needles_chapteroutline_ch05 - CHAPTER 5 The Operating Cycle...

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CHAPTER 5 The Operating Cycle and Merchandising Operations 0REVIEWING THE CHAPTER Objective 1: Identify the management issues related to merchandising businesses. 10. A merchandising business earns income by buying and selling goods, also known as merchandise inventory. This type of firm, whether wholesale or retail, uses the same basic accounting methods as a service company. However, accounting for a merchandising concern is more complicated because, unlike a service firm, a merchandiser must account for the inventory of goods it holds for resale. 20. 0A merchandiser engages in a series of transactions known as the operating cycle. The transactions involved in the operating cycle are (a) the purchase of merchandise inventory for cash or on credit, (b) payment for purchases made on credit, (c) sale of the merchandise inventory for cash or on credit, and (d) collection of cash from credit sales. 30. Cash flow can be improved by reducing the financing period (also called the cash gap ), which is the length of time a business will be without cash from merchandise inventory transactions. Technically, it is the amount of time from the purchase of inventory to the collection of cash from its sale minus the time the business takes to pay for the inventory. 40. A merchandising company must choose a system or a combination of systems to account for its inventory. The two basic systems are the perpetual inventory system and the periodic inventory system.0 a0. Under the perpetual inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. The detailed data available from the perpetual inventory system (which is often computerized) enable managers to quickly determine product availability, avoid running out of stock, and control the costs of carrying inventory. A physical count of the inventory should still be taken periodically to make sure that the actual number of goods on hand matches the accounting records. b0. Merchandisers use the periodic inventory system when it is unnecessary or impractical to keep track of the quantity of inventory or the cost of each item (e.g., when a retailer sells a high volume of low-value items). With this system, no detailed records of inventory are kept during the accounting period; the merchandiser waits until the end of the period to take a physical count of the inventory. 0The periodic inventory system is simpler and less costly to maintain than the perpetual inventory system. However, its lack of detailed records may lead to inefficiencies, lost sales, and higher operating costs. 50. Most merchandising and manufacturing firms conduct some of their business overseas. Transactions with foreign businesses are often denominated in the foreign currency, which
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needles_chapteroutline_ch05 - CHAPTER 5 The Operating Cycle...

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