Hello folk for you folks at home welcome back what we did before we start taping today was
to take a quiz in here why don't you go ahead and switch it over to the Elmo if you would
so that folks at home can see the quiz we took. This is the quiz we took everybody at
home hopefully you can see that if I think a good idea for you folks at home to just
pause this and take this as if it were quiz for you folks and go ahead and push play when
you were done and see how you would have done. So go ahead and do that but let's go ahead
and go over for the folks here that are live. Think I have the answers right here ok take
a look at that I just did that myself real quick does that look right folks now those
numbers that are highlighted in yellow are answers but they're not necessarily in that
right order that I asked correct? So make sure your looking at the right one so those
are very important equations and I certainly want you to know those you'll be using those
a lot in all your business classes especially your accounting ones. Ok so I'm not going
to read through them I think it's self-explanatory but are there any questions on that quiz?
Those were worth two points each so if you got all five of the yellow numbers right then
you got ten for each one that you got wrong you missed two ok. Did I put in something
extra that you don't need? What did I put? Withdrawals and accumulated depreciation yeah
I put in some things that you didn't need in there I want you to know the equation that
you need to know and have confidence in them just cause you see something extra don't throw
it in there alright because in real life you be able to discern what you need and what
you don't need. Alright any questions on that if not lets switch over to the PowerPoint's
just a quick little review on some of these slide we are talking about merchandising operations
which is the same thing as retailers right? These companies do not manufacture items they
sell but they purchase them for manufactures and then they sell them to the user what is
the main thing merchandisers provide? They provide convenience they provide convenience
ok. We have talked going over to the slide we have talked for chapters one through four
we have talked about service organizations that sell time now were talking about merchandisers
and there is that equation that was there on the quiz they sell products to earn revenues
we gave examples of Wal-Mart or Grocery stores or best buy or Kohl's we talked about the
cycle right you have money you purchase inventory you sell it either on credit or for cash eventually
you get more cash and then you can purchase more inventory to sell correct? Now coming
off of that to me we talked about how there is two main roles of a merchandiser they do
a lot of purchasing from manufacture right? And then of course they sell it to customers
ok. So there is the purchase cycle and then there's the sales cycle correct? What we're
going to talk about today is the purchase cycles were not selling to customers well
talk about that next time. What we're doing now is visioning yourself as the retailer
and you are praising dishwashers form whirlpool and you're purchasing televisions from Sony
your purchasing computer monitors from HP or whatever. We talked about the very important
flow equation that was also on the quiz ok. Now let's start talking about the journal
entries from the perspective of the retailer on the purchase side ok. Let's say on June
twenty Jason Inc. purchased fourteen thousand dollars of merchandise inventory and they
paid cash will there you go right there that's not too hard is it? Now merchandise inventory
is a new account and it is a current asset and merchandise inventory is different from
office supplies or something like that merchandise inventory are items that we have purchase
that we will resale to customers hopefully ok. So merchandise inventory is an asset it's
a current asset and everything that we have purchased that will be sold to customers goes
into merchandise inventory now of course there might be a lot of different sub groupings
in our detail but it all goes into merchandise inventory. Kara? "Is it always a debit balance
account" merchandising inventory is a current asset and it is a debit balance account as
all assets are. Now let's talk about some different types of terminology in this account
or in this chapter and some of these are similar but are different so I want to make sure you're
paying attention there's one thing called a trade discount and this is used by manufacturers
to offer better prices if you purchase in large quantities. Ok let's look at an example
Matrix Inc. Offers a thirty percent trade discount of orders of one thousand units or
more of their popular product racer each racers has a list price of five dollars and twenty
five. Ok so let's say that they sell a thousand to us as the retailer well a thousand times
the list price of five twenty five if they didn't offer any discount at all we would
