Merchandising Operations, Inventory, and Accounting Information Systems: Study Notes & Practice Questions

Merchandising Operations

Overview of Merchandising Operations

Merchandising operations involve the buying and selling of goods with the intent to resell them at a profit. Merchandising companies use specialized accounts and processes to track inventory and sales.

• Perpetual Inventory System: Continuously updates inventory records for each purchase and sale.

• Periodic Inventory System: Updates inventory records at specific intervals, typically at the end of an accounting period.

• Key Transactions: Purchases, sales, returns, allowances, and discounts.

Example: A company purchases inventory on account, sells goods to customers, and records returns and allowances as they occur.

Merchandise Inventory

Inventory Valuation Methods

Inventory valuation is crucial for determining cost of goods sold (COGS) and ending inventory. The two main methods are FIFO (First-In, First-Out) and Weighted Average.

• FIFO: Assumes the earliest goods purchased are the first to be sold.

• Weighted Average: Calculates average cost per unit for all goods available for sale during the period.

Formulas:

• FIFO Ending Inventory: $\text{Ending Inventory} = \text{Units Remaining} \times \text{Cost of Most Recent Purchases}$

• Weighted Average Cost per Unit: $\text{Average Cost} = \frac{\text{Total Cost of Goods Available for Sale}}{\text{Total Units Available for Sale}}$

• COGS: $\text{COGS} = \text{Units Sold} \times \text{Cost per Unit}$

Example: If a company purchases 10 units at $10 and 20 units at $12, FIFO would assign the cost of the first 10 units sold at $10 each, and the next 20 at $12 each.

Accounting Information Systems

Role in Merchandising Operations

Accounting information systems (AIS) are used to record, process, and report financial transactions. In merchandising, AIS helps track inventory, sales, and related journal entries.

• Journal Entries: Record purchases, sales, returns, and adjustments.

• Internal Controls: Safeguard assets and ensure accuracy of records.

Example: Recording a sale involves debiting Accounts Receivable and crediting Sales Revenue, while also updating inventory records.

Multi-Step Income Statement

Structure and Purpose

The multi-step income statement provides detailed information about a company's financial performance, separating operating and non-operating activities.

• Gross Profit: $\text{Gross Profit} = \text{Net Sales} - \text{Cost of Goods Sold}$

• Operating Income: $\text{Operating Income} = \text{Gross Profit} - \text{Operating Expenses}$

• Net Income: $\text{Net Income} = \text{Operating Income} + \text{Other Revenues} - \text{Other Expenses}$

Example: A company with net sales of $100,000, COGS of $60,000, and operating expenses of $25,000 would have a gross profit of $40,000 and operating income of $15,000.

Practice Questions Summary

Key Skills Tested

• Preparation of journal entries for merchandising transactions

• Calculation of COGS and ending inventory using FIFO and weighted average

• Adjustment of inventory accounts and calculation of shrinkage

• Preparation of a multi-step income statement

Sample Table: Inventory Transactions (FIFO vs. Weighted Average)

Date	Transaction	Units	Unit Cost	Total Cost
Oct 1	Beginning Inventory	20	11.00	220.00
Oct 5	Purchase	22	11.14	245.08
Oct 10	Sale	21	---	---
Oct 15	Purchase	18	11.50	207.00
Oct 20	Sale	17	---	---
Oct 25	Purchase	20	12.00	240.00
Oct 30	Sale	22	---	---

Additional info: Table entries for sales do not include unit cost as these are determined by the inventory method (FIFO or weighted average).