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Chapter 5Merchandising
Operations
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Learning Objective 1
Describe merchandising operations and the two types of merchandise inventory systems
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1-What Are Merchandising Operations?
• A merchandiser is a business that sellsmerchandise, or goods, to customers.
– The merchandise that this type of business sells is called merchandise inventory.
• There are two types of merchandiser.
1. A wholesaler buys goods from a manufacturer and sells them to retailers.
2. A retailer buys merchandise from manufacturers or a wholesaler and then sells the goods to consumers.
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2. The Operating Cycle of Merchandising Business
• The operating cycle begins when the company purchases inventory from a vendor.
• The company then sells the inventory to customers.
• The company collects cash from customers.
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• The income statement of a merchandiser reports:
• Sales Revenue rather than Service Revenue
• The cost of merchandise sold to customers, called Cost of Goods Sold (COGS)
• Gross profit, which is net Sales Revenue minus Cost of Goods Sold
• Operating expenses, which are expenses other than Cost of Goods Sold
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2. Financial Statements of Merchandising Business
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2. Financial Statements of Merchandising Business
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2. Financial Statements of Merchandising Business
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3. Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems
• Businesses need to determine the value of merchandise inventory on hand and the value sold.
• The two inventory accounting systems:
• A periodic inventory system requires a physical count of inventory to determine inventory on hand.
• A perpetual inventory system offers continuous computerized record of merchandise inventory.
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Learning Objective 2 and 3
Accounting for merchandise Business using a perpetual inventory system
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1. How Are Purchases of Merchandise Inventory Recorded in a Perpetual Inventory System?
• A merchandising entity begins with the purchase of merchandise inventory.
• The vendor ships the product to the merchandiser.
• The seller sends the buyer an invoice that requests payment.
• The buyer pays the vendor after the merchandise inventory is received.
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5-12© 2016 Pearson Education, Inc.
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Purchase Discounts
• Many businesses offer a discount for early payment, called a purchase discount.
• Credit terms are the payment terms of the purchase as stated on the invoice.
• Credit terms express the following:
– The discount.
– The discount time period.
– The final due date.
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Purchase Returns and Allowances
• Sellers allow purchasers to return merchandise that is defective, damaged, or unsuitable.
• Purchase returns exist when sellers allow purchasers to return merchandise.
• Purchase allowances are granted to purchasers as an incentive to keep goods that are not as ordered.
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Transportation Costs
While goods are in transit, rules are necessary to determine who bears the risk of loss.
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Cost of Inventory Purchased
• Knowing the net cost of inventory allows a business to determine the actual cost of the merchandise purchased.
• Net cost of inventory is calculated as follows:
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Learning Objective 4
Adjust and close the accounts of a merchandising business
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What Are the Adjusting and Closing Entries for a Merchandiser?
• Sometimes Actual inventory on hand may differ from what the books show.
– Inventory shrinkage is loss of inventory occurring from theft, damage, and errors.
• An adjustment is made to Merchandise Inventory based on the physical count of goods on hand.
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Adjusting Merchandise Inventory Based on a Physical Count
• Smart Touch Learning’s MerchandiseInventory account shows an unadjustedbalance of $31,530. But on December 31,the inventory on hand is $31,290. Theentry to record the $240 difference is:
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Closing the Accounts of a Merchandiser
5-21
1. Close revenues via the Income Summary.
2. Close expenses and contra revenues via the Income Summary.
3. Close Income Summary via Owner, Capital.
4. Close Owner, Withdrawals via Owner, Capital.
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Closing the Accounts of a Merchandiser
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Learning Objective 5
Prepare a merchandiser’s financial statements
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How Are a Merchandiser’s Financial Statements Prepared?
• There are two formats for income statement:
– The single-step income statement presents revenues and expenses with no subtotals.
– The multi-step income statement presents revenues and expenses with subtotals to highlight significant relationships.
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Single-Step Income Statement
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Multi-Step Income
Statement
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Multi-Step Income Statement
• Operating expenses are reported in two categories:
– Selling expenses are related to marketing and selling the company’s goods and services.
– Administrative expenses include expenses not related to marketing the company’s goods and services.
• Gross profit minus operating expenses equals operating income.
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Multi-Step Income Statement
• After determining operating income, the next section of the income statement reports other revenues and expenses.
• Examples include:
– Interest Revenue.
– Interest Expense.
– Gains and losses on the sale of plant assets.
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Statement of Owner’s Equity and the Balance Sheet
• The statements of owner’s equity for merchandisers and service businesses are similar.
• The balance sheet for a merchandiser reports Merchandise Inventory.
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Learning Objective 6
Use the gross profit percentage to evaluate business performance
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How Do We Use the Gross Profit Percentage to Evaluate Business
Performance?
• The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold.
• A high gross profit percentage is desired.
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