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Unformatted text preview: Chapter 5 1 Author: Anna Rovira Beavers Needles 2008 8/6/07 Financial Accounting Chapter 5 Notes The Operating Cycle And Merchandising Operations I. Management Issues in Merchandising Business Merchandising business earns income by buying and selling goods. Such companies uses same basic accounting methods as service companies but the buying and selling of goods adds to the complexity of the process. A. Cash Flow Management Merchandising companies are required to plan for its cash. If the company does not have enough cash to pay its bills when they are due or pay employees payroll on time, for example, it may be force to close. Even though this is true of all companies, purchasing of inventory puts additional burdens on a company as compare to a service organization, which is not required to keep inventory on hand. Operating Cycle of a merchandising company: 1. Purchase of merchandise inventory for cash or on credit 2. Payment made on credit 3. Sales of merchandise inventory 4. Collection of cash from credit sales Cash Flow Management involves planning the companys receipts and payment of cash. Most companies buy inventory on credit that must pay within 30 days. Management need to plan for cash flows from within the company or from borrowing (loans) to finance the inventory until it is sold and the resulting revenue is collected. B. Profitability Management Chapter 5 2 Author: Anna Rovira Beavers Needles 2008 8/6/07 Includes the following 1. Achieving a satisfactory gross margin by setting appropriate prices. 2. Maintain acceptable levels of operating expenses and controlling expenses and operate efficiently. Companies prepare an Operating Budget t o control expenses. II. Terms of Sales When goods are sold, cash or credit, there must be certain terms that must be understood by both parties. Such as: Shipping cost Who pays for shipping? Special terms in the invoice designate who is responsible for payment for freight. Shipping Terms Where Title Passes Who Pays the Cost of Transportation FOB shipping point At origin Buyer FOB Destination At destinations Seller Trade Discounts In the case of catalogue merchandise the price of an item may be quoted as a percentage of the list price. That is called trade discount. Trade discounts are not recorded in the accounting records.Trade discounts are not recorded in the accounting records....
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