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,. | ACCOUNTING FOR MERCHANDISING OPERATIONS Chapter 5 Chapter 5: Accounting for Merchandising Operations Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services Net income Equals Expenses Minus Revenues SERVICE COMPANIES 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 Customer Merchandising Companies MERCHANDISING ACTIVITIES C 1 Merchandising companies are different from service organizations because they sell inventory. Merchandising companies can sell inventory in the wholesale market or to final customers 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 Net Income Minus Equals Minus Equals Cost of Goods Sold Gross Profit Expenses Net Sales C1 Because merchandising companies sell inventory, their income statements will have an additional expense item called Cost of Goods Sold. The Cost of Goods Sold account represents the cost of the 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 | ACCOUNTING FOR MERCHANDISING OPERATIONS Chapter 5 Chapter 5: Accounting for Merchandising Operations Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services Net income Equals Expenses Minus Revenues SERVICE COMPANIES 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 Customer Merchandising Companies MERCHANDISING ACTIVITIES C 1 Merchandising companies are different from service organizations because they sell inventory. Merchandising companies can sell inventory in the wholesale market or to final customers in the retail market. A .
