5 The Operating Cycle and Merchandising Operations Managing

5 The Operating Cycle and Merchandising Operations

Managing Merchandising Businesses OBJECTIVE 1: Identify the management issues related to merchandising businesses.

Figure 1: Cash Flows in the Operating Cycle

Figure 2: The Financing Period

Managing Merchandising Businesses • A service business provides a service (e. g. , a dry cleaner, an accountant, or a car wash), whereas a merchandising business sells goods (e. g. , a department, drug, or grocery store).

Managing Merchandising Businesses • Operating cycle – Purchase of merchandise inventory for cash or credit – Collection of cash from credit sales – Payment for purchases made on credit – Sales of merchandise inventory for cash or on credit

Managing Merchandising Businesses • Choice of inventory system – Perpetual inventory system • Inventory records are updated with every purchase and every sale. – Periodic inventory system • Inventory records are updated only at the end of the period when a physical count is taken.

Managing Merchandising Businesses • Foreign business transactions – Foreign business transactions involve two currencies. – Timing differences and related changes in the exchange rate may result in exchange gains or losses.

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Terms of Sale OBJECTIVE 2: Describe the terms of sale related to merchandising transactions.

Terms of Sale • Trade discounts are reductions from the list price and are not recorded in the accounts. • Sales discounts are offered by the seller for prompt payment. – 2/10, n/30 means that the buyer can take a 2 percent discount by paying within 10 days of the invoice date or paying the full amount within 30 days. – Purchases discounts apply to the buyer.

Terms of Sale • Transportation costs – FOB shipping point means that title to the goods transfers at origin and freight charges are paid by the buyer. – FOB destination means that title to the goods transfers at destination and freight charges are paid by the seller. – Freight-in is the transportation cost paid by the buyer and added to cost of goods sold. – Delivery expense, or freight-out, is the transportation cost paid by the seller and is an operating expense.

Terms of Sale • Terms of debit and credit card sales – Debit cards deduct directly from a person’s bank account, whereas a credit card allows for payment later. – In credit card transactions, the credit card company takes a discount of 2 to 6 percent of the credit card sales, which is taken as a selling expense by the merchandiser.

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Perpetual Inventory System OBJECTIVE 3: Prepare an income statement and record merchandising transactions under the perpetual inventory system.

Exhibit 1: Income Statement Under the Perpetual Inventory System

Figure 3: Recording Purchase Transactions Under the Perpetual Inventory System

Figure 4: Recording Sales Transactions Under the Perpetual Inventory System

Perpetual Inventory System • With the perpetual inventory system, inventory records are updated with every purchase and every sale.

Perpetual Inventory System – A purchase of merchandise on credit is debited to the Merchandise Inventory account and credited to the Accounts Payable account.

Perpetual Inventory System – Transportation costs for goods received are debited to the Freight-In account and credited to either the Accounts Payable or Cash accounts.

Perpetual Inventory System • With the perpetual inventory system, inventory records are updated with every purchase and every sale. (cont. ) – A purchase return to the supplier (for credit) is debited to the Accounts Payable account and credited to the Merchandise Inventory account. – A payment on account is debited to the Accounts Payable account and credited to the Cash account.

Perpetual Inventory System – A payment on account is debited to the Accounts Payable account and credited to the Cash account.

Perpetual Inventory System • With the perpetual inventory system, inventory records are updated with every purchase and every sale. (cont. ) – Returns of merchandise by customers are debited to the Sales Returns and Allowances account (a contrarevenue account) and credited to the Accounts Receivable account. – The Sales Returns and Allowances account is debited instead of the Sales account to provide management with data about dissatisfied customers.

Perpetual Inventory System – Under the perpetual inventory system, a second entry is needed to transfer the cost of the returned goods from the Cost of Goods Sold account to the Merchandise Inventory account.

Perpetual Inventory System • With the perpetual inventory system, inventory records are updated with every purchase and every sale. (cont. ) – Receipts from customers on account are debited to the Cash account and credited to the Accounts Receivable account.

Perpetual Inventory System

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Periodic Inventory System OBJECTIVE 4: Prepare an income statement and record merchandising transactions under the periodic inventory system.

Exhibit 2: Income Statement Under the Periodic Inventory System

Figure 5: The Components of Cost of Goods Sold

Figure 6: Recording Purchase Transactions Under the Periodic Inventory System

Figure 7: Recording Sales Transactions Under the Periodic Inventory System

Periodic Inventory System • Merchandising income statement under the periodic system – Shows all the detailed computations of cost of goods sold – under the perpetual system, only the total cost of goods sold is disclosed. – With the periodic inventory system, inventory records are updated only at the end of the period, when a physical count is taken.

Periodic Inventory System • Merchandising income statement under the periodic system (cont. ) – Beginning inventory is the merchandise on hand at the beginning of the period. – Ending inventory is the merchandise on hand at the end of the period. The ending inventory of one period becomes the beginning inventory of the next period.

Periodic Inventory System • Merchandising income statement under the periodic system (cont. ) – Net purchases equals total purchases less purchases returns and allowances and purchases discounts. – Net cost of purchases equals net purchases plus freight-in.

Periodic Inventory System • Merchandising income statement under the periodic system (cont. ) – Cost of goods available for sale is the cost of merchandise available for sale during the period. It equals beginning inventory plus net cost of purchases. – Cost of goods sold is the cost to the merchandiser of the goods sold that period. It equals cost of goods available for sale less ending inventory.

Periodic Inventory System • Purchases of Merchandise – Journalize a purchase of merchandise on account.

Periodic Inventory System • Journalize a return of merchandise purchased.

Periodic Inventory System • Journalize a payment on account.

Periodic Inventory System • Sales of Merchandise – Journalize a sale of merchandise on account.

Periodic Inventory System • Journalize a return of merchandise sold.

Periodic Inventory System • Journalize collection from a customer on account.

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