have to pay this fifty two fifty, but that is at the amount you have to purchase a thousand
or more to get that thirty percent discount right? So we can take thirty percent of five
two fifty subtract it and we only have an invoice price of thirty six seventy five you
with me? And this isn't a concept that's to foreign to us there are things that if you
purchase in a larger quantity you get a cheaper price can you think of anything like that
in real life? If you purchase in a larger quantity you get a cheaper price? Yeah sometimes
Sam's club kind of works that way right? "Is that why Wal-Mart is so cheap because they
buy so much of something?" well yeah that's a little different concept but Sam's Club
is probably the if you buy twelve things of tooth paste you know which well last you a
while then your unit price is probably cheaper than if you just bought one right? So that
is what a trade discount is to offered as an incentive to purchasing greater quantities
alright, and a lot of times manufacturers can do this because a lot of times some of
the costs or effort to process a n order of a thousand units is not a lot different than
five units right? You see what I'm saying as far as the paper work and all the shipping
stuff they have to do a lot of times it's the same amount of costs so they would rather
they certainly would rather sell one order of a thousand than ten orders of a hundred
that come in during the year does that make sense? Alright lets go to the next thing let's
take a look at an invoice you guys have seen an invoice before right? This is not a new
deal for you let's look at some of the things on this invoice now number one is the seller
that who's selling it and number three is who it's sold to ok. Number tow is the invoice
date and a lot of times there's an invoice number on there, number five is the credit
terms were going to talk about that in a minute let's not worry about that now, now number
seven is the goods that were sold and it looks like what we purchased as the retailer here
was a something called a two fifty back up system and that is item number AC417 ok how
many did we purchase we purchased five hundred of them what was the price per two fifty back
up system it was fifty four so the invoice amount is twenty seven thousand dollars ok
now of course the difference between an invoice for a retailer is versus you and the invoice
you see is your probably not going to purchase five hundred backup systems aren't you you're
probably going to purchase one for yourself and that's it. But think about the quantity
that these retailers purchase in its pretty large isn't it? Now let's talk about what
the heck is this term two that looks like two fractions I don't know what that is let's
talk about that what does that mean in shipping terms of two ten in thirty well what that
means that if you pay within ten days you can knock two percent of the price off. But
if you chose not to do that you owe the full amount in thirty days so if you pay within
ten days you can knock off two percent of the invoice price but if you chose not to
do that you owe the full amount in thirty days you with me? This is on top of it there's
a traded discount Matt and I'm glad you pointed that out a purchase discount is to as an incentive
to pay early a trade discount is to buy it in large quantities make sense? Now this isn't
always two ten net thirty ok you could have going to the Elmo you could have you know
three ten in thirty which would mean you get three percent off if you pay within ten days
otherwise the full amount is due within thirty days or you could have one fifteen in sixty
you get one percent off if you pay within fifteen days but the full amount is due within
sixty or sometimes you'll see something like this two ten in EOM do you know what EOM stand
for? End of month so this would mean if you paid within ten days you would knock off two
percent otherwise the full amount by the end of the month so there's different ways that
you can say that but in this particular example it was two ten in thirty. Ok now how does
this work out? Well let's look at an example on May the seventh Jason Inc. purchased twenty
seven thousand dollars of merchandise inventory this time on account not with cash but on
account and the credit terms are two ten and thirty so when we record this we debit merchandise
inventory increasing that current asset and we increase our accounts payable for twenty
seven thousand alright. Now that was on May seventh and the terms here that was on May
seventh and our terms are two ten and thirty so what day do we have to pay by to enjoy
that ten percent discount? May seventeenth right? If we pay May seventeenth or earlier
we won't have to give them twenty seven thousand we will pay them well figure out how much
we give them but it's less than that. We pay them on May fifteenth so is that within the
date is that within the discount date or within the discount period yes it is so we do not
have to give them twenty seven thousand we only have to give them ninety eight percent
