Chapter 5 - merchandising operations Flashcards
What are merchandising operations
- Companies that buy and sell goods for resale (companies that sell merchandise)
- This excludes service businesses, manufacturers, government, not for profits
What are the characteristics of merchandising
- Hold inventory (for resale)
- “Operating cycle” is longer
- Nature of expenses - merchandising will identify the cost of the goods they have sold
-Have “operating” expenses, but they may be shown differently
Describe an operating cycle in merchandising businesses
- an operating cycle is the time it takes to go from cash going out in a business to cash coming into a business
- in a merchandising business, there is an initial cash outflow for the purchase of goods
- it may take some time to sell those goods and receive cash from the customers
Describe the basic format of an income statement
Revenue
Less COGS
= Gross profit
Less: Operating expenses
= Net income before tax
Less: Income tax expense
= Net income
Merchandising companies keep track of their inventory using one of which two methods
- Perpetual
- Periodic
What is inventory in merchandising companies
This is good purchased or held for resale
–> supply inventory is different and is not a cost of goods that you’re selling
is the choice of inventory control system a record keeping choice or a reporting choice
record keeping choice
–> either way you will be reporting
What type of inventory control system costs more
- Perpetual system –> this is worth it if you have a lot of inventory, and will let you know if something has gone missing immediately
Describe the perpetual inventory control method
- every time a sale is made, inventory is reduced and COGS is recorded
- inventory purchases are added to the inventory balance
- continuous record keeping provides us with an up to date inventory balance
Under the perpetual inventory method what is the journal entry when inventory is purchased
Dr Inventory
Cr Cash or A/P
(Inventory is an asset that is increasing so debit that, and we used up cash so credit cash)
Under the perpetual inventory method what is the journal entry when inventory is sold
Dr COGS
Cr Inventory
Dr. Cash
Cr Sales
- COGS is an expense which is natural balance debit, so add that expense to our journal by debiting it
- Inventory is an asset that is decreasing so credit that to remove the item from inventory
In the perpetual inventory method what happens at the end of the accounting period
- at the end of the accounting period that balance in the inventory asset account should equal what is on hand: count it and see
- if it doesn’t agree then we adjust the asset account for any shortage that becomes known
Describe the periodic inventory method
- no continuous records of inventories or COGS
-Use the beginning and ending inventory counts plus purchases to calculate COGS - Cheaper than the perpetual system but does not show if there is an inventory shortage or provide information between counts
Under the periodic inventory method what is the journal entry when inventory is purchased
Dr Purchases
Cr Cash
–> there is no impact to inventory which is why we don’t debit inventory like we do under perpetual system (Instead it goes to the purchases account on income statement) - any purchases are immediately expensed
Under the periodic inventory method what is the journal entry when inventory is sold
- no entry needed because the purchase was already expensed (we don’t keep track of inventory here in this method) vs. perpetual where there are two entries when inventory is sold
Under the periodic inventory method what occurs at the end of the accounting period
- Adjust the accounts to recognize what is counted by transferring the beginning inventory asset to expense and recording the ending inventory asset as whatever is counted, removing that amount form expense
–>:
Dr Beginning Inventory
Cr Inventory
Dr Inventory
Cr Ending inventory
- beginning and ending inventory are expense accounts
- inventory is an asset account
Under the periodic system How do you sum to COGS
Beginning Inventory
Add: purchases
Less: ending inventory
= COGS
–> there is no account called COGS, instead the accounts sum to equal COGS
How do you determine COGS on perpetual vs periodic inventory method
- perpetual: COGS is calculated directly as its removed from inventory asset
- periodic: COGS is deduced on the income statement adjusted for the difference between what was counted as the beginning and ending inventories (COGS = beginning + purchases - ending inventory)
What sales tax is included in the cost of inventory
PST
Describe Freight costs
- shipping/handling costs
- Freight out - when you sell something and pay for shipping
- Freight in - when you buy something and pay for shipping into your operation (This is only used in the periodic method - in perpetual method you just debit inventory and credit cash)
- goes on income statement as operating expenses - not as COGS
- FOB shipping point: Buyer pays to get the goods to the destination: buyer owns at shipping point
- FOB destination: Seller pays to get the goods to the destination: buyer owns at destination
- these are opposite to purchases
How are purchase returns and allowances on journal entries in periodic vs perpetual method
Periodic
–> Dr A/P
Cr Purchase returns and allowances
Perpetual
–> Dr. A/P
Cr. Inventory
- purchase returns and allowances is on income statement
What would purchase discount of 2/10 net 30 mean, and what would the journal entries be for purchase discounts
- 2% discount if paid within 10 days otherwise due in 30 days
- the discount taken reduces the cost of merchandise so:
Periodic
Cr. Purchase Discounts
Perpetual
Cr Inventory
How do you calculate the net purchases and cost of goods purchased in periodic method v
Purchases - Purchase returns and allowances - purchase discounts = net purchases + Freight in = cost of goods purchased
What requirement under IFRS is there regarding returns
- requirement to estimate returns if they are possible