Ch. 5 - Merchandising Operations

Question 1

Merchandising Companies vs Service Companies

Answer 1

Merchandising:
-Primary revenue source: buy and sell inventory
–>Manufacturers: produce goods for sale to wholesalers or others
–>Wholesalers: sell to retailers
–>Retailers: sell to consumers

Service:
-Primary revenue source: performed services

Question 2

Operating Cycle

Answer 2

-Time it takes to go from cash to cash in producing revenues
-Longer for merchandising companies than service companies

1. Merchandise purchased
2. Merchandise held in stores or warehouses
3. Merchandise is sold to customers

Question 3

Income Measurement Process

Answer 3

Revenues:
-Generated from sale of merchandise

Expenses:
-Divided into:
a) Cost of Goods Sold (COGS) - total cost of merch sold
b) Operating expenses - incurred in process of earning sales

Question 4

Gross Profit Formula

Answer 4

Sales - COGS

Question 5

Inventory Systems

Answer 5

Flow of Costs

beginning inventory + COG purchased = COG available for sale (COGS sold - statement of income OR Ending Inventory - statement of financial position)

Types:
1. Perpetual
2. Periodic

Question 6

Perpetual Inventory System

Answer 6

-Detailed records are kept for cost of each product purchased and sold
-Records are updated continuously (ex. perpetually) for purchases and sales
-Enables effective control of inventory; an important asset

COGS and reduction in inventory (both quantity and cost) are recorded each time a sale occurs.

-A physical count is done at least once a year to adjust perpetual records to actual

Question 7

Purchases

Answer 7

-Recorded in inventory account
-Includes all costs to get merchandise to place of business and ready for resale:
–>Includes freight and applicable taxes
–>Less purchase returns, allowances, discounts
–>Total of all costs is called cost of goods purchased

Paid by cash or purchased with credit (eg. on account)

Question 8

Purchases: GST and Freight

Answer 8

-GST is not included in COG purchased
-FOB (free on board)
–> Refers to where title (ex. ownership) of goods is transferred: (i) FOB destination - buyer’s place of business; seller pays for shipping. (ii) FOB shipping point - seller’s place of business; buyer pays for shipping

Freight paid by buyer is included in COG purchased

Question 9

Purchases: Returns and Allowances

Answer 9

Both returns and allowances decrease COG purchased.

Return: buyer returns merch to seller and receives cash refund or credit.

Allowance: seller provides buyer with and allowance (ex. deduction) for the purchase price. Buyer may elect to keep merchandise

Question 10

Purchases: Discounts

Answer 10

Quantity Discount: price reduction given in accordance with volume of the purchase. NOT recorded separately; discounted price is recorded as cost of purchase.

Purchase Discount: offered to encourage early payment of a balance due (ex. for purchases made on account 2/10, n/30)
-Recorded separately when payment made
-Results in a decrease to inventory account

Question 11

End of Period Adjusting Entry

Answer 11

A physical count conducted at least once a year to adjust perpetual records to actual
-Shrinkage: inventory on hand < inventory records

Question 12

Sales of Merchandise

Answer 12

Two Journal Entries Required:
1. Record sales revenue
2. Record cost of sale

Question 13

Refund Liability

Answer 13

(ex. deferred revenue)
-Used to track expected sales returns and allowances
-Reduces sales by amount of expected refund (ex. revenue will not be recorded for the portion of sales for which returns are anticipated)

Question 14

Estimated Inventory Returns

Answer 14

Used to record the cost of goods expected to be returned

Question 15

Sales of Merchandise: Freight

Answer 15

FOB Destination
-Seller records cost of freight as an operating expense
-Record increase in freight out and decrease in cash

Question 16

Sales of Merchandise: Returns

Answer 16

Two Journal Entries Required:
1. Record decrease in Refund Liability and decrease in CASH or A/R
2. Record increase in inventory and decrease in Estimated Inventory Returns

or

Record increase in COGS and decrease in Estimated Inventory Returns

Question 17

Sales of Merchandise: Receipt of Payment

Answer 17

-Applicable to sales made on account
-Record increase in Cash and decrease in A/R

Question 18

Statement of Income

Answer 18

Two Forms of Presentation:
1) Single step: all data classified into two categories: revenues and expenses
2) Multiple-step: components of income are presented separately

Question 19

Periodic Inventory System

Answer 19

Detailed records of merch are NOT kept throughout the period.

COGS is only determined at the end of the accounting period.