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Unformatted text preview: Ch. 8: Merchandise Inventory 1 Chapter 8 Merchandise Inventory In this chapter you will learn how merchandise inventory affects businesses, how it is controlled, accounted for, and reported in financial statements. What Is Merchandise Inventory? The products merchandising (retailing) companies buy and sell to individuals and/or other companies are called merchandise inventory . Wal-Mart's merchandise inventory includes food, clothing, home appliances, gardening supplies, and toys, to name just a few items. Like other merchandising companies, Wal-Mart buys products (merchandise inventory) from other companies, displays the products in stores and on the internet, and sells them to customers. The key element of merchandise inventory is it is a resource the merchandising company can use. Merchandise inventory is purchased to be sold to customers at a greater price than paid by the merchandising company. Through buying merchandise and selling it to customers at higher prices, merchandising companies increase their resources (assets) over time. In terms of the accounting equation, merchandise inventory is an asset, as shown below. The numbers in parentheses refer to the chapters in which the items are discussed. Assets Current Assets Cash and cash equivalents (6) Accounts receivable (7) Allow. for Uncoll. Accts. (7) Merchandise inventory (8) = Liabilities + Stockholders' Equity Revenues Sales (7) Sales Returns & Allow. (7) Operating Expenses Uncollect. Accts. Exp. (7) Bank Service Expense (6) Other Revenues & Expenses Interest Revenue (6) Interest Expense (6) The amount of merchandise inventory differs from company to company and from year to year within a given company. Exhibit 8-1 presents inventory for three merchandising companies and compares it to the companies' total assets. As the data show, there are many differences among the companies. For example, Target maintained approximately 17% of its total assets in merchandise inventory, while Wal-Mart's inventory was over 22% of total assets. Exhibit 8-1 Merchandise Inventory ($ millions) January 31, 2007 Company Inventory Total Assets Percent Federated Department Stores $5,317 $29,559 18.0 Target $6,254 $37,349 16.7 Wal-Mart $33,685 $151,193 22.3 Merchandising: An Overview 2 Ch. 8: Merchandise Inventory The following paragraphs briefly describe how merchandise inventory affects merchandising companies by discussing one part of the operations of the Matthew Sporting Goods Company. As you may remember from Chapter 7, the Matthew Sporting Goods Company sells sporting equipment and supplies to youth organizations. The following paragraphs are restricted to only that part of the company's operations relating to the sale of customized baseball shirts. Each shirt is imprinted with a team's name and logo. As shown in Exhibit 8-2, there are four steps involved with the company’s merchandise inventory (baseball shirts): (1) the purchase of merchandise from suppliers, (2) the sale of merchandise to customers, (3) the collection of cash...
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This note was uploaded on 10/09/2011 for the course ACCT 60.201 taught by Professor Monty during the Spring '11 term at UMass Lowell.
- Spring '11
- Financial Accounting