Chapter 5: Merchandising Operations

Question 1

What is a merchandising operation?

Answer 1

The process of wholesalers selling products to retailers selling it to consumers

United stationers -> Office depot -> customer

Question 2

Define sales revenue (or sales)

Answer 2

The primary source of revenues

Question 3

What is the equation for income measurement?

Answer 3

Net income = Service revenues - operating expenses

Question 4

How does the income measurement change regarding merchandising (NOT SERVICE BUSINESS)

Answer 4

Sales revenue - COST OF GOODS SOLD = GROSS PROFIT

GROSS PROFIT - operating expenses = net income

Question 5

Define cost of goods sold

Answer 5

The total cost of merchandise sold during the period

Question 6

Which of the following ARE NOT used in service business?

Cost of goods sold, gross profit, operating expenses, net income, and sales revenue

Answer 6

Cost of goods sold and gross profit are not used in a service business.

Question 7

How do operating cycles differ between merchandising companies and service companies?

Answer 7

A merchandising company’s operating cycle is ordinarily longer than that of a service company.

Question 8

What are the two type of inventory systems?

Answer 8

Perpetual inventory system and periodic inventory system

Question 9

What is the flow of costs?

Answer 9

Beginning inventory / Cost of goods purchased –> Cost of goods available for sale –> Cost of goods sold/ending inventory.

Question 10

What are the differences between perpetual and periodic inventory systems regarding record keeping?

Answer 10

Perpetual: Detailed records

Periodic: No detailed records

Question 11

What are the differences between perpetual and periodic inventory systems regarding inventory stock?

Answer 11

Perpetual: Records continuously show inventory on hand for every item

Periodic: Only ending inventory, determined by physical count

Question 12

What are the differences between perpetual and periodic inventory systems regarding the cost of goods sold?

Answer 12

Perpetual: Cost of goods sold calculated each time item is sold

Periodic: Cost of goods sold calculated at the end of a time period

Question 13

What are the advantages of using a perpetual system?

Answer 13

1. Good for merchandise with high value
2. Good records help you know what you do and don’t have on hand at any time
3. Better control over inventories than periodic system

Question 14

How to calculate cost of goods sold?

Answer 14

Beginning inventory + net purchases = goods available for sale

Goods available for sale - ending inventory = cost of goods sold

Question 14

When do you usually record products as inventory?

Answer 14

When goods are received from the seller

Question 15

What is the difference between FOB Shipping Point and FOB Destination?

Answer 15

FOB Shipping Point: The buyer owns the product once it leaves the sellers establishment

FOB Destination: The buyer doesn’t own the product until it arrives to their establishment

Question 16

How would you classify fright costs?

Answer 16

Operating expense

Question 17

When the purchaser is dissatisfied with the product- what two options are given?

Answer 17

Purchase return and purchase allowance

Question 18

Define purchase return

Answer 18

Goods are returned for credit or cash depending on how they were bought (buyer gets money back and does not keep the product)

Question 19

Define purchase allowance

Answer 19

The buyer keeps the product but for a discounted price due to dissatisfaction.

Question 20

Define purchase discount

Answer 20

A credit term that permits the buyer (retailer) to claim a cash discount for a faster payment

Ex: 2/10 n/30; you’ll get a 2% discount if you pay me within 10 days. But you will get no discount (pay net amount) if you pay me in 30 days.

Question 21

What are the advantages of a purchase discount?

Answer 21

1. Purchaser saves money
2. Seller gets money faster

Question 22

Regarding credit terms, what does 1/10 EOM mean?

Answer 22

1% discount if paid withing first 10 days of next month

Question 23

Regarding credit terms, what does n/10 EOM mean?

Answer 23

Net amount (no discount) due within the first 10 days of the next month

Question 24

If NMU Book Store (buyer) purchased printing paper for $3,800 from Office Max (seller) and we are preparing the JOURNAL ENTRY FOR NMU, what two accounts will be used for the $3,800? (Also state debit/credit)

Answer 24

Debit inventory $3,800
Credit accounts payable $3,800

Debit inventory because the printing paper is an increase in inventory.

Credit accounts payable because we did not pay in cash

Question 25

NMU has inventory delivered and needs to pay the fright charges $150. How would this show up on the journal FOR NMU (remember debit/credit)

Answer 25

Debit inventory $150
Credit cash $150

Debit inventory because the shipping was part of the process in getting the inventory

Credit cash since it was paid for once delivered

Question 26

If Office Max was to pay shipping charges for delivery inventory to NMU book store how would that look in the journal entry FOR OFFICE MAX? (remember debit/credit)

Answer 26

Debit Fright-Out (Expense)
Credit cash

Debit expense so the negative increases
Credit cash since you paid for it

Question 27

If NMU Book store returned some inventory for $300 to Office Max, how would NMU journal this entry? (remember debit/credit)

Answer 27

Debit accounts payable
Credit inventory

Debit accounts payable because you “got some money back” but credit inventory since you “lost some inventory”

Question 28

If NMU Book store didn’t need to pay Office Max until June but paid in May for a 2% discount on $3,500 (originally $3,800 but has a $300 return) what would the journal entry look like? (remember debit/credit)

Answer 28

Debit accounts payable for $3,500
Credit inventory for $70
Credit cash for $3,430

This is because we want both sides of the equation even

Question 29

If NMU Bookstore paid office max in june for full price ($3,500) what would the journal entry look like? (remember debit/credit)

Answer 29

Debit Accounts payable $3,500
Credit cash $3,500

This is because accounts payable is a loan, or a liability, while cash is an asset. And both sides of the equation need to equal.

Assets = liabilities + stockholder’s equity

Question 30

What 3 accounts do we need to close?

Answer 30

Revenue, dividend, expense, (cost of goods sold is an expense)