Chapter 5Merchandising

Operations

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Learning Objective 1

Describe merchandising operations and the two types of merchandise inventory systems

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1-What Are Merchandising Operations?

• A merchandiser is a business that sellsmerchandise, or goods, to customers.

– The merchandise that this type of business sells is called merchandise inventory.

• There are two types of merchandiser.

1. A wholesaler buys goods from a manufacturer and sells them to retailers.

2. A retailer buys merchandise from manufacturers or a wholesaler and then sells the goods to consumers.

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2. The Operating Cycle of Merchandising Business

• The operating cycle begins when the company purchases inventory from a vendor.

• The company then sells the inventory to customers.

• The company collects cash from customers.

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• The income statement of a merchandiser reports:

• Sales Revenue rather than Service Revenue

• The cost of merchandise sold to customers, called Cost of Goods Sold (COGS)

• Gross profit, which is net Sales Revenue minus Cost of Goods Sold

• Operating expenses, which are expenses other than Cost of Goods Sold

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2. Financial Statements of Merchandising Business

2. Financial Statements of Merchandising Business

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2. Financial Statements of Merchandising Business

3. Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

• Businesses need to determine the value of merchandise inventory on hand and the value sold.

• The two inventory accounting systems:

• A periodic inventory system requires a physical count of inventory to determine inventory on hand.

• A perpetual inventory system offers continuous computerized record of merchandise inventory.

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Learning Objective 2 and 3

Accounting for merchandise Business using a perpetual inventory system

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1. How Are Purchases of Merchandise Inventory Recorded in a Perpetual Inventory System?

• A merchandising entity begins with the purchase of merchandise inventory.

• The vendor ships the product to the merchandiser.

• The seller sends the buyer an invoice that requests payment.

• The buyer pays the vendor after the merchandise inventory is received.

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Purchase Discounts

• Many businesses offer a discount for early payment, called a purchase discount.

• Credit terms are the payment terms of the purchase as stated on the invoice.

• Credit terms express the following:

– The discount.

– The discount time period.

– The final due date.

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Purchase Returns and Allowances

• Sellers allow purchasers to return merchandise that is defective, damaged, or unsuitable.

• Purchase returns exist when sellers allow purchasers to return merchandise.

• Purchase allowances are granted to purchasers as an incentive to keep goods that are not as ordered.

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Transportation Costs

While goods are in transit, rules are necessary to determine who bears the risk of loss.

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Cost of Inventory Purchased

• Knowing the net cost of inventory allows a business to determine the actual cost of the merchandise purchased.

• Net cost of inventory is calculated as follows:

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Learning Objective 4

Adjust and close the accounts of a merchandising business

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What Are the Adjusting and Closing Entries for a Merchandiser?

• Sometimes Actual inventory on hand may differ from what the books show.

– Inventory shrinkage is loss of inventory occurring from theft, damage, and errors.

• An adjustment is made to Merchandise Inventory based on the physical count of goods on hand.

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Adjusting Merchandise Inventory Based on a Physical Count

• Smart Touch Learning’s MerchandiseInventory account shows an unadjustedbalance of $31,530. But on December 31,the inventory on hand is $31,290. Theentry to record the $240 difference is:

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Closing the Accounts of a Merchandiser

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1. Close revenues via the Income Summary.

2. Close expenses and contra revenues via the Income Summary.

3. Close Income Summary via Owner, Capital.

4. Close Owner, Withdrawals via Owner, Capital.

Closing the Accounts of a Merchandiser

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Learning Objective 5

Prepare a merchandiser’s financial statements

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How Are a Merchandiser’s Financial Statements Prepared?

• There are two formats for income statement:

– The single-step income statement presents revenues and expenses with no subtotals.

– The multi-step income statement presents revenues and expenses with subtotals to highlight significant relationships.

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Single-Step Income Statement

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Multi-Step Income

Statement

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Multi-Step Income Statement

• Operating expenses are reported in two categories:

– Selling expenses are related to marketing and selling the company’s goods and services.

– Administrative expenses include expenses not related to marketing the company’s goods and services.

• Gross profit minus operating expenses equals operating income.

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Multi-Step Income Statement

• After determining operating income, the next section of the income statement reports other revenues and expenses.

• Examples include:

– Interest Revenue.

– Interest Expense.

– Gains and losses on the sale of plant assets.

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Statement of Owner’s Equity and the Balance Sheet

• The statements of owner’s equity for merchandisers and service businesses are similar.

• The balance sheet for a merchandiser reports Merchandise Inventory.

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Learning Objective 6

Use the gross profit percentage to evaluate business performance

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How Do We Use the Gross Profit Percentage to Evaluate Business

Performance?

• The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold.

• A high gross profit percentage is desired.

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