University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

49

Pages:

1
Author:

stud_ice13

Merchandising Activities and Cost Flows Summary Merchandising companies engage in activities distinct from service companies, as they focus on buying and reselling physical products, known as merchandise. These companies earn income by purchasing products and selling them at a markup. Merchandisers are either wholesalers (who sell to retailers) or retailers (who sell to consumers). Key financial components of a merchandiser’s operations include: 1. Net Income Calculation: Net income equals revenue from selling merchandise (called sales) minus the cost of merchandise sold (cost of goods sold) and other expenses. Merchandisers also report gross profit, which is the difference between net sales and cost of goods sold. 2. Inventory Reporting: Merchandising companies list merchandise inventory as a current asset on their balance sheets, which includes all costs incurred to make the goods ready for sale (e.g., purchase price, shipping). 3. Operating Cycle: The operating cycle involves several steps: (a) purchasing merchandise, (b) holding it as inventory, (c) selling on credit, (d) receiving payment, and (e) collecting cash. This cycle varies by business type, with some industries, like grocery stores, having shorter cycles. 4. Inventory Systems: There are two main types of inventory accounting: o Perpetual System: Continuously updates inventory and cost of goods sold with each transaction. o Periodic System: Updates inventory and cost of goods sold at the end of a financial period. Perpetual systems are more common due to advances in technology, which provide real-time sales and inventory data.