After reading the material in this chapter, you should be able to: Describe the operating cycle of a merchandising company, understand the components of a merchandising company's income statement, account for purchases and sales of merchandise in a perpetual inventory system, explain how a periodic inventory system operates,. | Merchandising Activities Chapter 6 Chapter 6: Merchandising Activities Operating Cycle of a Merchandising Company The operating cycle of a business is the time it takes a business to start with cash, purchase inventory, sell the inventory, and finally collect cash from customers. The operating cycle of a business that sells inventory on credit is typically longer than that of a business that sells only on a cash basis. This is due to additional time between when a customer buys inventory and when the customer pays off the accounts receivable. Income Statement of a Merchandising Company Cost of goods sold represents the expense of goods that are sold to customers. Gross profit is a useful means of measuring the profitability of sales transactions. The income statements of merchandising companies have an additional expense item called Cost of Goods Sold. The Cost of Goods Sold account represents the cost of merchandise sold during the period to help earn revenue. Cost of Goods Sold is presented as a separate expense item on the income statement. Net Sales minus Cost of Goods Sold equals Gross Profit. Gross Profit is the amount left, after subtracting the cost of the inventory sold, to cover all other expenses and a profit. On September 5, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account. Perpetual Inventory Systems In the perpetual inventory system, the inventory account is continuously updated to reflect purchases, sales, and returns of inventory. On September 5th, Worley Company purchased on account from Electronic City one hundred laser lights for $30 each. Worley Company would debit Inventory and credit Accounts Payable for $3,000. On September 10, Worley Co. sold 10 laser lights for $50 per unit on account to ABC Radios. 10 ´ $30 = $300 Cost Retail Perpetual Inventory Systems 10 ´ $50 = $500 On September 10th, Worley Company sold 10 laser lights for $50 each to ABC Radios on account. Under the . | Merchandising Activities Chapter 6 Chapter 6: Merchandising Activities Operating Cycle of a Merchandising Company The operating cycle of a business is the time it takes a business to start with cash, purchase inventory, sell the inventory, and finally collect cash from customers. The operating cycle of a business that sells inventory on credit is typically longer than that of a business that sells only on a cash basis. This is due to additional time between when a customer buys inventory and when the customer pays off the accounts receivable. Income Statement of a Merchandising Company Cost of goods sold represents the expense of goods that are sold to customers. Gross profit is a useful means of measuring the profitability of sales transactions. The income statements of merchandising companies have an additional expense item called Cost of Goods Sold. The Cost of Goods Sold account represents the cost of merchandise sold during the period to help earn revenue. Cost of Goods .
