Chapter 6: Merchandising Operations and the Multistep Income Statement

Purchase Discount

Cash discount received for prompt payment of an account

Merchandising Company

Company that sells goods that have been obtained from a supplier.

Service Company

Company that sells services rather than physical goods.

Shrinkage

Cost of inventory lost to theft, fraud, error

Cost of Goods Sold

Expresses the relationship between inventory on hand, purchased, and sold. 1. BI + P - EI = COGS (Periodic) 2. BI + P - COGS = EI (Perpetual)

How are costs recorded for inventory?

Inventory Account: Costs needed to get the inventory into a condition and location ready for sale. (Purchaser) Selling Expenses: Costs to make inventory ready for sale. Freight-in to deliver goods to customers

Inventory vs Supplies

Inventory: Consist of goods acquired for resale to customers. Supplies: Goods acquired for internal use

Pros and Cons of Periodic Inventory Systems

Pros: 1. Easy to maintain Cons: 1. Accurate records of inventory on hand and inventory sold are unavailable outside the end of the month. 2. May need to take a large chunk of time to do a manual count of inventory.

When to record revenue: Retailers vs wholesalers

Retailers: Customer buys and takes possession of the good. Wholesaler: Time state on written sales agreement

Retailers vs Wholesalers

Retailers: Sell directly to individual consumers Wholesalers: Sell inventory to retail businesses for resale to consumers

Gross Profit

Sales Revenue - COGS

Operating Cycle

Series of activities that a company undertakes to generate revenues and cash.

Three Key Differences in the Balance Sheet and Income Statement between service and merchandising companies.

Service: 1. Do not report inventory. Instead report Supplies (B/S) 2. Earn revenue from services, record Service Revenue (I/S) 3. Do not report COGS Merchandising: 1. Report Inventory (B/S) 2. Earn revenue from sales, record Sales Revenue (I/S) 3. Report COGS (I/S)

Goods Available for Sale

Sum of beginning inventory and purchases for the period. (BI + P)

Perpetual Inventory System

System in which a detailed inventory record is maintained by recording each purchase and sale of inventory during the accounting period.

Periodic Inventory System

System in which ending inventory and cost of goods sold are determined only at the end of the accounting period based on a physical inventory count.

Inventory

Tangible property held for sale in the normal course of business or used in producing goods or services for sale.

FOB Shipping Point

Term of sale indicating that goods are owned by the buyer the moment they leave the seller's premise. Buyer incurs transportation cost (freight-in)

FOB Destination

Term of sale indicating that goods are owned by the seller until delivered to the buyer. Supplier incurs transportation cost

Why does perpetual provide the best inventory control?

The continuous tracking of transactions allows companies to instantly determine the quantity of products on the shelves and evaluate how much time inventory has spent there.

List the two types of transportation terms of sale.

1. FOB Shipping Point 2. FOB Destination

List the two possible times for transfer control

1. FOB Shipping Point - sale is recorded when the goods leave the seller's shipping department. 2. FOB Destination - Sale recorded when the goods reach their destination (customer)

List the accounts important to a Merchandiser

1. Inventory 2. Sales Revenue 3. Cost of Goods Sold (COGS)

List the two ways inventory can be tracked by companies

1. Periodic 2. Perpetual

Options available to buyer when goods are damaged or fail to meet expectations.

1. Return for full refund 2. Keep inventory and ask for cost reduction

List the 2 components of a merchandise sale.

1. Selling Price 2. Cost

Who pays for transportation costs?

1. Supplier OR 2. Company receiving supplies

Dissect: 2/10, n/30

2 - Discount % offered 10 - No. of days in discount period n - Net Purchase (after returns) 30 - Max credit period

Purchase Returns and Allowances

A reduction in the cost of purchases associated with unsatisfactory goods.