Merchandising Operations and the Accounting Cycle - Pearson

Decision Guidelines
How do merchandising operations differ from service
operations?
How do a merchandiser’s financial statements differ
from the financial statements of a service business?
Income statement:
Merchandiser
Sales revenue ....................................... $XXX
– Cost of goods sold ................................ (X)
= Gross margin......................................... $ XX
– Operating expenses.............................. (X)
= Net income ........................................... $ X
What types of inventory systems are there?
How do the adjusting and closing processes of
merchandisers and service entities differ?
How to format the merchandiser’s income statement?
Multi-step format
Sales revenue ....................................... $XXX
– Cost of goods sold ................................ (X)
= Gross margin......................................... $ XX
– Operating expenses.............................. (X)
+ Other revenues ..................................... X
= Net income ........................................... $ XX
How to evaluate inventory operations?
How to determine the amount of cost of goods sold?
Merchandising Operations and the Accounting Cycle
• Merchandisers buy and sell merchandise inventory (often called
inventory, or goods).
• Service entities perform a service.
Balance sheet:
• Merchandiser has inventory, current asset.
• Service business has no inventory.
Service Business
Service revenue .................................... $XX
– Operating expense................................ (X)
= Net income ........................................... $ X
Statements of retained earnings:
No difference
• Perpetual system shows the amount of inventory on hand (the
asset) and the cost of goods sold (the expense) at all times.
• Periodic system shows the correct balances of inventory and
cost of goods sold only after a physical count of the inventory
and adjustment of the books to reflect that count, which occurs
at least once each year.
Very little. The merchandiser may have to adjust the Inventory account
for spoilage and theft. The merchandiser must close the Cost
of Goods Sold account. Service entities have no inventory to adjust
or cost of goods sold to close.
Single-step format
Revenues:
Sales revenue......................................... $ XXX
Other revenues ....................................... X
Total revenues....................................
Expenses:
$ XXX
Cost of goods sold.................................. (X)
Operating expenses................................ (X)
Total expenses ................................... $ XX
Net income ............................................. $ XX
Two key ratios:
Gross margin percentage* = Gross margin
Net sales revenue
Inventory turnover* = Cost of goods sold
Average inventory
*In most cases—the higher, the better
Can use the cost of goods sold model from the periodic
system (assumed amounts):
Beginning inventory ....................... $100
+ Net purchases and freight in ......... 800
= Cost of goods available.................. 900
– Ending inventory............................. (200)
= Cost of goods sold.......................... $700
Cost of goods sold is computed automatically in the
perpetual inventory system.
Chapter Five Merchandising Operations and the Accounting Cycle 249