LO1 – Describe merchandizing and explain the financial statementcomponents of sales, cost of goods sold, merchandizeinventory, and gross profit; differentiate between the perpetualand periodic inventory systems.
Merchandizers buy and resell products. Merchandize inventory, an asset, is purchased from suppliers and resold to customers to generate sales revenue. The cost of the merchandize inventory sold is an expense called cost of goods sold. The profit realized on the sale of merchandize inventory before considering any other expenses is called gross profit. Gross profit may be expressed as a dollar amount or as a percentage. To track merchandize inventory and cost of goods sold in real time, a perpetual inventory system is used; the balance in each of Merchandize Inventory and Cost of Goods Sold is always up-to-date. In a periodic inventory system, a physical count of the inventory must be performed in order to determine the balance in Merchandize Inventory and Cost of Goods Sold.
LO2 – Analyze and record purchase transactions for a merchandizer.
In a perpetual inventory system, a merchandizer debits Merchandize Inventory regarding the purchase of merchandize for resale from a supplier. Any purchase returns and allowances or purchase discounts are credited to Merchandize Inventory as they occur to keep the accounts up-to-date.
LO3 – Analyze and record sales transactions for a merchandizer.
In a perpetual inventory system, a merchandizer records two entries at the time of sale: one to record the sale and a second to record the cost of the sale. Sales returns that are returned to inventory also require to entries: one to reverse the sale by debiting a sales returns and allowances account and a second to restore the merchandize to inventory by debiting Merchandize Inventory and crediting Cost of Goods Sold. Sales returns not restored to inventory as well as sales allowances are recorded with one entry: debit sales returns and allowances and credit cash or accounts receivable. Sales discounts are recorded when a credit customer submits their payment within the discount period specified.
LO4 – Record adjustments to merchandize inventory.
A physical count of merchandize inventory is performed and the total compared to the general ledger balance of Merchandize Inventory. Discrepancies are recorded as an adjusting entry that debits cost of goods sold and credits Merchandize Inventory.
LO5 – Explain and prepare a classified multiple-step incomestatement for a merchandizer.
A classified multiple-step income statement for a merchandizer is for internal use because of the detail provided. Sales, less sales returns and allowances and sales discounts, results in net sales. Net sales less cost of goods sold equals gross profit. Expenses are shown based on both their function and nature. The functional or group headings are: operating expenses, selling expenses, and general and administrative expenses. Within each grouping, the nature of expenses is detailed including: depreciation, salaries, advertizing, wages, and insurance. A specific expense can be divided between groupings.
LO6 – Explain the closing process for a merchandizer.
The steps in preparing closing entries for a merchandizer are the same as for a service company. The difference is that a merchandizer will need to close income statement accounts unique to merchandizing such as: Sales, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.
LO7 – (Appendix) Explain and identify the entries for purchase andsales transactions in a periodic inventory system.
A periodic inventory system maintains a Merchandize Inventory account but does not have a Cost of Goods Sold account. The Merchandize Inventory account is updated at the end of the accounting period as a result of a physical inventory count. Because a merchandizer using a period system does not use a Merchandize Inventory account to record purchase or sales transactions during the accounting period, it maintains accounts that are different than under a perpetual system, namely, Purchases, Purchase Returns and Allowances, Purchase Discounts, and Transportation-in.
- 1357 reads