of twenty seven thousand which is the hu7ndred percent minus the two percent discount. So
I get ninety eight percent times twenty seven thousand and that's how much cash we have
to pay we have to give them twenty six for sixty now we debit accounts payable don't
make the mistake of debiting accounts payable for twenty six four sixty cause in our original
entry we credited or increased that liability for twenty seven grand if you mistakenly just
debit it for twenty sic four sixty it's going to imply that you still owe money. So accounts
payable is debited for the full twenty seven thousand it's satisfied it's taken care of
even though we've given them twenty six four sixty well how do you complete this journal
entry you credit merchandise inventory for five fifty now sometimes that seems odd to
people and I'll show you why we do that in a second ok any questions on how we came up
with these numbers let's talk about why these merchandise inventory is credited for five
forty. Ok well if you go back to the original journal entry we debited inventory on five
seven for twenty seven thousand right? On the original journal entry date, but in the
end is that how much we paid for it? No it isn't so how much did we pay for it in the
end twenty six four sixty so by us crediting it merchandise inventory for five forty that
means that merchandise inventory is going to be recoded on the books and twenty six
four sixty which was the true cost of that inventory correct? So what principle does
this follow? Remember the cost principle assets should be stated on your balance sheet at
what they're true cost was right? And our true cost for this inventory when it was all
said and done thus it should be on the books for twenty six four sixty. Cool now looking
back at that account payable you can see to that our original credit was to increase AP
was twenty seven thousand even though we only paid twenty six four sixty we debited it and
our balance is zero we don't owe that manufacture any more money do we? Make sense? Now I asked
you I believe I handed you guys something like this and it said basic purchase journal
entries did you get a chance to try to do that did you have success or did you get confused?
Let's take a look and actually what I want to do is and for you folks at home of course
everything is under lessons tab on the handouts for chapter five is basic purchasing journal
entries is there but I want to go ahead and do the bottom one first ok let's go ahead
and read that. On September fifteenth Schneider company purchased some merchandise inventory
from Makarov Inc. with an invoice price of thirty five thousand and credit terms of two
ten net thirty. Schneider Company paid Makarov on September twenty eighth. Prepare the journal
entries for Schneider company the purchaser on the following dates ok well on September
fifteenth we debit merchandise inventory and credit accounts payable for thirty five thousand
ok. Ok now the terms were two ten net thirty right? We bought it on September fifteenth
so when do we need to pay by to get that discount? September twenty fifth when did we pay the
twenty eighth missed the discount didn't we so all it is here well you have to pay the
full thirty five thousand you blew it. "I just didn't know since it wasn't thirty days
I didn't know if you would like pay part of that" yeah what she's asking is why not wait
to day thirty and that's actually a good question in businesses it's like if you don't want
to pay before you need to what this company should have done is pay on day ten not day
five not day six but day ten taken the discount so they missed the discount they might as
well paid on day thirty cause the longer you have the money the better it can maybe earn
some money in a savings account maybe you can sweep it over in a nightly certificate
deposit or some sort of interest earning investment right? But that's a little on this but going
to this that's the journal entry right you missed the discount let's take at what it
is if you made the discount and for you folks at home if you didn't print this out or you
didn't understand it pause it now before we go over the answer and try to do it. Alright
on august first Gilmore company purchased merchandise from Hendren Inc. with an invoice
of sixty thousand and credit terms of two ten net thirty. Gilmore Company paid Hendren
August the eighth. Prepare the journal entries for Gilmore on the following dates. Ok on
august first we debit merchandise inventory and credit account payable for sixty thousand
ok. Ok we had credit terms of two ten net thirty so if we purchased it on august first
what date do we need to get it paid by to get the discount? By the eleventh we paid
the eighth so we got the discount didn't we? So we did not have to give them cash of sixty
thousand did we? So how much cash did we have to give them we only have to give them ninety
eight percent of sixty thousand which is the hundred percent minus the two percent discount
what is the ninety eight percent of sixty thousand? Fifty eight-eight hundred right?
