Merchandising Company and Inventory Management: Key Concepts and Ratios

What is a merchandising company?

A company that buys and sells inventory (products) rather than providing services.

What is inventory?

Goods a company owns and plans to sell to customers.

What is the primary source of revenue for a merchandising company?

Sales revenue from selling merchandise.

What is the operating cycle for a merchandising company?

Buy inventory → Sell inventory → Collect cash.

What is Cost of Goods Sold (COGS)?

The cost of inventory that was sold during the period.

What is the formula for Cost of Goods Sold?

Beginning Inventory + Purchases − Ending Inventory

What is Cost of Goods Available for Sale?

Beginning Inventory + Net Purchases

What is Gross Profit?

Sales Revenue − Cost of Goods Sold

What does gross profit represent?

Profit made from selling inventory before operating expenses.

What are the two inventory systems?

Perpetual and Periodic.

What is a perpetual inventory system?

Inventory is updated every time merchandise is bought or sold.

What is a periodic inventory system?

Inventory is updated only at the end of the period after a physical count.

In a perpetual system, what account is used when inventory is purchased?

Inventory

In a periodic system, what account is used when inventory is purchased?

Purchases

What does FOB shipping point mean?

Buyer owns goods when shipped and pays freight.

What does FOB destination mean?

Seller owns goods until delivered and pays freight.

Under FOB shipping point, who owns goods in transit?

Buyer

Under FOB destination, who owns goods in transit?

Seller

What is Freight-In?

Shipping cost paid by buyer for incoming inventory (added to inventory cost).

What is Freight-Out?

Shipping cost paid by seller to deliver goods to customers (delivery expense).

What do credit terms 1/10, n/30 mean?

1% discount if paid within 10 days, otherwise full amount due in 30 days.

How do you calculate a purchase discount?

(Purchase − Returns) × Discount %

Are discounts taken before or after returns?

After returns.

What is a purchase return?

Returning inventory to the supplier.

In a perpetual system, what account is credited when inventory is returned?

Inventory

In a periodic system, what account is credited when inventory is returned?

Purchase Returns and Allowances

When inventory is sold, how many journal entries are recorded?

Two

What is the first entry when inventory is sold?

Dr Accounts Receivable (or Cash), Cr Sales Revenue

What is the second entry when inventory is sold?

Dr Cost of Goods Sold, Cr Inventory

When a customer returns merchandise (perpetual), what happens?

Sales Returns and Allowances increases and Inventory increases.

What is Net Sales?

Sales − Sales Returns − Sales Discounts

What are the sections of a multiple-step income statement in order?

Sales Revenue, Sales Returns and Allowances, Sales Discounts, Net Sales, Cost of Goods Sold, Gross Profit, Operating Expenses, Operating Income, Other Revenues and Gains, Other Expenses and Losses, Net Income.

Does the income statement include investing activities?

No

What is Net Purchases formula?

Purchases − Purchase Returns − Purchase Discounts + Freight-In

What is Cost of Goods Sold (Periodic)?

Cost of Goods Available − Ending Inventory

What is Gross Profit Rate?

Gross Profit ÷ Net Sales

What is Profit Margin?

Net Income ÷ Net Sales