Chapter 06 lecture - Chapter 6 Accounting for Merchandising...

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Chapter 6 Accounting for Merchandising Businesses ______________________________________________ Chapter 6 introduces the merchandising form of business. It opens by contrasting the income statements of service and merchandising businesses. The chapter then presents the financial statements for a merchandising business and summarizes the essential differences between the periodic and perpetual inventory systems. After a brief description of the periodic inventory system, the chapter focuses solely on the perpetual system. The text illustrates how to record transactions related to the sale and purchase of merchandise under the perpetual inventory system. It also presents a chart of accounts and an overview of the accounting cycle for a merchandiser using a perpetual inventory system. Computerized accounting and inventory systems have made it feasible for even small merchandisers to track each purchase and sale of inventory. In a computerized accounting system, the need for a work sheet is virtually eliminated, and closing entries are performed automatically. After studying the chapter, you should be able to: 1. Distinguish the activities of a service business from those of a merchandising business. 2. Describe and illustrate the financial statements of a merchandising business. 3. Describe the accounting for the sale of merchandise. 4. Describe the accounting for the purchase of merchandise. 5. Describe the accounting for transportation costs, sales taxes, and trade discounts. 6. Illustrate the dual nature of merchandising transactions. 7. Prepare a chart of accounts for a merchandising business. 8. Describe the accounting cycle for a merchandising business. 9. Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets. Distinguish the activities of a service business from those of a merchandising business. KEY TERMS: Cost of Merchandise Sold Gross Profit Merchandise Inventory The goal of Objective 1 is to introduce the basic skeleton of the income statement for the merchandiser. Sales - Cost of Merchandise Sold Gross Profit - Operating Expenses Net Income Question: What is the largest expense incurred by a retail store, such as Target or Old Navy? Answer: the cost of the merchandise that is sold to the customer. 143
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Because this cost is the retailer's major expense, it is shown separately from the operating expenses when preparing the income statement. The cost of merchandise sold is deducted from sales to get the subtotal gross profit. This amount is the profit left after "paying for" the merchandise that was sold to the customer. It must be used to "pay" the retailer's operating expenses, such as salaries, rent, utilities, and advertising. Merchandise Inventory is reported as a current asset on the balance sheet.
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This note was uploaded on 06/22/2009 for the course ACCOUNTING 1A taught by Professor Seyedin during the Fall '08 term at Foothill College.

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Chapter 06 lecture - Chapter 6 Accounting for Merchandising...

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