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Unformatted text preview: Victor Leung ACCT2111 2010 Chapter 5 A & B 1 CHAPTER 5 A Accounting for Merchandising Operations I. (Obj 01 & 04) Nature of Merchandising Business (1) A merchandising company buys and sells goods to earn a profit. (2) The operating cycle of merchandiser is as follows: Receive Cash Cash Buy Inventory Merchandise Inventory Sell Inventory Accounts Receivable (Also, Illustration 5-2, page 197) (3) Balance sheet for a merchandising company (Illustration 5-13, page 214) (4) Merchandise Inventory * The year-end merchandise inventory is obtained by taking a physical inventory. * Merchandise Inventory is reported as a current asset immediately below receivables. II. Two Inventory Systems A merchandising company may use either a perpetual or a periodic inventory system in determining cost of goods sold . (1) In a perpetual inventory system , detailed records of the cost of each inventory item are maintained throughout the accounting period and the cost of each item sold is determined from the records when the sale occurs. The Inventory account is increased when inventory is purchased. The Inventory account is decreased when inventory is sold to a customer. Therefore, the Inventory account continuously (perpetually) updated showing the amount of inventory on hand. Inventory shrinkage (inventory shortage) is found when the amount of inventory on hand determined by taking a physical inventory count is less than that indicated in the inventory record. Inventory shortage resulted when the company experiences some loss of inventory due to shop-lifting, employee theft, or errors in recording or counting inventory. Used for all types of merchandising goods. Victor Leung ACCT2111 2010 Chapter 5 A & B 2 (2) In a periodic inventory system , detailed inventory records are not maintained and the cost of goods sold is determined only at the end of an accounting period. Purchases of inventory are recorded in a Purchases account. Inventory records are not up-dated when inventories are sold. Therefore, the amount of inventory on hand must be determined by taking a physical inventory count at the end of the year. Inventory shrinkage (inventory shortage) is not calculated and not reported. Used for inexpensive merchandising goods. III. (Obj 05 & 06) Multiple-Step Income Statement for a merchandising company (Illustration 5-11, page 212 -- using perpetual inventory system). Net sales Both Sales Returns and Allowances and Sales Discounts are subtracted from Sales to arrive at Net Sales . Cost of goods sold In a perpetual inventory system, the amount of cost of goods sold is obtained from the ledger balance and also can be obtained from the inventory record....
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This note was uploaded on 02/04/2012 for the course ACCT 2111 taught by Professor Eric during the Spring '11 term at CUHK.
- Spring '11