Chapter 5: Merchandising Operations and Inventory Systems in Accounting

What is the primary source of revenue for merchandising companies?

Sales revenue or sales

What are the two primary categories of expenses for merchandising companies?

Cost of goods sold and operating expenses

What does 'Cost of Goods Sold' represent?

The total cost of merchandise sold during the period, directly related to the revenue from sales.

What are operating expenses?

Expenses incurred in the process of earning sales revenue, such as advertising and rent expenses.

How does the operating cycle of a merchandising company compare to that of a service company?

It is usually longer due to the purchase and sale of merchandise inventory.

What is the purpose of a multiple-step income statement?

To provide detailed information about revenues, expenses, and profits.

What is the first step in the income measurement process for a merchandising company?

Calculate the cost of goods sold.

What is gross profit?

The difference between sales revenue and the cost of goods sold.

What is the typical operating cycle for a service company?

The time period to turn cash back into cash, which is ordinarily shorter than that of a merchandiser.

What are retailers?

Merchandising companies that sell directly to consumers.

What are wholesalers?

Merchandising companies that sell to retailers.

What is the significance of the gross profit rate?

It indicates the percentage of revenue that exceeds the cost of goods sold.

What is profit margin?

A measure of profitability calculated as net income divided by sales revenue.

What does the term 'merchandising operations' refer to?

The activities involved in purchasing and selling merchandise.

What is the role of purchasing entries in merchandising operations?

To record the acquisition of inventory for resale.

What are sales entries in merchandising operations?

Records that document the sale of merchandise to customers.

What is a merchandiser?

A company that purchases goods for resale.

What is a service company?

A company that provides services rather than goods.

What is the perpetual inventory system?

A system that maintains detailed records of each inventory purchase and sale, continuously showing inventory on hand.

What is the periodic inventory system?

A system that does not maintain detailed records of inventory during the period and determines cost of goods sold at the end of the period.

How do you determine the cost of goods sold (COGS)?

Add the cost of goods purchased to the beginning inventory, then subtract the ending inventory.

What is the formula for calculating COGS?

COGS = Beginning Inventory + Purchases - Ending Inventory.

What are the advantages of the perpetual inventory system?

Continuous updates of inventory records, better control over inventories, and timely investigation of shortages.

What is a purchase discount?

A reduction in the purchase price offered for prompt payment.

What does the term '2/10, n/30' mean?

A 2% discount is available if paid within 10 days; otherwise, the net amount is due in 30 days.

What is a purchase return?

Returning goods to the seller due to dissatisfaction with the product.

What is a purchase allowance?

Keeping merchandise while receiving a reduction in the purchase price.

What is the impact of not taking a purchase discount?

It can be viewed as paying interest for the use of money, which can be costly.

What does FOB shipping point mean?

The buyer pays for freight costs and assumes risk of loss during transit.

What does FOB destination mean?

The seller pays for freight costs and assumes risk of loss until the goods reach the buyer.

How are freight costs treated in a perpetual inventory system?

Freight costs incurred by the buyer are included as part of the cost of inventory.

How are freight costs treated in a periodic inventory system?

Freight costs incurred by the seller are treated as an operating expense.

What is the effect of a purchase discount on inventory?

The amount of the discount decreases inventory when taken.

What is the purpose of a physical inventory count?

To determine the actual cost of goods on hand and calculate COGS.

What happens to the inventory account when goods are purchased?

Purchases are recorded in the Inventory account.

What is the significance of the operating cycle for merchandising companies?

It is usually longer than that of service companies due to the time taken to sell inventory.

What is the role of purchase invoices?

They provide evidence of the transaction for purchases made on credit.

What is the impact of a return on accounts payable?

It reduces accounts payable and increases inventory.

What is the calculation for cash payment after a discount?

Cash payment = Amount due - Discount.

What is the annual cost of failing to take a discount?

It can be calculated as the discount percentage multiplied by the number of days in a year divided by the discount period.

How does a company record a purchase discount taken?

The discount amount is subtracted from the payment and recorded in the inventory account.

What is the difference between a purchase return and a purchase allowance?

A purchase return involves returning goods, while a purchase allowance involves keeping the goods with a price reduction.