Merchandising Operations and Inventory Systems: Financial Accounting Study Notes

Merchandising Operations

Overview of Merchandising Operations

Merchandising operations involve businesses that purchase goods for resale to customers. These businesses are classified as either wholesalers or retailers, and their main asset is merchandise inventory. - Wholesaler: Buys goods from manufacturers and sells them to retailers. - Retailer: Buys goods from wholesalers or manufacturers and sells them to consumers. - Merchandise Inventory: Goods held for resale by a merchandiser.

The Operating Cycle of a Merchandising Business

The operating cycle describes the flow of transactions in a merchandising business, from purchasing inventory to collecting cash from customers. - Step 1: Purchase inventory from a vendor. - Step 2: Sell inventory to customers. - Step 3: Collect cash from customers.

Financial Statements of Merchandisers

Merchandisers report Sales Revenue instead of Service Revenue, and include Cost of Goods Sold (COGS) and Gross Profit on their income statements. - Gross Profit: Net Sales Revenue minus Cost of Goods Sold. - Operating Expenses: Expenses other than COGS.

Balance Sheet Differences

The balance sheet of a merchandising company includes merchandise inventory as a current asset, unlike a service company.

Merchandise Inventory Systems

Perpetual vs. Periodic Inventory Systems

Businesses use inventory systems to track the value of merchandise inventory. - Perpetual Inventory System: Maintains a continuous, computerized record of inventory. - Periodic Inventory System: Requires a physical count at period end to determine inventory on hand.

Purchasing Merchandise Inventory (Perpetual System)

Recording Purchases

Purchases are recorded when inventory is received, either for cash or on account. - Invoice: Seller's request for payment; also called a bill.

Purchase Returns and Allowances

- Purchase Return: Returning defective or unsuitable merchandise. - Purchase Allowance: Reduction in price for keeping unsatisfactory goods.

Purchase Discounts

Purchase discounts incentivize early payment. - Credit Terms: Expressed as, e.g., "3/15, n/30" (3% discount if paid within 15 days, net due in 30 days). - Example: $28,000 owed, 3% discount = $840 discount if paid within period.

Transportation Costs

Shipping terms determine ownership and responsibility for freight costs. - FOB Shipping Point: Buyer owns goods after they leave seller; buyer pays freight. - FOB Destination: Buyer owns goods at delivery; seller pays freight. - Freight In: Cost to bring goods into purchaser's warehouse. - Freight Out: Cost to deliver goods to customer.

Net Cost of Inventory Purchased

The net cost formula is: $\text{Net cost of inventory purchased} = \text{Purchase cost} - \text{Purchase returns and allowances} - \text{Purchase discounts} + \text{Freight in}$

Selling Merchandise Inventory (Perpetual System)

Recording Sales

Sales transactions require two entries: one for sales revenue and one for the cost of goods sold.

Sales on Account

Sales may be made on account, with or without discounts.

Sales Discounts

- Sales Discount: Reduction in revenue for early payment. - Example: $7,500 sale, 2% discount = $150 discount if paid within period.

Sales Returns and Allowances

- Sales Return: Customer returns goods. - Sales Allowance: Reduction in amount owed without return of goods.

Transportation Costs—Freight Out

- Freight Out: Delivery expense to seller for shipping goods to customers.

Adjusting and Closing Accounts (Perpetual System)

Inventory Shrinkage

Inventory shrinkage is the loss of inventory due to theft, damage, or errors. Adjusting entry: $\text{Inventory shrinkage} = \text{Merchandise inventory balance before adjustment} - \text{Actual inventory on hand}$

Closing Entries

Merchandisers close temporary accounts to Income Summary and then to Retained Earnings.

Financial Statements (Perpetual System)

Single-Step vs. Multi-Step Income Statement

- Single-Step: Groups all revenues and expenses together. - Multi-Step: Reports subtotals for gross profit, operating income, and net income.

Gross Profit Percentage

Evaluating Business Performance

The gross profit percentage measures profitability above the cost of goods sold. - Formula: $\text{Gross profit percentage} = \frac{\text{Gross profit}}{\text{Net sales revenue}} \times 100$

Periodic Inventory System

Recording Purchases

Purchases are recorded in a Purchases account, and inventory is updated at period end.

Freight In

Freight in is debited to a separate account under the periodic system.

Net Cost of Inventory Purchased

Net cost is calculated at period end, combining purchases, returns, discounts, and freight in.

Sales Transactions

No running record of inventory; sales discounts and returns are handled similarly to the perpetual system.

Adjusting and Closing Accounts (Periodic System)

Adjusting Entries

Ending inventory is determined by physical count; no adjustment for shrinkage.

Closing Entries

Temporary accounts are closed via Income Summary; ending inventory and estimated returns are recorded as debits.

Financial Statements (Periodic System)

Cost of Goods Sold Calculation

At period end, cost of goods sold is calculated by combining relevant accounts.

Net Method for Sales Discounts

Recording Sales at Net Amount

Under new standards, sales are recorded at the net amount, less any sales discounts. Additional info: These notes cover the full scope of merchandising operations, inventory systems, and related financial statement preparation, suitable for Financial Accounting college students.