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Lecture Principles of financial accouting - Chapter 5: Accounting for merchandising operations

After completing this chapter you should be able to: Describe merchandising activities and identify income components for a merchandising company, identify and explain the inventory asset and cost flows of a merchandising company, compute the acid-test ratio and explain its use to assess liquidity,. | Chapter 5 Accounting for Merchandising Operations Chapter 5: Accounting for Merchandising Operations Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services Service Companies C 1 So far, we have been using examples that mainly consist of service companies, like accounting firms, law firms, and plumbing services. These companies all sell different services, but they have one thing in common: They do not sell inventory. This makes their income statements rather simple. The income statements of a service organization typically consist of revenues minus expenses to arrive at net income. Manufacturer Wholesaler Retailer Consumers Merchandising Companies Merchandiser C 1 Merchandising companies are different from service organizations because they sell inventory. Merchandising companies can sell inventory in the wholesale market or to consumers in the retail market. A wholesaler is an intermediary that buys products from manufacturers or | Chapter 5 Accounting for Merchandising Operations Chapter 5: Accounting for Merchandising Operations Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services Service Companies C 1 So far, we have been using examples that mainly consist of service companies, like accounting firms, law firms, and plumbing services. These companies all sell different services, but they have one thing in common: They do not sell inventory. This makes their income statements rather simple. The income statements of a service organization typically consist of revenues minus expenses to arrive at net income. Manufacturer Wholesaler Retailer Consumers Merchandising Companies Merchandiser C 1 Merchandising companies are different from service organizations because they sell inventory. Merchandising companies can sell inventory in the wholesale market or to consumers in the retail market. A wholesaler is an intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers. A retailer is an intermediary that buys products from manufacturers or wholesalers and sells them to consumers. Reporting Income for a Merchandiser Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores C 1 Net income for a merchandiser equals revenues from selling merchandise minus both the cost of merchandise sold to customers and the cost of other expenses for the period. The usual accounting term for revenues from selling merchandise is sales, and the term used for the expense of buying and preparing the merchandise is cost of goods sold. (Some service companies use the term sales instead of revenues; and cost of goods sold is also called cost of sales.) The income statement for Z-Mart illustrates the key components of a merchandiser’s net income. The first two lines show that products are acquired at a cost of $230,400 and sold for $314,700. The third line