Chapter 5 Merchandising Operations Flashcards
What does merchandising involve?
Merchandising companies have many different items that make up the total inventory,what is the inventory classification given to these many items?
These many items such as prescription medication, over-the-counter medication, cosmetics, and personal care products (from shoppers drug mart for example) have two common characteristics, what are they?
Merchandising involves purchasing products (inventory) to resell to customers.
There are many different items that make up the total inventory of merchandising companies. These different items only have one inventory classification called merchandise inventory or just inventory.
These items have two common characteristics: 1) they are owned by the company, and 2) they are in a form ready for sale to customers.
Merchandising companies that purchase and sell directly to consumers are called what?
Merchandising companies that sell to retailers are known as what? Companies that produce goods for sale to wholesalers or others are called what?
Retailers.
Wholesalers.
Manufacturers.
What is operating cycle? Provide an example for a merchandising company.
What is the cash conversion cycle?
What does a short cash conversion cycle imply?
The time it takes to go from cash to cash in producing revenues.
For example:
In the typical course of events, a merchandising company purchased inventory on credit, increasing accounts payable. The company then sells that inventory on credit, increasing accounts receivable. Afterwards, it pays cash for its accounts payable, and collects cash from its accounts receivable…
…This amount of time between the outlay of cash and the collection of cash is known as the cash conversion cycle.
A short cash conversion cycle implies that the company needs to finance it’s inventory and accounts receivable for only a short period of time. A long cash conversion cycle indicates lower liquidity. It implies that a company must finance its inventory and accounts receivable for a longer period of time. Consequently a shorter cash conversion cycle indicates greater liquidity.
The sale of merchandise is often referred to simply as what?
Often referred to simply as sales revenue or just sales.
Expenses for a merchandising company are divided into two categories, what are they?
What is cost of goods sold?
What is gross profit?
1) Cost of goods sold and 2) operating expenses.
The cost of goods sold is the total cost of the merchandise that was sold during the period. This expense is directly related to the revenue that is recognized for sale goods.
Sales revenue less the cost of goods sold is called gross profit.
What needs to be done after gross profit is calculated in a merchandising company?
After gross profit is calculated, operating expenses are deducted to determine profit before income tax.
Operating expenses are expenses that are incurred in the process of earning sales revenue. Operating expenses of a merchandising company include many of the same expenses found in a service company, such as salaries, insurance, utilities, and depreciation.
Then, as is done for a service company, income tax expense is deducted from profit before income tax to determine profit (loss).
Summarize the income measurement process for a merchandising company?
Sales revenue - cost of goods sold = gross profit - operating expenses = profit (loss) before income tax - income tax expense = profit (loss).
Sales revenue - operating expense = profit (loss) before income tax - income tax expense = profit (loss).
Why does the merchandising company keeps track of its inventory?
To determine what is available for sale (inventory) and what has been sold (cost of goods sold).
What is the formula for cost of goods available for sale?
What is ending inventory?
Beginning inventory + the cost of goods purchased = the cost of goods available for sale. As goods are sold they are assigned to cost of goods sold.
Those goods that are not sold by the end of the accounting period represent what’s left, or in accounting terms, ending inventory. Ending inventory (goods not sold) is reported as merchandise inventory, current assets on the statement of financial position. The cost of goods sold (goods sold) is reported as cost of goods sold expense on the income statement.
What happens in a perpetual inventory system?
Why is effective control of the merchandise on hand important in a perpetual inventory system?
How to adjust for any inventory shortages?
How to adjust for any inventory overages?
In a perpetual inventory system, detailed records are maintained for the cost of each product that is purchased and sold. These records continuously -perpetually-show the quantity and cost of the inventory purchased, sold, and on hand.
When inventory items are purchased under a perpetual inventory system, the purchased item is recorded by debiting (increasing) the Merchandise Inventory account. When merchandise inventory is later sold, the cost of the goods that have just been sold (The original purchase cost of the merchandise) is obtained from the inventory records. This cost is transferred from the account Merchandise Inventory (an asset) to the account Cost of Goods Sold (an expense).
Under a perpetual inventory system, the cost of goods sold and the reduction in inventory- both it’s quantity and cost – are record each time a sale occurs. As a result, the Merchandise Inventory account is always able to reflect the amount of ending inventory on hand. This helps make it possible for management to monitor merchandise availability and maintain optimal inventory levels.
Inventory is usually the largest current asset for a merchandiser. effective control over the merchandise on hand is an important feature of a perpetual inventory system. Since the inventory records show the quantities thatshould be on hand, the merchandise can be counted at any time to see whether the amount actually on hand matches the inventory records. Any differences that are found can be investigated and adjusted, if required.
To adjust for any inventory shortages, the Cost of Goods Sold account would be debited and the Merchandising Inventory account credited. Although the “missing” inventory has not been sold, the Cost of Goods Sold account is debited because inventory losses are considered part of the cost of selling the goods. The missing inventory must be removed from the Merchandise Inventory account so that the account reflects the actual amount of inventory on hand.
Inventy overages are adjusted by debiting the Merchandise Inventory account and crediting the Cost of Goods Sold account. For control purposes, a physical inventory count is always taken at least once a year, and ideally more often, under the perpetual inventory system.
What happens in a periodic inventory system?
How to determine the cost of good sold under a periodic inventory system?
In a periodic inventory system, detailed inventory records of the merchandise on hand are not kept throughout the period. As a result, the cost of goods sold is determined only at the end of the accounting period– that is, periodically – when a physical inventory count is done to determine the cost of the goods on hand. First, the physical inventory count determines the quantities on hand, and then costs are assigned to these quantities.
1) Beginning inventory: determine the cost of goods on hand at the beginning of the accounting period (beginning inventory). Note that this is the same amount as the previous accounting period’s ending inventory.
2) cost of goods available for sale: add the cost of goods purchased to the beginning inventory. The total is the cost of goods available for sale during the period.
3) ending inventory: determine the cost of goods on hand at the end of the accounting (ending inventory) from the physical inventory count. Subtract the ending inventory from the cost of goods available for sale. The result is the cost of goods sold.
