Comm 201_Chapter 6 Merchandising Operations_Canvas

Chapter 6: Merchandising Operations

Learning Objectives

• LO 6-1: Distinguish between service and merchandising operations.

• LO 6-2: Explain the differences between periodic and perpetual inventory systems.

• LO 6-3: Analyze purchase transactions under a perpetual inventory system.

• LO 6-4: Analyze sales transactions under a perpetual inventory system.

• LO 6-5: Prepare and analyze a merchandiser’s multistep income statement.

LO 6-1: Operating Cycle of Merchandisers

• Operating Cycle: The process a merchandising company follows from buying inventory to selling it and collecting cash.

  • Steps:

    • Buy inventory

    • Sell inventory

    • Collect cash

    • Incur operating expenses

LO 6-2: Inventory Systems

Perpetual Inventory System

• Continuously updates records for inventory as it is bought and sold.

  • Tracks inventory counts in real-time.

Periodic Inventory System

• Updates inventory records at specific intervals, not continuously.

  • Requires physical counts at the end of a period to determine ending inventory.

LO 6-3: Key Merchandising Transactions

Home Depot Income Statement Example

• For the Month Ended December 31:

  • Sales Revenue: Total revenue from sales.

  • Cost of Goods Sold: Total cost of inventory sold.

  • Gross Profit: Sales Revenue - Cost of Goods Sold.

  • Expenses:

    • Wages Expense

    • Supplies Expense

    • Rent Expense

    • Depreciation Expense

  • Income from Operations: Gross Profit - Total Expenses.

Inventory Transactions

1. Home Depot acquires inventory on credit.

2. Sales of merchandise involve billing customers.

3. Payment can be made in cash or on account.

Inventory Costs and Principles

• Cost Principle: Inventory is recorded at its total acquisition cost.

  • Includes:

    • Purchase cost

    • Transportation-in costs

    • Any discounts, returns, or allowances

• Sales Transactions involve recognition of revenue at the point of sale.

Specific Transactions Example: Bella’s Hair Salon

1. Purchase on Account: Hair-care products costing $27,000.

2. Transportation Costs: $600 cash for transport.

3. Purchase Returns: $400 of inventory returned.

4. Purchase Allowance: Received $50 for a shipping error with no return.

5. Payment of Account: Payment made on the remaining balance owed.

6. Purchasing Terms: Products bought under terms of 2/10, n/30.

Sales Transactions Example: Bella’s Hair Salon

• Sold products for $21,000; cost was $16,000.

• Sales returns and allowances: Manage customer returns effectively, affecting both income statements and cash flow.

Multi-Step Income Statement Example

• Demonstrates the breakdown of revenues, expenses, and resulting profit.

  • Gross Profit calculated as:

    • Gross Profit = Sales Revenue - Cost of Goods Sold.

  • Net Sales calculated as:

    • Net Sales = Sales Revenue - Sales Returns and Allowances - Sales Discounts.

Example Statement Components

• Sales Revenue: $104,000

• Net Sales: $102,000 (after returns and discounts)

• Cost of Goods Sold: $65,000

• Gross Profit: $37,000

• Operating Expenses: Various, leading to a breakdown for income from operations.

Learning Activities: Summary of Transactions

Recording Transactions for Purchases and Sales

• Journal Entries: Important for recording all inventory transactions, both purchases and sales, and ensuring accuracy in financial reports.