So we only have to give them cash of fifty eight-eight hundred now were going to go ahead
and decrease the accounts payable for the full amount cause were good were not giving
them any more money we don't owe them any more money so that journal entry doesn't balance
right? What do we credit for twelve hundred we credit merchandise inventory so that the
merchandise inventory will be recorded on our books at the true cost which was in the
end fifty eight-eight hundred alright. "Is the order of the credits matter?" nope you
can switch the you looking at the Elmo you can switch these in any order as long as they're
both credited. Ok alright good appreciate those who read that and tried it you're probably
a little better prepared than other wise alright. Any other questions on that ok? Let's talk
about a few more things ion the purchase cycle oh first of all let's ask us this if we don't
take that discount is it really that big a deal? Yes the answers is yes it's a big deal
its expensive and people might say oh Krug its only an extra two percent it's not that
big of deal it is a big deal and let me tell you why. People are used to thinking
of annually aren't they and like if I had a two percent annual rate on my mortgage or
on my auto loan buy that would be awesome wouldn't it? ok however you have to pay an
extra two percent for how many more days now you can pay by day ten and get the discount
but if you don't pay by day ten when do you have to pay by? Day thirty right? Ok looking
at me here you can pay on day ten and get the discount but otherwise you have to pay
on day thirty that's just an extra twenty days correct? So you're in essence for two
percent more for just twenty more days of credit. Now the way I like to look at this
as follows going to the Elmo we said we get only get twenty more days right now how many
twenty day periods are there in a year? Well a year has three hundred and sixty five days
right? So the true annual cost of that that's two percent for twenty more days the true
cost of that is what bang that out there Sarah? "Thirty six point five percent?" Thirty six
point five percent is that a good rate ok let's say that Jessica was my controller and
I'm the owner of my company ok. Let's say Jessica and I'm the owner and she says hey
Dave I went and secured us a new bank loan and I said really what was the new rate you
got and she says it's an annual interest rate on our new loan of thirty six and a half percent.
Would I be happy with her? No but when we don't take these discounts essentially that
is exactly what has happened isn't it? You'd be better off to take the discount and put
it on a credit card that charges you nineteen percent a year. Very important to make these
discounts when I go work with my clients I often see that they have not made there purchased
discounts do you know what the most common reason they haven't made them is? "They don't
want to pay early?" "Negligence?" it's not because they don't have the money it's just
because of oh it's so busy I missed it again do you have any classes here at school where
there's always the same couple of students that are always four or five minutes late?
Well they'll probably grow up to be the sort of person that's always late two or three
days in their invoices but it makes a big difference doesn't it? Cause think about how
much purchasing think about how much purchasing best buy does in a year think if you added
an extra two percent times the amount that they purchase that would be probably tens
of millions of dollars maybe not that much cause they purchase probably hundreds of millions
per year don't they? That would be somebody would get fired ok for good cause we have
this in our own lives right it's like you get your cable TV bill you we a hundred dollars
if paid by October thirty first if you pay after that a hundred dollars and fifty cents
and you look at your calendar and you missed it you ever had that happen? I've had that
happen in my own life well that's a lot isn't it? if you figure out annual interest rate
it's a lot so the main reasons my clients don't make their purchase discounts is they're
just I'm so busy I'm just missed it I'm just so busy well you need to hire you'd be better
off to hire some help and make those discounts ok. One last thing I want to point is folks
there are people out there who hope you stay financially ignorant not saying you are now
but they don't even like that I'm going to tell what I'm going to tell you they like
people they like consumers that are financially stupid ok. And they'll send you stuff you
folks getting credit card offers in the mail? I could fill my wall in the basement with
credit card offers now here's the way they used to sell these credit card offers is you
would get an envelope in the mail ok and it would say new credit card only four percent
interest rate and then they'd have an asterisk rate it would say four percent per month and
then down here there would be a message we love you ok. And they want you to be stupid
they want you to think hey a new credit card I don't know much but I know this I know four
percent a pretty low rate we pay more than that on our mortgage a lot more well listen
Einstein its four percent per month it's not annual is it? So what is a four percent per
month roughly speaking what is that on a annual rate? Forty eight percent there sued to be
credit card companies and banks and credit unions and lending authorities that would
try to mask what the annual percentage rate was and that's why they made rules that say
you have to have certain type of font certain size of font what your APR is right annual
percentage rate cause they were trying to deceive they want you folks to be stupid they
want you to be stupid and they want you to go buy a big screen TV on their credit cards
and the big screen TV costs six hundred dollars and before it's all said and done you gave
them nine hundred and eighty dollars. Don't let them take advantage of you these credit
card companies they don't love you I'm going to tell they do not love you they say they
love you they do not love you they want you stay fat dumb and stupid dumb and stupid are
the same things so word to the wise. Alright let's talk about a few more things in regards
to purchasing purchase returns and purchase allowances ok these are very similar things
and they look similar like journal entries but they're actually different ok. Here's
let's talk bout these purchase returns versus purchase allowances ok let's come off there
if we can let's say you're going to purchase some table and let's say that you purchase
ten of these tables that you're sitting at and let's say you pay fifty dollars each for
them and you're going to sell them in your retail store for ninety. Well let's say you
sell how many did I say we purchased? Ten let's say for whatever reason you bought too
many and so you just returned one there was nothing wrong with it you just returned it.
