CH3- Merchandising Businesses

Merchandising business

A business that generates revenue by selling goods it purchased from suppliers

Supplier

A company that a merchandising business purchases its merchandise from

Merchandise inventory

Goods purchased by a business for the purpose of resale

Retail company

A merchandising business that sells goods to the final customer (e.g., Old Navy)

Wholesale company

A merchandising business that sells goods to other businesses (e.g., Sysco)

Product costs

All costs incurred to acquire merchandise and ready it for sale; recorded in inventory first, then become cost of goods sold when sold

Period costs

Costs not included in inventory, such as selling and administrative costs; immediately expensed on the income statement

Selling and administrative costs

Costs such as store employee wages and advertising that are expensed immediately as period costs

Cost of goods sold (COGS)

Expense on the income statement representing the cost of inventory that has been sold to customers

Gross margin

Sales revenue minus cost of goods sold; also called gross profit

Gross profit

Another name for gross margin

Purchasing merchandise inventory

Transaction where inventory increases and cash decreases or accounts payable increases

Selling merchandise inventory

Transaction with two parts: a sales portion (revenue recognized) and a cost portion (inventory moved to cost of goods sold)

Sales portion of a sale

Cash or accounts receivable increases and revenue increases, which increases net income

Cost portion of a sale

Inventory decreases and cost of goods sold is recognized as an expense, which decreases net income

Title

Legal ownership of goods; generally, whoever pays shipping costs has title to the goods during transit

Common carrier

Third-party shipping company that transports goods from the seller to the buyer

FOB shipping point

Shipping term where the buyer pays shipping, title passes when goods are given to the common carrier, and the buyer owns goods in transit

FOB destination

Shipping term where the seller pays shipping, title passes when goods are delivered to the customer, and the seller owns goods in transit

Inventory shrinkage

Decreases in inventory for reasons other than sales to customers, such as theft, damage, or spoilage

Physical count

Periodic counting of inventory on hand to compare against the accounting records

Book balance

The inventory balance shown in the company's accounting records

Shrinkage adjusting entry

Entry that reduces the inventory account to match the physical count when the count is lower than the books

Merchandising businesses generate revenue by selling ____.

goods

Merchandising businesses purchase the goods they sell from companies called ____.

suppliers

Goods purchased for resale are called merchandise ____.

inventory

____ companies sell goods to the final customer.

Retail

____ companies sell goods to other businesses.

Wholesale

____ costs include all costs incurred to acquire merchandise and ready it for sale.

Product

Selling and administrative costs are ____ costs.

period

Product costs begin in the ____ account on the balance sheet.

inventory

When inventory is sold, its cost becomes cost of goods ____.

sold

Gross margin is also called gross ____.

profit

Gross margin equals sales revenue minus cost of goods ____.

sold

Purchasing inventory on account increases accounts ____.

payable

Selling inventory on account increases accounts ____.

receivable

Recognizing cost of goods sold ____ net income.

decreases

Purchasing inventory with cash is an asset ____ transaction.

exchange

Purchasing inventory on account is an asset ____ transaction.

source

The cost portion of a sale is an asset ____ transaction.

use

Shipping costs to get inventory from the supplier to the store are a ____ cost.

product

Wages of store sales employees are a ____ cost.

period

Generally, whoever pays shipping costs has ____ to the goods during transit.

title

Under FOB shipping point, the ____ owns the goods during transit.

buyer

Under FOB destination, the ____ owns the goods during transit.

seller

Under FOB shipping point, title passes when goods are provided to the common ____.

carrier

Under FOB destination, the goods remain on the ____'s balance sheet until delivered.

seller

Decreases in inventory for reasons other than sales are called inventory ____.

shrinkage

Companies periodically ____ their inventory and compare it to their accounting records.

count

If the physical count is lower than the books, an ____ entry reduces the inventory account.

adjusting

Inventory lost to shoplifting is an example of ____.

theft

What type of company sells goods directly to the final customer?

Retail company

What type of company sells goods primarily to other businesses?

Wholesale company

A beverage distributor sells cases of drinks to grocery stores. How is it classified?

Wholesale company

What are goods purchased for the purpose of resale called?

Merchandise inventory

Which of the following is a product cost for a retailer?

Shipping costs to bring goods from the supplier to the store

Which of the following is a period cost for a retailer?

