Horngren's Accounting - Chapter 5: Merchandising Operations

Comprehensive vocabulary flashcards covering the key concepts, accounts, shipping terms, formulas, and financial statement formats of merchandising operations.

Merchandiser

A business that sells merchandise, or goods, to customers.

Merchandise Inventory

The merchandise that a merchandising business sells; classified as a current asset on the balance sheet.

Wholesaler

A merchandising business that buys goods from a manufacturer and sells them to retailers.

Retailer

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

Vendor

An individual or a business from whom a company purchases inventory.

Operating Cycle of a Merchandiser

The sequence that begins when a company purchases inventory from a vendor, continues with selling the inventory to customers, and ends with collecting cash from customers.

Cost of Goods Sold (COGS)

The cost of the merchandise sold to customers, reported as an expense on the income statement.

Gross Profit

The excess of net Sales Revenue over Cost of Goods Sold ($\text{Gross Profit} = \text{Net Sales Revenue} - \text{Cost of Goods Sold}$).

Operating Expenses

Expenses incurred in operating a merchandising business other than Cost of Goods Sold.

Periodic Inventory System

An inventory accounting system that requires a physical count of inventory to determine inventory on hand and update balances at the end of the period.

Perpetual Inventory System

An inventory accounting system that keeps a running, computerized record of merchandise inventory and cost of goods sold.

Invoice

A seller's request for payment from the purchaser, also called a bill (sales invoice for the seller, purchase invoice for the purchaser).

Purchase Returns

A transaction that exists when sellers allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable.

Purchase Allowances

Amounts granted by sellers to purchasers as an incentive to keep merchandise that is not as ordered.

Purchase Discount

A discount that businesses offer to purchasers as an incentive for early payment.

Credit Terms

The payment terms of purchase or sale stated on an invoice indicating the discount, discount period, and final due date (such as 3/15, NET 30 DAYS).

FOB Shipping Point vs. FOB Destination

Under FOB shipping point, ownership transfers to the buyer once goods leave the seller's location and the buyer pays freight. Under FOB destination, ownership transfers to the buyer upon arrival at destination and the seller pays freight.

Freight In

The transportation cost to ship goods into the purchaser's warehouse; treated as part of the cost of purchased inventory.

Freight Out

The transportation cost to ship goods out of the seller's warehouse to the customer; treated as a delivery selling expense by the seller.

Net Cost of Inventory Purchased

The actual cost of merchandise purchased: $\text{Net Cost of Inventory Purchased} = \text{Purchase Cost} - \text{Purchase Returns and Allowances} - \text{Purchase Discounts} + \text{Freight In}$.

Sales Revenue

The amount earned by a business from selling merchandise inventory to customers.

Perpetual Sales Entries

The two dual entries required for a sale under a perpetual system: (1) record Cash/Accounts Receivable and Sales Revenue, and (2) record Cost of Goods Sold expense and reduction of Merchandise Inventory.

Sales Discount

A reduction in the amount of revenue earned on sales offered to customers as an incentive for prompt early payment.

Sales Return

The return of merchandise inventory by a customer, which reduces future cash collected or requires a refund.

Sales Allowance

A reduction in the amount owed by a customer that does not involve returning merchandise inventory.

Credit Memo

A document issued by the seller indicating an allowance or reduction in the customer's Accounts Receivable or a cash refund.

Inventory Shrinkage

The loss of inventory resulting from theft, damage, and errors, measured as the difference between the unadjusted inventory balance and the actual physical count.

Single-Step Income Statement

An income statement format that groups all revenues together and lists all expenses together without reporting subtotals like gross profit.

Multi-Step Income Statement

An income statement format that calculates and displays several significant subtotals, including gross profit, operating income, and net income.

Selling Expenses

Operating expenses related to marketing and selling the company's goods and services, such as sales salaries, advertising, and delivery expense.

Administrative Expenses

Operating expenses incurred that are not related to marketing the company's goods and services, such as office salaries, utilities, and office supplies.

Operating Income

A measure of operating performance calculated as gross profit minus total operating expenses.

Other Income and Expenses

Revenues or expenses outside the normal day-to-day operations of a business, such as interest expense and gains or losses on sales of long-term assets.

Gross Profit Percentage

A profitability metric measuring gross profit per dollar of net sales revenue: $\text{Gross Profit Percentage} = \frac{\text{Gross Profit}}{\text{Net Sales Revenue}}$.

Purchases Account

A temporary account used in a periodic inventory system to record the cost of merchandise inventory acquired on account or for cash.

Cost of Goods Available for Sale

The total cost of all merchandise on hand for sale during an accounting period: $\text{Cost of Goods Available for Sale} = \text{Beginning Inventory} + \text{Net Cost of Inventory Purchased}$.