Now chances are you haven't paid for it by then so they just knocked off fifty dollars
to what you owed them right? You guys know what purchased returns right? Ok you buy a
sweater form JC Penny and you take it home and you show your husband and you go does
this look nice on me? And he says oh... ok and you decide you didn't like it and you
take it back and get your money there's nothing wrong with it that's a purchase return they
just knock off what they owe you will see how that looks. Well a purchase allowance
is the following let's say I purchased ten of these tables for fifty dollars each and
so I owe them ten times fifty five hundred dollars ok and let's say that once I unpack
them I notice that one of these has a scratch on it's not real big but maybe a four five
inch scratch on the top. Well I call the manufacturer and I say hey one of these tables that you
sold me for fifty dollars has a scratch on it and they would probably say you can do
one of two things you can send it back to us and will knock off fifty dollars of what
you owe us or if you want keep the table we'll knock thirty five dollars of what you owe
and essentially you'll end up buying the table for fifteen dollars. Does that make sense?
With the purchase allowance I don't actually return the product to the manufacturer they
just kind of give me an allowance and I might decide yeah I'll keep the table if I could
buy it for fifteen because I might be able to sell it to a customer and actually make
more money on it than a regular table. There's people like me who are cheap who like to buy
stuff like that when I bought a clothes dryer the clothes dryer was normally two hundred
and eighty bucks or something like that but it had a big long scratch the side it was
till brand new it just had a scratch and there was nothing wrong with it just had a big long
scratch and so they said you can buy it for half price if you want? And I said giddy up
baby right? Cause who cares if my clothes dryer has a scratch on it? Do you ever go
to your friend's house and say I'm going to look at the side of their clothes dryer who
cares? Ok so a purchase return you actually return the good to the manufacturer purchase
allowance you keep it and they knock off of what you owe them make sense? Let's take a
look and see how that looks ok on May ninth Matrix Inc. purchased twenty thousand dollars
of merchandise inventory on account credit terms are two ten net thirty. Ok well that's
the journal entry we debit merchandise inventory we credit accounts payable now on May the
tenth we returned five hundred dollars of defected merchandise to the supplier. We haven't
paid yet so all that happens is we decrease our liability we debit our accounts payable
by five hundred dollars and we also decrease or credit merchandise inventory because we
don't have it anymore. Does that make sense? Now Kara you asked if merchandise inventory
always a debit balance account yes it is always a debit balance account but we know all accounts
are debited and credited right going back to this journal entry when we credit merchandise
inventory since it's a debit balance account that's simply means were decreasing it which
is what reality is right were returning five hundred dollars of merchandise so how much
do we owe them at this point? We owed them twenty thousand then we sent some back and
we decreased it by five hundred what do we owe them at this point? No we owed them twenty
thousand dollars we returned five hundred we only owe them nineteen thousand five hundred
don't we? And t hats if we pay that's if we don't take advantage of the discount here.
