COMM 201 Chapter 6 Seminotes (1)

Chapter 6: Merchandising Business Overview

• A merchandising business purchases finished products (inventory) and resells them.

• Key Elements of Merchandizing:

  • Beginning Inventory (BI) + Purchases (P) = Total Goods Available for Sale

  • Cost of Goods Sold (COGS) refers to the cost of goods that have been sold.

  • Ending Inventory (EI) represents the unsold goods left at the end of a period.

Operating Cycle of Merchandisers

• The operating cycle consists of activities that create revenue leading to cash inflow.

• Important accounts include:

  • Inventory: Reports the total cost of unsold goods.

  • Sales Revenue: Represents the total income from all goods sold.

  • Cost of Goods Sold (COGS): Shows the total cost associated with the goods that were sold.

Gross Profit Calculation

• Gross Profit = Sales Revenue - COGS

• Represents profit before accounting for other expenses (e.g., wages and depreciation).

• Ending inventory for one period becomes the beginning inventory for the next.

Inventory Tracking Systems

• BI + P – EI = COGS or BI + P – COGS = EI

  • Inventory can be tracked using Periodic or Perpetual Inventory Systems.

Perpetual Inventory System

• Records transactions immediately upon purchase, sale, or return.

• Used by larger retailers for better inventory control.

• Provides real-time inventory levels, allowing for shrinkage estimates (loss from theft, fraud, etc.).

Periodic Inventory System

• Inventory records are updated at the end of the accounting period.

• Cost of ending inventory is calculated and used to adjust COGS.

• Simpler for small businesses.

Transportation Costs

• FOB (Free On Board) Accounts:

  • FOB Shipping Point: Sale is recorded when goods leave the supplier.

  • FOB Destination: Sale is recorded when goods reach the buyer.

• Transportation costs impact overall inventory costs based on ownership transfer.

Sales Transactions and Inventory

• Each merchandise sale consists of:

  • Selling Price and Cost (Recorded in perpetual inventory).

• Sales Returns and Allowances:

  • Allow for refunds or cost reductions for damaged goods.

  • Impacts profitability analysis.

  • Recorded as contra-revenue accounts.

Gross Profit Analysis

• Gross Profit measures the profitability of sales before expenses.

• Gross Profit Percentage = (Net Sales - COGS) / Net Sales * 100

• Higher percentages indicate better sales strategies and cost management.

Purchase Discounts and Accounting Methods

• Terms like 2/10, n/30 indicate discount options for early payment.

  • 2% off if paid within 10 days; full amount due in 30 days.

• Discounts can be recorded using either the net or gross method:

  • Net Method: Discount recognized at the time of sale.

  • Gross Method: Discount recognized when payment is received.

Merchandise Transactions Impact

• Purchase transactions impact balance sheet accounts. Sales transactions impact both balance sheet and income statement accounts.

• COGS / Average Inventory formula used to calculate inventory turnover.

Revenue Recognition: Five-Step Model

1. Identify the contract

2. Identify performance obligations

3. Determine transaction price

4. Allocate the price to obligations

5. Recognize revenue when obligations are satisfied

Learning Activity and Journal Entries

• Students are tasked with summarizing journal entries for various purchasing situations, including returns and allowances.

• Example reporting on a multi-step income statement:

  • Sales Revenue

  • Deduct Sales Returns and Discounts to determine Net Sales.

  • COGS subtracted from Net Sales calculates Gross Profit.

Conclusion

• Key factors in merchandising include managing inventory effectively, understanding revenue recognition, and analyzing sales data for profitability analysis.