Now That You’re Experts
Now that you’re experts in the Accounting Cycle it is time to look at special problems in Accounting.
Specifically we’re going to look at running a merchandising business and issues related to inventory this
week. Next week we will look at the accountant’s role in safeguarding assets.
Service Business? Merchandising Business? What’s The Difference?
The difference between the two really boils down to the fact that the merchandising business sells a physical
product. We call them grocery stores, retail stores, hardware stores, etc. This differs from a business that
offers accounting services, beauty services or auto repair services. The principal difference being a
merchandising business has merchandise inventory that it sells. From here on out I will refer to merchandise
inventory as inventory.
So is this a big deal? You bet! The inventory that enters our merchandising business is likely to be one of
our largest assets. As it leaves our accounting system it becomes one of our largest expenses. It is very
important to learn to manage inventory levels and protect the inventory from loss due to stealing, spoilage,
obsolescence, etc. Maintain too small an inventory level and you miss sales as your customer goes to the
competition to buy what he or she wants. Maintain too large an inventory and you sink your firm through a
pile of Accounts Payable that it can’t make payment on.
Because it is such an important issue a merchandising business will frequently present a different style of
Income Statement. It is called a Multi-step Income Statement. The goals of and principles used in
developing it are just the same as you are used to; it just looks different. If you will look in your text to
Illustration 6-6 page 238 you will see an example of one.
Notice the section labeled
Cost of Goods Sold.
This is the big addition to our report that reflects the
importance of inventory in our operation. Notice in this section there is mention made of a beginning of the
period inventory, and end of period inventory, and purchases. It is quite detailed and it reflects the
importance our managing all three components of inventory. At the end of the section there is a final line
that reflects the
Cost of Goods Sold,
and another that reflects
. What we are doing is a very tight
matching of revenue and expense. We not only want to know what did we do and what did we get. We want
to know how did our managing of inventory impact our profits on the sales we made. Obviously it takes a
year or two to get the data to tell whether our company is going forward or backward, but the Cost of Goods
Sold section provides information to our internal users to start managing inventory from day one.