Chapter 4 & Appendix 4A: Accounting for Merchandising Operations

merchandise

products/goods a company buys to resell

how do merchandisers earn net income

buying and selling merchandise (wholesalers or retailers)

wholesaler

buys products from manufacturers and sells them to retailers

retailer

buys products from manufactures or wholesalers and sells them to customers

cost of goods sold

expense of buying and preparing merchandise

gross profit / margin

net sales - cost of goods sold

operating cycle for a merchandiser

(1) purchasing merchandise

(2) storing goods

(3) selling products

(4) collecting payment

(5) paying vendors

**from when they buy the merchandise to when they pay back the manufacturer/wholesaler

do companies try to have short or long operating cycles

short because assets tied up in inventory and receivables are not productive

what shortens operating cycles

cash sales

perpetual inventory system

records cost of goods sold at the time of each sale

periodic inventory system

records cost of goods sold at the end of the period

goods available for sale

beginning inventory + net purchases

cogs

goods available for sale - ending inventory

net income

gross profit - expenses

steps to get net income for a merchandiser

net sales

less: cost of goods sold

= gross profit

less: expenses

= net income

cash discount

encourages buyers to pay earlier (purchases discount / sales discount)

credit period

amount of time allowed before full payment is due

gross method

records the purchase at its gross (full) invoice amount, then does an adjusting entry when the discount comes into play

what does FOB stand for

free on board

what is FOB point

point of transfer of goods / ownership of goods

FOB shipping point

means buyer accepts ownership of goods when the goods leave the seller’s place of business, buyer pays for shipping and has risk of loss in transit

**buyer debits merchandise inventory to record cost of shipping

FOB destination

ownership of goods transfers to the buyer when the goods arrive at the buyer’s place of business - seller pays shipping charges and has risk of loss in transit, seller doesn’t record revenue until goods arrive at destination

**seller debits delivery expense to record cost of shipping

net method

records sales at the net amount, assuming all discounts are taken, then makes adjusting entries if discounts are not taken

sales discounts

contra revenue account = DB balance, temp accoutn

sales returns and allowances

contra revenue account to sales, DB balance, temp account

what are the adjusting entries for merchandisers?

(1) shrinkage - loss of inventory:

cost of goods sold

……….merchandise inventory

(2) sales discounts, returns, and allowances

estimate for expected returns and allownaces and sales discounts

multiple step income statement

details net sales and expenses, reports specific subtotals:

(1) gross profit

(2) income from operations

(3) total operating expenses

(4) net sales

operating expenses divided into two sections

selling expenses and general and administrative expenses

selling expenses

costs to market and distribute products and services

Ex. advertising, store supplies and rent, delivery of goods to customers

general and administrative expenses

costs to administer a company’s overall operations i.e. office salaries, office equipment, and office supplies

single-step income statement

lists COGS as an expense, has one subtotal for expenses

expesnese grouped into categories

classified balance sheet for merchandisers

merchandise inventory = current asset, usually after accounts receivable

acid-test ratio (quick ratio)

quick assets divided by current liabilities

= (cash & cash equivalents + short-term investments + current receivables) / current liabilities

**excludes less liquid current assets i.e. inventory and prepaid expenses that take longer to be converted to cash - higher is better

gross margin ratio

without enough gross profit, a merchandiser can fail - gross margin ratio helps understand this link

**excludes all costs except COGS

= (net sales - COGS) / net sales

does the periodic system have a shrinkage entry?

no

adjusting entries for periodic

expected sales discounts, expected returns and allowances

what’s different about closing entries for periodic

NO shrinkage, DB ending inventory and credit beginning inventory