Ch 5.1 Merchandising Operations Flashcards
What is merchandising
buying products (inventory) to resell to customers
what are the two charactersitics of inventory/ merchandise inventory
the company owns them
they are in a form ready for sale to customers
3 types of merchandising companies
retailers, wholesalers, and manufacturers
retailers
sell merch inventory directly to consumers
wholesalers
sell merch to retailers
manufacuteres
produce foods for sale to wholesalers or direct to relatiers
how is a manufacturing company slighlty different from a merchandising company
not all of its invetory may be ready for sale yet
what are the 3 categories of inventory
1) raw materials: have not been used in production prcoess
2) work in progress: inventory in the production process that is yet to be completed
3) finished goods: production has been completed, ready for sale
operating cycle
period from when cash is spent to buy inventory/provide a service to the time when cash is collected from customers
is operating cycle longer for merchandising or a serviece company
longer for a merchandising company!!!!
what does the operating cycle for a service company look like
performing services for cash or on account!
1) PERFORM SERVCIES FOR CUSTMOERS FOR CASH OR ON ACCOUNT
2) PAY CASH TO EMPLOYEES PERFORMING SERVICES
3) RECEIVE CASH FROM CUSTOMERS WHO PURCHASED ON ACC
what does operating cycle look like for merchandising companies
merchandise must be purchased for cash or on account before it can be sold to customers for cash or on account
1) purchase merch for cash or on acc
2) hold merchandise in stores or warehouses
3) pay for merch purchased on account
4) sell merch to customers for cash or on acc
5) recieve cash from customers that purchased on acc
REPEAT FROM 1
As merchandise is normally held in stores or warehouses for some time before being sold, the operating cycle includes the time between buying the inventory on account from suppliers and collecting the cash from its customers that purchase the inventory. Illustration 5.1 compares the operating cycles for service and merchandising companies. (Note that the timing of the receipt and payment of cash may vary from that shown for illustrative purposes.)
As merchandise is normally held in stores or warehouses for some time before being sold, the operating cycle includes the time between buying the inventory on account from suppliers and collecting the cash from its customers that purchase the inventory. Illustration 5.1 compares the operating cycles for service and merchandising companies. (Note that the timing of the receipt and payment of cash may vary from that shown for illustrative purposes.)
what does a long operating cycle mean
company has more money tied up in accounts receiveable or inventory; less liquidity
The longer the operating cycle, the longer a company must finance its inventory and accounts receivable.
The longer the operating cycle, the longer a company must finance its inventory and accounts receivable.
main source of revenue for merch companies
sales/sales revenue
two categories of expenses for merchandising companies
1) cogs: total ocst of merchandise that was sold during the period-> directly related to the revenue that is recognized from sale of those goods
2) operating expenses: incurred in the prcoess of earning sales (salaries, insurance, depreciation)
Why do we report cogs separate from other expenses
management and users can monitor these costs relative to sales revenue
GROSS PROFIT/GROSS MARGIN FORMULA
sales- cost of goods sold
HOW Is income measured for a merchandising company
sales-cogs= gros sprofit
gross profit- operating expenses= income before tax
income before tax-income tax expense= net income
inventory vs cogs
-both can be measured how?
inventory= goods avilabile for sale
cogs= goods that have been sold
dollars and units
Flow of costs for a merchandising company
(focusing on inventory)
beginning inventory + cogs purchased = cogs available for sale
you can separate cogs available for sale into 2 categories (cost of goods sold and ending inventory; this is for measuring the sold goods and also unsold goods)
how to note the cost of goods available for sale on financial statemetns
cogs (expense on statement of income)
ending inventory (Sofp asset)
what are the 2 types of inventory system
perpeutla inventory system
periodic inventory system
perpetual inventory system
detailed records are mainted for the cost of each product that is purchased and sold
PERPETUALLY SHOW QUANTITY AND COST OF INVENTORY SOLD/PURCHASED/LEFTOVER
HOW do you record inventory purchases in perpetual inven syst
DR inventory
CR Cash
whenever inventory increases@
HOW do you recordsale of inventory in perpetual inven syst
cogs obtained from inventory system, and transferred from inventory to cogs
DR cogs
CR Inventory
Under a perpetual inventory system, the cost of goods sold and the reduction in inventory—both its quantity and cost—are recorded each time a sale occurs.
!! for updated recrods
what must cogs and inventory do in perpetual inventory system
BALANCE AT ALL TIMES
HOW to determine ending inventory under perpetual inventory system
beginning inventory + cogs purhased= cogs available for sale
cogs available for sale- cogs = ending inventory
benefits of perpetual inven syst
maintain optimumum inventory levels
this is so improtant for merchandsiers
shrinkage
when inventory counted is less than the amount reported on records!!! inventory spoliage or theft
For control purposes, a physical inventory count is always taken at least once a year (and ideally more often) under a perpetual inventory system.
makes sense
Periodic inventory system
detailed records are not kept
cogs is determined only at the end of the accounting period
MAIN diff between perpetual and periodic inventory systems
perpetual: cogs is always known
Periodic: cogs is ONLY DETEMRINED AT THE END OF THE ACCOUNTING PERIOD
HOW to determine the cogs under a periodic inventory system
beginning inventory + cogs = cogs available for sale
cogs avialbel for sale-ending inventory= cogs
** we count ending inventory at end and that shwen we knows cogs
Key diff between periodic and perpetual inventory systems
the key difference is that, in a periodic inventory system, cost of goods sold, rather than ending inventory, is a residual number.
can you determine shrinkage in periodic inventory system?
no! cuz regular records were not kept!!
Advantages of perpetual inventory systems
1) up to date info on ending invenotry and cogs
2) enables companies to establish auto reordering based on predetermined minimum inventory levels (prevents over and under stocking)
3) can assess the shrinkage (determine how mcuh was stolen or spoiled)
4) reduces the needs and cost of frequeent inventory costs
advanatages of periodic inventory system
is cheaper comparing to equipment and system costs for perpetual systems
is ismpler
What is cost of goods sold?
the total cost of the merchandise sold to customers
INVENTORY CAN BE IN ONLY ONE OF TWOPLACES!!! WHERE?
EITHER ending inventory (sofp) or cost of goods sold (soi)
what is cost of goods sold??? WHAT DOES IT MEAN
it is inventory that has been sold
in a perpetual inventory system- how do you record:
a) increases in inventory
b) decreases in inventory
a) Dr Inventory
Cr Cash/AP
Dr Cost of Goods Sold (Expense acc)
Cr Inventory
best quality in inventory account under perpetual inventory system
it is always up to date!!! always adjusted in every sale for inventory and cogs so always updated
what is the main distinction in periodic inventory system?
that we subtract
COG available for sale- ending inventory= cogs
we assume any goods that were not included in ending inventory were sold!! thus cogs
