Merchandising Operations and the Accounting Cycle - Pearson

More documents

Recommendations

Info

The Forzani Group Ltd. (FGL) is Canada’s largestselling retailer of sporting goods. The company operates its retail stores under four different banners: SportChek, Sports Experts, Forzani’s, and Coast Mountain Sports. “FGL has redefined the concept of sporting goods retailing by migrating the experience to one focussed on an active lifestyle.” Indeed, the company recovered from near-bankruptcy in the mid-1990s to become one of the most successful retailers in the country. The company operates over 130 corporate stores and 165 franchised stores with over 46,000 product items available. FGL has defined its target markets and is taking strategic initiatives to ensure success. One such initiative is to deliver the “customer experience” at the lowest possible cost. To achieve this initia- The Forzani Group Ltd. www.forzanigroup.com The Bay www.hbc.com Canadian Tire www.canadiantire.com Petro-Canada www.petro-canada.ca Molson Breweries www.molson.com 222 Part One The Basic Structure of Accounting tive, the company must successfully manage its inventory, which accounted for 55 percent of its total assets in fiscal year 2000. Inventory management for retailers, like FGL, is critical to their success. SportChek wants to ensure that it has enough inventory on hand and the “right” products to meet the needs of its customers. At the same time, too much inventory or the “wrong” products in inventory can cause cashflow problems. Advances in computer systems have helped companies manage their inventory by providing up-to-date inventory data in real time. FGL recognizes the potential changes in buying habits that the internet will bring. To this end, FGL is creating its own website to take advantage of e-commerce retailing. Source: The Forzani Group Ltd. 2000 Annual Report. CHAPTER 5 comes to mind when you think of merchandising? You probably think of the clothing that you purchase from a department store, the bread you buy at the grocery store, or the gas you purchase at your local service station. In addition to SportChek and Sports Experts stores, other merchandisers include Zellers, The Bay, Canadian Tire, Petro-Canada, and Shoppers Drug Mart. How do the operations of The Forzani Group Ltd. and other merchandisers differ from those of the businesses we have studied so far? In the first four chapters, Air & Sea Travel, Inc. provided an illustration of a business that earns revenue by selling its services. Service enterprises include Four Seasons Hotels, Air Canada, physicians, lawyers, public accountants, the Vancouver Canucks hockey club, and the twelve-year-old who cuts lawns in your neighbourhood. A merchandising entity earns its revenue by selling products, called merchandise inventory or, simply, inventory. This chapter demonstrates the central role of inventory in a business that sells merchandise. Inventory includes all goods that the company owns and expects to sell in the normal course of operations. Some businesses, such as Zellers department stores, Petro-Canada gas stations, and Safeway grocery stores, buy their inventory in finished form ready for sale to customers. Others, such as Bombardier and Molson Breweries, manufacture their own products. Both groups sell products rather than services. We illustrate accounting for the purchase and sale of inventory, how to adjust and close the books of a merchandiser and how to prepare financial statements for a merchandiser. The chapter illustrates both the perpetual and periodic inventory methods. The chapter covers two ratios that investors and creditors use to evaluate companies. What
Before launching into merchandising, let’s compare service entities, with which you are familiar, to merchandising companies. The following summarized financial statements will show how the two types of companies are similar and different: SERVICE CO.* Income Statement For the Year Ended June 30, 2002 Service revenue ........................ $XXX Expenses Amortization expense ........ X Salary expense ..................... X Net income............................... $ X SERVICE CO. Balance Sheet June 30, 2002 Assets Current assets: Cash....................................... $X Short-term investments...... X Accounts receivable, net..... X Prepaid expenses................. X * Such as Air & Sea Travel Inc. MERCHANDISING CO.** Income Statement For the Year Ended June 30, 2002 Sales revenue............................ $XXX Cost of goods sold ...................... X Gross margin ........................... XX Operating expenses Amortization expense ........ X Interest expense................... X Salary expense ..................... X Net income............................... $ X MERCHANDISING CO. Balance Sheet June 30, 2002 Assets Current assets: Cash....................................... $X Short-term investments...... X Accounts receivable, net..... X Inventory................................ X Prepaid expenses................. X ** Such as The Forzani Group Ltd., a corporation What Are Merchandising Operations? Exhibit 5-1 shows the income statement of The Forzani Group Ltd. (FGL) for two recent years. FGL generates revenue in two different ways. Corporate revenue is revenue earned by selling merchandise through company-owned stores. Franchise revenue is revenue earned from selling merchandise to franchise stores, which are stores that belong to other owners that are allowed to use FGL’s store names, advertising, and selling expertise. In return, the franchise stores agree to purchase all inventory from FGL. FGL’s income statement differs from those of the service business discussed in previous chapters. For comparison, Exhibit 5-1 also provides the income statement for Air & Sea Travel, Inc. The highlighted items in the FGL statement are unique to merchandising operations. The selling price of merchandise sold by a business is called sales revenue, often abbreviated as sales. (Net sales equals sales revenue minus any sales returns and sales discounts.) The major revenue of a merchandising entity, sales revenue, results in an increase in retained earnings from delivering inventory to customers. The major expense of a merchandiser is cost of goods sold, also called cost of sales. It represents the entity’s cost of the goods (the inventory) it sold to customers. While inventory is held by a business, the inventory is an asset because the goods are an economic resource with future value to the company. When the inventory is sold, however, the inventory’s cost becomes an expense to the seller because the goods are no longer available. When one of FGL’s SportChek stores sells equipment to a customer, the equipment’s cost is expensed as cost of goods sold on SportChek’s books. OBJECTIVE 1 Use sales and gross margin to evaluate a company Chapter Five Merchandising Operations and the Accounting Cycle 223
Page 1: C H 5A P T E R Merchandising Operat
Page 5 and 6: Suppose FGL’s Sports Experts stor
Page 7 and 8: debiting the Inventory account. A $
Page 9 and 10: Austin paid within the discount per
Page 11 and 12: STOP & THINK Refer to the Accounts
Page 13 and 14: STOP & THINK Why is there no Januar
Page 15 and 16: sales. Therefore the GST paid on pu
Page 17 and 18: Requirement 2 Inventory Cost of Goo
Page 19 and 20: Exhibit 5-5. All the new accounts
Page 21 and 22: EXHIBIT 5-7 Financial Statements of
Page 23 and 24: Journal Adjusting Entries a. Dec. 3
Page 25 and 26: Two Key Ratios for Decision Making
Page 27 and 28: Wal-Mart 1 2 3 4 5 6 Austin Sound C
Page 29 and 30: Decision Guidelines How do merchand
Page 31 and 32: 3. Prepare the company’s multi-st
Page 33 and 34: Requirement 3 JAN KING DISTRIBUTING
Page 35 and 36: c. Buying a large enough quantity o
Page 37 and 38: Date: ___________________________ T
Page 39 and 40: 2. The R39 truck tires were ordered
Page 41 and 42: Required 1. Prepare the business’
Page 43 and 44: $7,700, $12,160, and $10,180 thousa
Page 45 and 46: 2. The note payable signed on May 2
Page 47 and 48: Trial Balance Adjustments Account T
Page 49 and 50: Sales discounts....................
Page 51 and 52: e. Store supplies on hand at Decemb
Page 53 and 54:
Required 1. Inventory on hand at Se
Page 55 and 56:
c. The equipment is expected to las
Page 57 and 58:
HEIGHTS PHARMACY LTD. Balance Sheet
Page 59 and 60:
Supplement to Chapter 5 Accounting
Page 61 and 62:
Panel A Panel B Beginning inventory
Page 63 and 64:
AUSTIN SOUND CENTRE INC. Trial Bala
Page 65 and 66:
Assets Current assets: Cash .......
Page 67 and 68:
Journal Adjusting Entries a. Dec. 3
Page 69 and 70:
Summary Problem for Your Review The
Page 71 and 72:
Requirement 2 Adjusting Entries 200
Page 73 and 74:
Requirement 4 Inventory Cost of goo
Page 75 and 76:
Required Journalize these transacti
Page 77:
BLISS SALES COMPANY LTD. Trial Bala
show all

Merchandising Operations and the Accounting Cycle - Pearson

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?