SB4 - Accounting for Merchandisers

Merchandise

Goods that a company owns and expects to sell to customers

What is another name for Merchandise?

Inventory

What is a Merchandiser and what are two examples of them?

Entity that earns income by buying and selling merchandise (wholesalers and retailers)

Wholesaler

Intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers

Retailer

Intermediary that buys products from manufacturers or wholesalers and sells them to consumers

Net Income for a Merchandiser equals _____ from selling merchandise minus both the ____ __ ______ ____ and other expenses.

revenues; cost of merchandise sold

Revenue from selling merchandise is called ____, and the expense of buying and preparing merchandise is called ____ __ ____ ____.

sales; cost of goods sold

Gross Profit

Net Sales minus Cost of Goods Sold

What is another name for Gross Profit?

Gross Margin

How is Merchandising Inventory listed on a Merchandiser’s balance sheet?

A current asset

Inventory cost includes the cost to ___ the goods, ____ them to the store, and make them ready to ____.

buy; ship; sell

What is the “formula” for Merchandise availabel for sale?

Net Purchases + Beginning Inventory = Merchandise Available for Sale = Cost of Goods Sold + Ending Inventory

Companies account for inventory in one of 2 ways:

1. Perpetual Inventory

2. Periodic Inventory

Perpetual Inventory System

Records cost of goods at the time of each sale

Periodic Inventory System

Records cost of goods at the end of a period

Technology has increased the use of the ______ ______ _____ when calculating cost of goods.

Perpetual Inventory System

Credit Terms

Description of the amounts and timing of payments

Credit Period

Time period that can pass before a customer’s payment is due

Cash Discount

Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period

Cash Discounts are beneficial to sellers because (3):

1. They encourage buyers to pay earlier

2. They can reduce collection efforts

Cash Discounts are described in the _____ ____ and the _____.

Credit Terms; invoice

Gross Method

Method of recording purchases at the full invoice price without deducting any Cash Discounts

Gross Method is preferrable for recording because it (3)…

1. Complies with revenue recognition rules

2. Is used more in practice

3. Is easier and less costly

What costs are recorded in Merchandise Inventory?

1. Purchase costs

2. Shipping fees

3. Taxes on the merchandise

4. Costs to prepare merchandise for sale

Net Method

Method of recording purchases at the full invoice price less any Cash Discounts

Sales Discounts has a normal ____ balance, because it is subtracted from Sales which has a normal ____ balance.

debit; credit

Shrinkage

Inventory losses that occur as a result of theft or deterioration

How is Shrinkage computed?

By comparing a physical count of inventory with recorded amounts

Period-ending adjustments for Merchandisers are commonly made for ____ ___ ________, and expected ____ ________.

returns and allowances; sales discounts

Merchandiser’s Income Statements have 3 main parts:

1. Gross Profit

2. Income from Operations

3. Net Income

Operating expenses are separated into what 2 sections?

Selling Expenses and General & Administrative Expenses

Selling Expenses

Expenses promoting sales, such as displaying & advertising merchandise, making sales, and delivering goods to customers

General & Administrative Expenses

Expenses that support operating activities, such as salaries, office equipment, and office supplies

Acid-Test Ratio

Ratio used to assess a company’s ability to settle its current debts with its most liquid assets

Gross Margin Ratio

Ratio calculated like profit margin ratio, but it excludes all costs except for cost of goods sold