So we pay do we pay within the discount period? Yes we do so we don't have to give them the
full nineteen thousand five hundred we only have to give them ninety eight percent of
the nineteen thousand five hundred which in this case is nineteen thousand one hundred
and ten now one thing that they want to point out there is we take the discount based on
the nineteen five don't take it on the twenty thousand cause that's not what you owe them
cause you see what I'm saying cause you sent back five hundred dollars' worth of those
goods take it on the nineteen thousand five hundred. Ok let's talk about what I want to
do now is this I want you to do and we are going to take a few minutes to do this I want
you to do quick study five point three on page two oh nine on two hundred and nine page
two hundred and nine I want you to do quick study five point three for you folks at home
you do it as well, we'll come back in a few minutes and well go over the answers to quick
study five point three roll that music. (36:35-42:20) ok if you folks at home aren't done just pause
it and you can start us up when you are done, but in that transaction on quick study five
point three on march the fifth we purchased five hundred units of product at five dollars
per unit and the terms were two ten net sixty. Ok so the journal entry on March the fifth
would be a debit to merchandise inventory for two five hundred dollars or five times
five hundred and a credit to AP correct? Now what happened on March the seventh? We returned
fifty defected units and this was a purchase return and we received full credit so what's
five times fifty? Its two fifty we decrease our accounts payable and we decrease our merchandise
inventory for two fifty right? So how much at this point do we owe them? Twenty two fifty
do we pay within the discount period? Yes so we don't have to give them twenty two fifty
we only have to give them ninety eight percent of twenty two fifty which in this case is
cash of twenty two-o-five and of course we credit or decrease the accounts payable for
twenty two fifty and we have fully extinguished that liability it's taken care of we don't
owe them anymore do we? Now somebody pointed out something in break that was good when
we say we pay in cash that doesn't mean I'm taking hundred dollar bills and shoving them
in an envelope and sending them we are writing a check right? But that's the same thing as
paying with cash it comes out of our checking account. Alright going back to that any questions
on quick study five point three? Ok a couple last things that I want to go over it will
just take a minute is there's also the item we need to cover of transportation costs now
there are sometimes that the seller pays for transportation and there's sometimes that
the buyer pays for transportation. And it's important to know now the way that they do
this do you know what FOV stands for? Free on board and we're always thinking from the
perspective of the merchandiser so if it is free on board clear to the destination it
is free on board clear to the destination well we are the destination that means its
free clear to here that's the destination that mean that the seller pays for transportation
now if its free on board only up to the point where they ship it this is where they start
to ship it right here. That means while its traveling we are paying for it the buyer is
paying for it. So free on board shipping point it's only free up to the shipping point thus
the buyer has to pay if it's free onboard to the destination that means that whole time
it's free for us and the seller pays. Now the question might come up who owns those
goods while they are being transported well the answer is this whoever is paying for the
transportation owns the goods while they are being transported. So if you see a train full
of stuff moving along or a truck full of stuff moving along on the highway and you're going
I wonder who owns that all I would say is well tell me is the buyer or the seller paying
for the transportation. If the buyer is paying for the transportation then as it is moving
along the road the buyer has it in their inventory on their books. If the seller is paying for
it then they own it does that make sense? "Transportation and something happens?" Ok
then you get into insurance there's usually insurance on it ok. Usually there is some
sort of insurance with the transportation company, but whoever owns the goods is whoever
is paying for the goods while they are being transported. Now lastly let's look at an example
on May the twelfth Jason Inc. purchased eight thousands of merchandise inventory for cash
and they also paid one hundred for transportation costs. I want you to recognize that we debit
merchandise inventory for that full eighty one hundred which includes that one hundred
dollar transportation cost. We don't have a separate expense account called transportation
expense we want to capture those transportation cost in merchandise inventory so we debit
merchandise inventory does that make sense? Any costs that were necessary to get that
as inventory become part of merchandise inventory okay? Ok that is it I'm only giving one homework
question to do but I want to make sure you do it so do exercise five point one for next
time do exercise five point one alright see you guys.