Accounting for Merchandising Operations

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Chapter 5

Accounting for Merchandising Operations


1.Additional accounts of a merchandising company likely include Merchandise Inventory, Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances (and possibly Delivery Expense).

2.Merchandising companies report Merchandise Inventory on the balance sheet, service companies do not. Also, merchandising companies report both Sales (of goods) and Cost of Goods Sold on the income statement, while service companies do not.

3.A company can have a net loss if its expenses (absent cost of goods sold) are greater than its gross profit from sales of merchandise.

4.A cash discount can be offered to encourage customers to promptly pay. This provides cash more quickly to the seller and avoids the costs of additional collection activities—of course, the seller must do a costs vs. benefits analysis on the merits and terms of any cash discount offered to customers.

5.For a perpetual inventory system, inventory shrinkage is determined by taking a physical count of the inventory available at the end of a period and comparing that amount with the amount recorded in the Merchandise Inventory account.

6.Cash discounts are granted in return for early payment and reduce the amount paid below the negotiated price. Cash discounts are recorded in the accounting records (as a reduction of Merchandise Inventory). Trade discounts are deducted from the list or catalog price to determine the purchase (negotiated) price. Trade discounts are not recorded in the accounting records.

7.Sales discount is a term used by a seller to describe a cash discount granted to a customer. Purchase discount is a term used by a purchaser to describe a cash discount received from a seller. (It is a matter of perspective: seller versus buyer.)

8.A manager is concerned about the quantity of its purchase returns because the company incurs costs in receiving, inspecting, identifying, and returning the merchandise. More returns create more expenses. By knowing more about returns, the manager can decide if they are a problem and how they can be minimized.

9.The sender (maker) of a debit memorandum records a debit in an account of the recipient; and the recipient records a credit in an account maintained for the sender.

10.The single-step income statement format presents cost of goods sold and expenses in one list, totals the list, and subtracts the total from net sales in one step. The multiple-step format presents intermediate totals, including gross profit (the difference between net sales and cost of goods sold) and sub-categories of expenses (often by key activities).

11.Krispy Kreme uses the term "operating expenses" instead of cost of goods sold—an uncommon practice. Note that the investor relations department at Krispy Kreme confirmed that only cost of sales are included in its line item titled “operating expenses.” A detailed calculation of cost of goods sold is not presented for Krispy Kreme.

12.Tastykake refers to its inventory account as “Inventories.” An alternate name that could be used is “Merchandise Inventories” (or simply “Merchandise” or “Inventory”).

13.Harley-Davidson reports a separate gross profit figure on its consolidated statement of income. Its 2002 gross profit is $1,417,841 (in thousands).

14.A buyer should attempt to negotiate the shipping terms FOB destination. In this case, title will pass after the goods are safely delivered to the buyer’s business and transportation charges will be the responsibility of the supplier (seller).

Quick StudIES

Quick Study 5-1 (10 minutes)

Mar. 5Merchandise Inventory 2,000

Accounts Payable 2,000
To record credit purchase [(500 x $5) x 80%].

Mar. 7Accounts Payable 200

Merchandise Inventory 200
Returned defective units [(50/500) x $2,000].

Mar. 15Accounts Payable 1,800

Cash 1,764...
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