Merchandising Operations and the Accounting Cycle - Pearson

Summary
Requirement 4
254 Part One The Basic Structure of Accounting
Inventory Cost of goods sold $166,470
turnover
= =
= 2.7 times
Average inventory ($59,500 + $65,800)/2
The increase in the rate of inventory turnover from 2.1 to 2.7 suggests higher profits
in 2003 than in 2002. However, gross margin and expenses for both years must be
checked to verify this suggestion.
Cyber
Coach
1. Use sales and gross margin to evaluate a company.
The major revenue of a merchandising business is sales
revenue, or net sales. The major expense is cost of goods sold.
Net sales minus cost of goods sold is called gross margin, or
gross profit. This amount measures the business’s success
or failure in selling its products at a higher price than it
paid for them.
2. Account for the purchase and sale of inventory. The
merchandiser’s major asset is inventory. In a merchandising
entity the accounting cycle is from cash to inventory as
the inventory is purchased for resale, and back to cash as
the inventory is sold. The invoice is the business document
generated by a purchase or sale transaction. Most merchandising
entities offer discounts to their customers and
allow them to return unsuitable merchandise. They also
grant allowances for damaged goods that the buyer chooses
to keep. Sales Discounts and Returns and Allowances are
contra accounts to Sales Revenue.
3. Adjust and close the accounts of a merchandising business.
The end-of-period adjusting and closing process of
a merchandising business is similar to that of a service
business. In addition, a merchandiser adjusts inventory
for theft losses, damage, and accounting errors.
Self-Study Questions
Test your understanding of the chapter by marking the
correct answer for each of the following questions:
1. The major expense of a merchandising business is
(p. 223)
a. Cost of goods sold c. Rent
b. Amortization d. Interest
2. Sales total $440,000, cost of goods sold is $210,000,
Visit the Student Resource area of the Accounting Companion Website
for extra practice with the new material in Chapter 5.
www.pearsoned.ca/horngren
4. Prepare a merchandiser’s financial statements. The income
statement may appear in the single-step format or the
multi-step format. A single-step income statement has only
two sections—one for revenues and the other for expenses—and
a single income amount for net income. A
multi-step income statement has subtotals for gross margin
and income from operations. The multi-step format is the
most widely used format.
5. Use the gross margin percentage and the inventory
turnover ratio to evaluate a business. Two key decision
aids for a merchandiser are the gross margin percentage
(gross margin/net sales revenue) and the rate of inventory
turnover (cost of goods sold/average inventory). Increases
in these measures usually signal an increase in profits.
6. Compute cost of goods sold. Cost of goods sold is the cost
of the inventory that the business has sold. It is the largest
single expense of most merchandising businesses. Cost of
goods sold is the sum of the cost of goods sold amounts
recorded during the period. In a periodic inventory system,
Cost of goods sold = Beginning inventory + Purchases
(net of any contra accounts) + Freight in – Ending
inventory.
and operating expenses are $160,000. How much
is gross margin? (p. 224)
a. $440,000 c. $210,000
b. $230,000 d. $70,000
3. A purchase discount results from (p. 221)
a. Returning goods to the seller
b. Receiving a purchase allowance from the seller