate

5. Exercises

6. Features:
Perpetual System
1. Purchases increase Merchandise Inventory.
2. Freight costs, Purchase Returns and Allowances and Purchase
Discounts are included in Merchandise Inventory.
3. Cost of Goods Sold is increased and Merchandise Inventory is
decreased for each sale.
4. Physical count done to verify Merchandise Inventory balance.
1. Perpetual System and Periodic System

7. Two Journal Entries to Record a Sale
Cash or Accounts receivable XXX
Sales XXX
#1
Cost of goods sold XXX
Merchandise inventory XXX
#2
Selling
Price
Cost
1. Perpetual System and Periodic System (cont’d)

8. Contra-revenue account (debit).
Sales Returns and Allowances
FOB shipping point - seller places goods Free On Board the
carrier, and buyer pays freight costs.
Freight Costs
1. Perpetual System and Periodic System (cont’d)
Sales returns and allowances 27,000
Accounts receivable 27,000
Merchandise inventory 19,800
Cost of goods sold 19,800
Cash 463,540
Accounts receivable 473,000
Sales discounts 9,460
FOB destination - seller places the goods Free On Board to the
buyer’s place of business, and seller pays freight costs.
Entry:
Sales not reduced (debited)
Entry:

9. Features:
Periodic System
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:
Beginning inventory $ 100,000
Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $ 775,000
1. Perpetual System and Periodic System (cont’d)

10. Exercise 1
On October 1, Ahmad Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200
each. During the month of October, the following transactions occurred.
Oct. 4 Purchased 30 bicycles at a cost of $200 each from Dreams Bicycle Company, terms
2/10, n/30.
6 Sold 18 bicycles to El-Nasr Team for $300 each, terms 2/10, n/30.
7 Received credit from Dreams Bicycle Company for the return of 2 defective bicycles.
13 Issued a credit memo to El-Nasr Team for the return of a defective bicycle.
14 Paid Dreams Bicycle Company in full, less discount.
Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual
inventory system.

11. Answers
Oct. 4 Merchandise Inventory ........................................................ 6,000
Accounts Payable ....................................................... 6,000
6 Accounts Receivable ........................................................... 5,400
Sales........................................................................... 5,400
Cost of Goods Sold.............................................................. 3,600
Merchandise Inventory ............................................... 3,600
7 Accounts Payable................................................................ 400
Merchandise Inventory ............................................... 400
13 Sales Returns and Allowances............................................ 300
Accounts Receivable .................................................. 300
Merchandise Inventory ........................................................ 200
Cost of Goods Sold..................................................... 200
14 Accounts Payable ($6,000 – $400)...................................... 5,600
Cash ($5,600 × .98).................................................... 5,488
Merchandise Inventory ($5,600 × .02) ........................ 112

12. Exercise 2
The following information is available for Khaled Company:
Debit Credit
Khaled, Capital $ 50,000
Khaled, Drawing $ 32,000
Sales 510,000
Sales Returns and Allowances 20,000
Sales Discounts 7,000
Cost of Goods Sold 347,000
Freight-out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Store Salaries Expense 45,000
Utilities Expense 18,000
Depreciation Expense 7,000
Interest Revenue 25,000
Instructions:
Using the above information, prepare the closing entries for Khaled Company.

13. Answers
Dec. 31 Interest Revenue.................................................................. 25,000
Sales .................................................................................... 510,000
Income Summary ........................................................ 535,000
31 Income Summary................................................................. 480,000
Sales Returns and Allowances ................................... 20,000
Sales Discounts .......................................................... 7,000
Cost of Goods Sold..................................................... 347,000
Freight-out .................................................................. 2,000
Advertising Expense ................................................... 15,000
Interest Expense......................................................... 19,000
Store Salaries Expense .............................................. 45,000
Utilities Expense ......................................................... 18,000
Depreciation Expense................................................. 7,000
31 Income Summary................................................................. 55,000
Khaled, Capital ............................................................... 55,000
31 Khaled, Capital ....................................................................... 32,000
Khaled, Drawing ............................................................ 32,000

14. Income Measurement
Cost of goods sold is the total cost of
merchandise sold during the period.
Not used in a Service
business.
Net
Income
(Loss)
Less
LessEquals
Equals
Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
2. Single-step and multiple-step income statement

15. Prepare the sales revenue section of the income statement for
Wheeler Company.
2. Single-step and multiple-step income statement (cont’d)

16. Chapter
5-16
Single-
Step
2. Single-step and multiple-step income statement (cont’d)

17. Chapter
5-17
Key Items:
Net sales
Gross profit
Gross profit
rate
Operating
expenses

18. Chapter
5-18
Forms of
Financial
Statements
Key Items:
Net sales
Gross profit
Gross profit
rate
Operating
expenses
Nonoperating
activities
Net income

19. Exercise 3The adjusted trial balance of Jihad Company contained the following information:
Debit Credit
Sales $560,000
Sales Returns and Allowances $ 20,000
Sales Discounts 7,000
Cost of Goods Sold 386,000
Freight-out 2,000
Advertising Expense 15,000
Interest Expense 18,000
Store Salaries Expense 55,000
Utilities Expense 28,000
Depreciation Expense 7,000
Interest Revenue 30,000
Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended
December 31, 2008.
2. Prepare a single-step income statement for the year ended December 31, 2008.

20. Answers JIHAD COMPANY
Income Statement
For the Year Ended December 31, 2008
Sales revenues
Sales..................................................................................................... $560,000
Less: Sales returns and allowances....................... $ 20,000
Sales discounts........................................................... 7,000…………….. 27,000
Net sales................................................................................................. 533,000
Cost of goods sold.................................................................................. 386,000
Gross profit ............................................................................................. 147,000
Operating expenses
Selling expenses
Store salaries expense .............. $55,000
Advertising expense ................... 15,000
Freight-out ................................... 2,000
Total selling expenses ............................ 72,000
Administrative expenses
Utilities expense......................... 28,000
Depreciation expense ................. 7,000
Total administrative expenses ................ 35,000
Total operating expenses............................................... 107,000
Income from operations........................................................................ 40,000
Other revenues and gains
Interest revenue................................................ 30,000
Other expenses and losses
Interest expense .............................................. 18,000 …………….12,000
Net income ........................................................................................... $ 52,000

21. Answer (cont’d)
JIHAD COMPANY
Income Statement
For the Year Ended December 31, 2008
Revenues
Net sales................................................................................................ $533,000
Interest revenue........................................................................................ 30,000
Total revenues.................................................................................. 563,000
Expenses
Cost of goods sold................................................................ $386,000
Selling expenses ...................................................................... 72,000
Administrative expenses.......................................................... 35,000
Interest expense ..................................................................... 18,000
Total expenses ................................................................................. 511,000
Net income ...................................................................................................... $ 52,000

22. 3. Gross Profit Rate:

23. Exercise 4
The following information is available for Ammar Company:
• Administrative expenses $ 30,000
• Cost of goods sold 245,000
• Sales 350,000
• Sales returns and allowances 15,000
• Selling expenses 50,000
Instructions:
Compute each of the following:
(a) Net sales
(b) Gross profit
(c) Income from operations

24. Answer
(a) Net sales = $335,000 ($350,000 – $15,000)
(b) Gross profit = $90,000 ($335,000 – $245,000)
(b) Gross profit rate = Net sales / Gross profit x100= 90,000 / 335,000 x100 = 26.8 %
(c) Income from operations = $10,000 ($90,000 – $30,000 – $50,000)