chapter 4 -- reporting and analyzing merchandising operations Flashcards
(32 cards)
Service organizations
Sell time to earn revenue. Examples: accounting firms, law firms, and plumbing services.
Merchandise inventory
Products (goods) that a company buys to resell to customers.
Merchandising company
Sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores. Earns net income by buying and selling merchandise.
Operating cycle for a merchandiser
Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. Length of operating cycle differs across the types of businesses.
Department stores operating cycle
2-5 months
Grocery merchant’s operating cycle
2-8 weeks. Has more operating cycles in a year than clothing or electronics retailers.
Operating cycle moves from
Cash purchases of merchandise –> inventory for sale –> credit sales –> accounts receivable –> cash
Why do companies try to keep their operating cycles short
Because assets tied up in inventory and receivables are not productive. Cash sales shorten operating cycles.
Merchandise available for sale
Beginning inventory + net purchases. It is either sold (COGS) or kept for future sales (ending inventory)
Perpetual systems
Updates accounting records for each purchase and sale of merchandise. Technological advances and competitive pressures have dramatically increased the use of them.
Periodic systems
Updates records for purchase and sale of merchandise only at the end of the accounting period.
Inventory systems
Perpetual and periodic systems
Credit terms
A deduction from the invoice price granted to induce early payment of the amount due. Includes the amounts and timing of payments from a buyer to a seller.
Cash discount
Sellers can grant one to encourage buyers to pay earlier. Described in the credit terms on the invoice.
Cash discount is viewed as
A purchase discount.
Seller views a cash discount as
A sales discount.
A reduced payment applies only for the
Discount period.
Purchase Discounts
2/10, n/30
Discount percentage/discount period (days), net/entire credit period (days)
Invoice
Source document is the purchase invoice of the buyer and the sales invoice for the seller. The amount recorded for merchandise inventory includes its purchase cost, shipping fees, taxes, and any other costs necessary to make it ready for sale.
Purchases allowance
A price reduction to the buyer of defective or unacceptable merchandise.
Purchase return
Merchandise returned by the purchaser to the supplier.
Debit memorandum
When a buyer returns or takes an allowance on merchandise, the buyer issues this to inform the seller of a debit made to the account payable in the buyer’s records (debits reduce liabilities).
FOB (free on board)
Point of transfer.
FOB shipping point
The buyer accepts ownership when the goods depart the seller’s place of business. The buyer pays shipping costs and has the risk of loss in transit. The goods are part of the buyer’s inventory when they are in transit since ownership has transferred to the buyer.
