ch05quiz - CHAPTER 5 Merchandising Operations and the...

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CHAPTER 5 Merchandising Operations and the Multiple-Step Income Statement CHAPTER OVERVIEW Chapter 5 discusses the differences between service firms and merchandising firms. You will learn about the two types of inventory systems used by merchandisers and how to record purchases and sales of inventory using the perpetual inventory system. You will take a close look at a merchandising firm's financial statements, particularly the income statement, and learn how to compute cost of goods sold under a periodic system. Finally, you will look at factors affecting a firm's profitability. REVIEW OF SPECIFIC STUDY OBJECTIVES SO1. Identify the differences between a service enterprise and a merchandising company. Merchandising companies buy and sell merchandise as their primary source of revenue. Retailers are merchandisers that purchase and sell directly to consumers . Wholesalers are merchandisers that sell to retailers . The primary source of revenues for merchandising companies is the sale of merchandise , called sales revenues or sales. Expenses are divided into two categories : cost of goods sold (the total cost of merchandise sold during the period) and operating expenses . Net income is determined as follows: Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Income The operating cycle of a merchandising company is longer than that of a service firm because of the purchase and sale of merchandise inventory.
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62 Kimmel Financial Accounting: Tools for Business Decision Making, Third Edition There are two systems of inventory available to a merchandising company: the perpetual inventory system and the periodic inventory system . With a perpetual system , detailed records of the cost of each inventory purchase and sale are maintained and show at all times the inventory that should be on hand for every item. Cost of goods sold is determined each time a sale occurs . The use of computer systems, bar codes, and optical scanners makes such a system practicable. With a periodic system , detailed records are not kept throughout the period . Cost of goods sold is determined only at the end of the accounting period when a physical count of goods is taken. A perpetual system provides better inventory control . Goods can be counted at any time to see if they exist, and shortages can be investigated immediately. The quantity of inventory can be managed so that neither too much nor too little is on hand at a given time. SO2. Explain the recording of purchases under a perpetual inventory system. Purchases , either for cash or on account (credit), are normally recorded when the goods are received from the seller . A business document (a canceled check or a cash register receipt for a cash purchase, or a purchase invoice for a credit purchase) will provide written evidence of the purchase. A
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ch05quiz - CHAPTER 5 Merchandising Operations and the...

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