Merchandising Operations and the Accounting Cycle - Pearson

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