The Operating Cycle and Merchandising Operations 6

Managing Merchandising Businesses OBJECTIVE 1: Identify the management issues related to merchandising businesses.

Figure 1: Cash Flows in the Operating Cycle

Figure 2: The Financing Period

Managing Merchandising Businesses A service business provides a service (e.g., a dry cleaner, an accountant, or a car wash), whereas a merchandising business sells goods (e.g., a department, drug, or grocery store).

Managing Merchandising Businesses Operating cycle –Purchase of merchandise inventory for cash or credit –Collection of cash from credit sales –Payment for purchases made on credit –Sales of merchandise inventory for cash or on credit

Managing Merchandising Businesses Choice of inventory system –Perpetual inventory system Inventory records are updated with every purchase and every sale. –Periodic inventory system Inventory records are updated only at the end of the period when a physical count is taken.

Managing Merchandising Businesses Foreign business transactions –Foreign business transactions involve two currencies. –Timing differences and related changes in the exchange rate may result in exchange gains or losses.

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Terms of Sale OBJECTIVE 2: Describe the terms of sale related to merchandising transactions.

Terms of Sale Trade discounts are reductions from the list price and are not recorded in the accounts. Sales discounts are offered by the seller for prompt payment. –2/10, n/30 means that the buyer can take a 2 percent discount by paying within 10 days of the invoice date or paying the full amount within 30 days. –Purchases discounts apply to the buyer.

Terms of Sale Transportation costs –FOB shipping point means that title to the goods transfers at origin and freight charges are paid by the buyer. –FOB destination means that title to the goods transfers at destination and freight charges are paid by the seller. –Freight-in is the transportation cost paid by the buyer and added to cost of goods sold. –Delivery expense, or freight-out, is the transportation cost paid by the seller and is an operating expense.

Terms of Sale Terms of debit and credit card sales –Debit cards deduct directly from a person’s bank account, whereas a credit card allows for payment later. –In credit card transactions, the credit card company takes a discount of 2 to 6 percent of the credit card sales, which is taken as a selling expense by the merchandiser.

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Perpetual Inventory System OBJECTIVE 3: Prepare an income statement and record merchandising transactions under the perpetual inventory system.

Exhibit 1: Income Statement Under the Perpetual Inventory System

Figure 3: Recording Purchase Transactions Under the Perpetual Inventory System

Figure 4: Recording Sales Transactions Under the Perpetual Inventory System

Perpetual Inventory System With the perpetual inventory system, inventory records are updated with every purchase and every sale.

Perpetual Inventory System –A purchase of merchandise on credit is debited to the Merchandise Inventory account and credited to the Accounts Payable account.

Perpetual Inventory System –Transportation costs for goods received are debited to the Freight-In account and credited to either the Accounts Payable or Cash accounts.

Perpetual Inventory System With the perpetual inventory system, inventory records are updated with every purchase and every sale. (cont.) –A purchase return to the supplier (for credit) is debited to the Accounts Payable account and credited to the Merchandise Inventory account. –A payment on account is debited to the Accounts Payable account and credited to the Cash account.

Perpetual Inventory System –A payment on account is debited to the Accounts Payable account and credited to the Cash account.

Perpetual Inventory System With the perpetual inventory system, inventory records are updated with every purchase and every sale. (cont.) –Returns of merchandise by customers are debited to the Sales Returns and Allowances account (a contra- revenue account) and credited to the Accounts Receivable account. –The Sales Returns and Allowances account is debited instead of the Sales account to provide management with data about dissatisfied customers.

Perpetual Inventory System –Under the perpetual inventory system, a second entry is needed to transfer the cost of the returned goods from the Cost of Goods Sold account to the Merchandise Inventory account.

Perpetual Inventory System With the perpetual inventory system, inventory records are updated with every purchase and every sale. (cont.) –Receipts from customers on account are debited to the Cash account and credited to the Accounts Receivable account.

Perpetual Inventory System

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Periodic Inventory System OBJECTIVE 4: Prepare an income statement and record merchandising transactions under the periodic inventory system.

Exhibit 2: Income Statement Under the Periodic Inventory System

Figure 5: The Components of Cost of Goods Sold

Figure 6: Recording Purchase Transactions Under the Periodic Inventory System

Figure 7: Recording Sales Transactions Under the Periodic Inventory System

Periodic Inventory System Merchandising income statement under the periodic system –Shows all the detailed computations of cost of goods sold –under the perpetual system, only the total cost of goods sold is disclosed. –With the periodic inventory system, inventory records are updated only at the end of the period, when a physical count is taken.

Periodic Inventory System Merchandising income statement under the periodic system (cont.) –Beginning inventory is the merchandise on hand at the beginning of the period. –Ending inventory is the merchandise on hand at the end of the period. The ending inventory of one period becomes the beginning inventory of the next period.

Periodic Inventory System Merchandising income statement under the periodic system (cont.) –Net purchases equals total purchases less purchases returns and allowances and purchases discounts. –Net cost of purchases equals net purchases plus freight-in.

Periodic Inventory System Merchandising income statement under the periodic system (cont.) –Cost of goods available for sale is the cost of merchandise available for sale during the period. It equals beginning inventory plus net cost of purchases. –Cost of goods sold is the cost to the merchandiser of the goods sold that period. It equals cost of goods available for sale less ending inventory.

Periodic Inventory System Purchases of Merchandise –Journalize a purchase of merchandise on account.

Periodic Inventory System Journalize a return of merchandise purchased.

Periodic Inventory System Journalize a payment on account.

Periodic Inventory System Sales of Merchandise –Journalize a sale of merchandise on account.

Periodic Inventory System Journalize a return of merchandise sold.

Periodic Inventory System Journalize collection from a customer on account.

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