Chapter 5 Merchandising Operations

Question 1

what are the merchandising operations?

Answer 1

a merchandiser is a business that sells merchandise, or goods, to customers

Question 2

what are the 2 main types of inventory accounting?

Answer 2

periodic inventory system - requires businesses to obtain a physical count of inventory to determine quantities on hand
perpetual inventory system - keeps a running computerized record of merchandise inventory

Question 3

how are purchases of merchandise inventory recorded in a perpetual inventory system?

Answer 3

Purchase of merchandise inventory: Merchandise inventory DR, Cash or Accounts Payable CR
Purchase Return: Cash or Accounts Payable DR, Merchandise Inventory CR
Payment of Freight in: Merchandise Inventory DR, Cash CR
Payment within discount period: Accounts Payable DR, Cash CR, Merchandise inventory CR
Payment after discount period: Accounts Payable DR, Cash CR

Question 4

how are sales of merchandise inventory recorded in a perpetual inventory system?

Answer 4

sale of merchandise inventory: cash or accounts receivable DR, Sales Revenue CR
Merchandise inventory DR, Cost of Goods Sold CR
Sales Return: Sales returns and allowances DR, Cash or Accounts Receivable CR
Merchandise Inventory DR, Cost of Goods Sold CR
Sales Allowance: sales returns and allowances DR, Cash or Accounts Receivable CR
Payment of freight out: Delivery Expense DR, Cash CR
Collection of Cash During Discount Period: Cash DR, Sales Discounts DR, Accounts Receivable CR
Collection of Cash after discount period: Cash DR, Accounts Receivable CR

Question 5

what are the adj and closing entries for a merchandiser?

Answer 5

an adj entry must be made for inventory shrinkage, the loss of inventory that occurs because of theft, damage, and errors.
closing entries include the new accounts (Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold

Question 6

how are a merchandiser’s financial statements prepared?

Answer 6

2 formats for income statements: Single step income statement - groups all revenues together and all expenses together without calculating other subtotals
Multistep income statement - lists several important subtotals including gross profit, operating income, and net income
A merchandisers statement of retained earnings looks exactly like that of a service business
the balance sheet will also look the same, except merchandisers have an additional current asset, merchandise inventory.

Question 7

how do we use the gross profit percentage to evaluate business performance?

Answer 7

the gross profit percentage measures the profitability of each sales dollar above the cost of goods sold. Gross profit percentage = gross profit / net sales revenue

Question 8

how are merchandise inventory transactions recorded in a periodic inventory system?

Answer 8

the merchandise inventory account is not used when recording purchase transactions instead purchases, purchase discounts, purchase returns and allowances, and freight in are used.
Sales transactions only involve recording the sales revenue. the merchandise inventory account is not used
an adjustment for inventory shrinkage is not needed
closing entries are similar to the perpetual inventory system with the addition of closing the new accounts discussed. ending merchandise inventory must be recorded and beginning merchandise inventory must be removed

Question 9

what are administrative expenses?

Answer 9

expenses incurred that are not related to marketing the company’s products

Question 10

what is the cost of goods sold (COGS)?

Answer 10

the cost of the merchandise inventory that the business has sold to customers

Question 11

what are credit terms?

Answer 11

the payment terms of purchase or sale as stated on the invoice

Question 12

what is FOB Destination?

Answer 12

situation in which the buyer takes ownership (titles) to the goods at the delivery destination point and the seller typically pays the freight

Question 13

what is FOB Shipping point?

Answer 13

situation in which the buyer takes ownership (title) to the goods after the goods leave the seller’s place of business (shipping point) and the buyer typically pays the freight

Question 14

what is freight in?

Answer 14

the transportation cost to ship goods into the purchaser’s warehouse; therefore, it is freight on purchased goods

Question 15

what is freight out?

Answer 15

the transportation cost to ship goods out of the seller’s warehouse, therefore it is freight on goods sold to a customer

Question 16

what is gross profit?

Answer 16

excess of net sales revenue over cost of goods sold

Question 17

what is gross profit percentage?

Answer 17

measures the profitability of each sales dollar above the cost of goods sold, gross profit / net sales revenue

Question 18

what is inventory shrinkage?

Answer 18

the loss of inventory that occurs because of theft, damage, and errors

Question 19

what is an invoice?

Answer 19

a seller’s request for payment from the purchaser

Question 20

what is merchandise inventory?

Answer 20

the merchandise that a business sells to customers

Question 21

what is a merchandiser?

Answer 21

a business that sells merchandise, or goods, to customers

Question 22

what is a multi-step income statement?

Answer 22

income statement format that contains subtotals to highlight significant relationships, in addition to net income, it reports gross profit and operating income

Question 23

what are net purchases?

Answer 23

purchase less purchase returns and allowances less purchase discounts

Question 24

what is net sales revenue?

Answer 24

the amount a company has made on sales of merchandise inventory after returns, allowances, and discounts have been taken out. sales revenue less sales returns and allowances and sales discounts

Question 25

what are operating expenses?

Answer 25

expenses, other than cost of goods sold, that are incurred in the entity’s major line of business

Question 26

what is operating income?

Answer 26

measures the results of the entity’s major ongoing activities. gross profit minus operating expenses

Question 27

what are other revenues and expenses?

Answer 27

revenues or expenses that are outside the normal, day-to-day operations of a business, such as gain or loss on the sale of plant assets or interest expense

Question 28

what is a periodic inventory system?

Answer 28

an inventory system that requires businesses to obtain a physical count f inventory to determine quantities on hand

Question 29

what is a purchase allowance?

Answer 29

an amount granted to the purchaser as an incentive to keep goods that are not “as ordered”

Question 30

what is the perpetual inventory system?

Answer 30

an inventory system that keeps a running computerized record of merchandise inventory

Question 31

what is a purchase discount?

Answer 31

a discount that businesses offer to purchasers as an incentive for early payment

Question 32

what is a purchase return?

Answer 32

a situation in which sellers allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable

Question 33

what is a retailer?

Answer 33

a type of merchandiser that buys merchandise either from a manufacturer or a wholesaler and then sells those goods to consumers

Question 34

what are sales discounts?

Answer 34

reduction in the amount of cash received from a customer for early payment

Question 35

what are sales returns and allowances?

Answer 35

decreases in the seller’s merchandise or from granting the customer and allowance from the amount owed to the seller

Question 36

what is sales revenue?

Answer 36

the amount that a merchandiser earns from selling its inventory

Question 37

what are selling expenses?

Answer 37

expenses related to marketing and selling the company’s product

Question 38

what is a single-step income statement?

Answer 38

income statement format that groups all revenues together and then lists and deducts all expenses together without calculating any subtotals

Question 39

what is a vendor?

Answer 39

the individual or business from whom a company purchases goods

Question 40

what is a wholesaler?

Answer 40

a type of merchandiser that buys goods from manufacturers and then sells them to retailers