Advertising to customers

Where are product costs recorded before the goods are sold?

Inventory (asset on the balance sheet)

When are product costs expensed?

When the goods are sold to a customer, as cost of goods sold

What is another name for gross margin?

Gross profit

A retailer purchases inventory on account. How is net income affected?

No effect

A retailer purchases inventory on account. Which accounts change?

Inventory increases and accounts payable increases

When a retailer sells inventory, which accounts change in the cost portion of the transaction?

Inventory decreases and cost of goods sold increases

Purchasing inventory with cash is what type of transaction?

Asset exchange

Recording cost of goods sold is what type of transaction?

Asset use

Under FOB shipping point, who pays the shipping costs?

Buyer

Under FOB destination, who owns the goods while they are in transit?

Seller

Under FOB shipping point, when does title pass to the buyer?

When the goods are provided to the common carrier

A store orders goods on March 2. They ship March 5 and arrive March 9, FOB shipping point. When does the store record the inventory?

March 5

A store orders goods on March 2. They ship March 5 and arrive March 9, FOB destination. When does the store record the inventory?

March 9

What is inventory shrinkage?

Decreases in inventory for reasons other than sales to customers

Which of the following is an example of inventory shrinkage?

Spoilage of perishable goods

If a physical count shows less inventory than the books, what must the company do?

Record an adjusting entry to reduce inventory to match the count

Trailhead Outfitters has sales revenue of $250,000 and cost of goods sold of $140,000. What is gross margin?

$110,000

A company has cost of goods sold of $75,000 and gross margin of $45,000. What is sales revenue?

$120,000

A company has sales revenue of $600,000 and gross margin of $220,000. What is cost of goods sold?

$380,000

Maple Street Market has sales revenue of $180,000, cost of goods sold of $100,000, and operating expenses of $35,000. What is net income?

$45,000

A new retailer with no beginning inventory buys $15,000 of inventory with cash and $25,000 on account. It then sells goods costing $9,000 for $20,000. What is the ending inventory balance?

$31,000

A retailer sells inventory that cost $4,000 to a customer for $6,500 on account. By how much does net income change?

Increases by $2,500

A retailer pays a $12,000 purchase price for goods, $800 to ship them from the supplier, $1,500 for store advertising, and $2,000 in sales staff wages. What amount is recorded in inventory?

$12,800

A retailer buys goods for $8,000 and pays $400 to ship them FOB shipping point. It later sells all of the goods for $13,000. What is gross margin?

$4,600

A company has a beginning inventory of $5,000, purchases $30,000 of inventory, and has an ending inventory of $8,000. What is cost of goods sold?

$27,000

A retailer with no beginning accounts payable buys $30,000 of inventory on account and pays $18,000 of that bill. What is ending accounts payable?

$12,000

A company's books show inventory of $18,000, but a physical count shows $16,750. What is the amount of inventory shrinkage?

$1,250

A company's books show inventory of $50,000 and the initial count shows $46,000. It finds $1,200 of uncounted inventory in a back room and $700 of damaged goods that were thrown out but never recorded. Assuming the rest is theft, how much was stolen?

$2,100

Gross margin

Sales Revenue - Cost of Goods Sold

Sales revenue (solving from gross margin)

Cost of Goods Sold + Gross Margin

Cost of goods sold (solving from gross margin)

Sales Revenue - Gross Margin

Net income (merchandiser)

Gross Margin - Operating Expenses

Net income (full)

Sales Revenue - Cost of Goods Sold - Operating Expenses

Cost of inventory (product cost)

Purchase Price + Costs to Ready Goods for Sale (e.g., shipping from supplier when buyer pays)

Ending inventory

Beginning Inventory + Purchases - Cost of Goods Sold

Cost of goods sold (from inventory)

Beginning Inventory + Purchases - Ending Inventory

Effect of a sale on net income

Sales Price - Cost of Goods Sold

Ending accounts payable

Beginning A/P + Inventory Purchased on Account - Payments Made

Inventory shrinkage

Book Balance - Physical Count

Adjusted physical count

Initial Count + Inventory Missed in the Count

Adjusted book balance

Book Balance - Unrecorded Damaged or Disposed Inventory

Theft (unexplained shrinkage)

Adjusted Book Balance - Adjusted Physical Count