Chapter 4: Merchandising Operations in Accounting

Overview

• This chapter follows the groundwork laid by the first exam.
• Focus shifts to specific areas of accounting, specifically merchandising operations.

Key Concepts

Merchandising vs. Service Companies

• Service Companies: Revenue from services (e.g., accounting firms). Expenses include wages, overhead, etc.
• Merchandising Companies: Revenue from selling products (e.g., retail stores). Key metric is cost of goods sold (COGS).

Income Reporting

• Net Sales: Revenue for both service and merchandising companies.
• Cost of Goods Sold: Unique to merchandisers; represents the inventory cost of products sold.
• Gross Profit: Calculated as Net Sales minus COGS.
• Expenses: Salaries, utilities, etc., subtracted from gross profit to determine net income.

Operating Cycle (Merchandiser)

• Process: Purchase goods → Inventory → Credit Sales → Accounts Receivable → Cash Collection → Inventory.
• Important to memorize the cycle for future reference.

Inventory Systems

Perpetual System

• Updates inventory records immediately upon each purchase or sale.
• Example: Uses barcode scanners (e.g., Walmart).
• Provides detailed real-time information but is costly.

Periodic System

• Updates records at the end of an accounting period.
• Risks: Assumes all missing inventory was sold (ignores theft, spoilage).
• Simpler and cheaper but less accurate than perpetual systems.

Shipping Terms: FOB (Free On Board)

FOB Shipping Point

• Buyer assumes ownership when goods are shipped.
• Buyer pays shipping costs and bears risks during transit.

FOB Destination

• Seller retains ownership until goods are delivered.
• Seller pays shipping and bears risks during transit.

Transactions and Discounts

Purchase Discounts

• Example terms: 2/10, n/30 (2% discount if paid within 10 days, net due in 30 days).
• Pay on last discount day (day 10) or on net due date (day 30) to manage cash effectively.

Sales Discounts

• Similar terms and accounting for sales side.
• Discounts offered to encourage early payments.

Returns and Allowances

• Purchase Returns: Buyer returns goods.
• Purchase Allowances: Price reductions for defective goods kept by buyer.

Income Statements

Multi-Step Income Statement

• Details gross profit, operating expenses, and income from operations.
• Provides more insight into operational performance than a single-step statement.

Single-Step Income Statement

• Simpler; groups revenues and expenses broadly.

Closing Entries

• Close revenues and expenses to income summary.
• Income summary closed to retained earnings.
• Dividends closed directly to retained earnings.

Ratios for Merchandisers

Acid-Test Ratio

• Measures liquidity: (Cash + Short-term Investments + Receivables) / Current Liabilities.
• A value of 1 or more is desirable.

Gross Margin Ratio

• Measures profitability: Gross Margin / Net Sales.
• Indicates how much profit a company makes after covering the cost of goods sold.

Conclusion

• Understanding merchandising operations is crucial.
• The chapter builds on foundational accounting principles.
• Preparing for practical accounting applications in merchandising.