ch5 - Merchandising Operations Wal-Mart and Target are...

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Merchandising Operations Wal-Mart and Target are called merchandising companies because they buy and sell merchandise rather than perform services as their primary source of revenue. Merchandising companies that purchase and sell directly to consumers are called retailers . Merchandising companies that sell to retailers are known as wholesalers . The primary source of revenues for merchandising companies is the sale of merchandise, often referred to simply as sales revenue or sales . A merchandising company has two categories of expenses: the cost of goods sold and operating expenses. The cost of goods sold is the total cost of merchandise sold during the period. This expense is directly related to the revenue recognized from the sale of goods. Illustration 5-1 shows the income measurement process for a merchandising company. Operating Cycles The operating cycle of a merchandising company ordinarily is longer than that of a service company.
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Flow of Costs The flow of costs for a merchandising company is as follows: Beginning inventory is added to the cost of goods purchased to arrive at cost of goods available for sale. Cost of goods available for sale is assigned to the cost of goods sold (goods sold this period) and ending inventory (goods to be sold in the future). . Companies use one of two systems to account for inventory: a perpetual inventory system or a periodic inventory system . Illustration 5-3 Flow of costs In a perpetual inventory system , companies maintain detailed records of the cost of each inventory purchase and sale. These records continuously—perpetually—show the inventory that should be on hand for every item. For example, a Ford dealership has separate inventory records for each automobile, truck, and van on its lot and showroom floor. Similarly, a grocery store uses bar codes and optical scanners to keep a daily running record of every box of cereal and every jar of jelly that it buys and sells. Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs . Indicates amount of inventory on hand at all the time. In a periodic inventory system , companies do not keep detailed inventory records of the goods on hand throughout the period. They determine the cost of goods sold only at the end of the accounting period —that is, periodically. At that point, the company takes a physical inventory count to determine the cost of goods on hand. To determine the cost of goods sold under a periodic inventory system, the following steps are necessary: 1. Determine the cost of goods on hand at the beginning of the accounting p 2. Add to it the cost of goods purchased. 3. Subtract the cost of goods on hand at the end of the accounting period.
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Illustration compares sequence of activities and the timing of the cost of goods sold computation under the two inventory systems. Recording Purchases of Merchandise
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This document was uploaded on 11/02/2011 for the course ACCOUNTING ac 201 at Montgomery.

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ch5 - Merchandising Operations Wal-Mart and Target are...

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