Chapter 03- Accounting for Merchandising Businesses

Merchandising Businesses

generate revenue by selling goods. They buy the merchandise they sell from companies called suppliers

Merchandise Inventory

Companies report inventory costs on the balance sheet in this asset account

• Include all costs incurred to acquire merchandise and ready it for sale

Product Costs

All costs related to obtaining or manufacturing a product intended for sale to customers are accumulated in inventory accounts and expensed as cost of goods sold at the point of sale. For a manufacturing company, product costs include direct materials, direct labor, and manufacturing overhead.

Selling and Administrative Costs

Costs that cannot be directly traced to products that are recognized as expenses in the period in which they are incurred. Examples include advertising expense and rent expense.

Period Costs

General, selling, and administrative costs that are expensed in the period in which the economic sacrifice is made.

Cost of Goods Available for Sale

Allocated between the asset account Merchandise Inventory and an expense account called Cost of Goods Sold

Gross Margin/Gross Profit

Difference between sales revenue and cost of goods sold; the amount a company makes from selling goods before subtracting operating expenses.

Purchase Return

A reduction in the cost of purchases resulting from dissatisfaction with merchandise purchased.

Cash Discounts

Discount offered on merchandise sold to encourage prompt payment; offered by sellers of merchandise and represents sales discounts to the seller when they are used and purchase discounts to the purchaser of the merchandise.

Purchases Discount

Reduction in the gross price of merchandise extended under the condition that the purchaser pay cash for the merchandise within a stated time (usually within 10 days of the date of the sale)

FOB Shipping Point

Term that designates the buyer as the responsible party for freight costs (transportation-in costs)

FOB Destination

Term that designates the seller as the responsible party for freight costs (transportation-in costs)

Transportation-In

Cost of freight on goods purchased under terms FOB shipping point that is usually added to the cost of inventory and is a product cost.

Transportation Out

Freight cost for goods delivered to customers under terms FOB destination; a period cost expensed when it is incurred.

Shrinkage

a term that reflects decreases in inventory for reasons other than sales to customers

• ex. stolen inventory, damaged inventory, lost or misplaced inventory

Gross Margin

the difference between the sales revenue and the cost of goods sold when merchandise inventory is sold for more than it cost.

Gain

Increase in assets or decrease in liabilities that results from peripheral or incidental transactions.

• profit resulting from transactions that are not likely to occur

Loss

Decrease in assets or increase in liabilities that results from peripheral or incidental transactions.

Operating Income

Income statement subtotal representing the difference between operating revenues and operating expenses, but before recognizing gains and losses from peripheral activities which are added to or subtracted from operating income to determine net income or loss.

• Generated from normal recurring operations

Multistep Income Statements

Income statement format that matches particular revenue items with related expense items and distinguishes between recurring operating activities and nonoperating items such as gains and losses.

Single-Step income Statements

Single comparison between total revenues and total expenses.

Common Size Financial Statements

Financial statements in which amounts are converted to percentages to allow a better comparison of period-to-period and company-to-company financial data since all information is placed on a common basis.

Cost of Goods Percentage

cost of goods sold / net sales