Podcast
Questions and Answers
What are the main types of business operations identified?
What are the main types of business operations identified?
What do merchandising companies primarily generate revenue from?
What do merchandising companies primarily generate revenue from?
Which of the following is included in the costs that merchandising businesses need to account for?
Which of the following is included in the costs that merchandising businesses need to account for?
What does the merchandise inventory account represent?
What does the merchandise inventory account represent?
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How is gross profit calculated for merchandising businesses?
How is gross profit calculated for merchandising businesses?
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What are the three sections on the income statement of a merchandising business?
What are the three sections on the income statement of a merchandising business?
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What does COGS stand for in the context of merchandising businesses?
What does COGS stand for in the context of merchandising businesses?
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What is included in the expenses of a merchandising business?
What is included in the expenses of a merchandising business?
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What is the combined rate of HST in Ontario after the implementation of the HST?
What is the combined rate of HST in Ontario after the implementation of the HST?
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What must a business do to recover the HST paid on purchases?
What must a business do to recover the HST paid on purchases?
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Which inventory system continuously updates inventory after each sale?
Which inventory system continuously updates inventory after each sale?
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What is the primary reason businesses use a Periodic Inventory System?
What is the primary reason businesses use a Periodic Inventory System?
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What is the effect of a Sales Return on the financial accounts?
What is the effect of a Sales Return on the financial accounts?
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What will appear in the liabilities section of the balance sheet regarding HST?
What will appear in the liabilities section of the balance sheet regarding HST?
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Under which condition are businesses required to remit HST each month?
Under which condition are businesses required to remit HST each month?
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Why would a business face cash flow issues regarding HST?
Why would a business face cash flow issues regarding HST?
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Which account is debited when a business offers a Purchase Discount?
Which account is debited when a business offers a Purchase Discount?
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What must be included on a sales invoice for businesses that charge HST?
What must be included on a sales invoice for businesses that charge HST?
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How does a purchase return affect the total cost of purchases?
How does a purchase return affect the total cost of purchases?
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What is included in the COGS calculation?
What is included in the COGS calculation?
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How is gross profit calculated?
How is gross profit calculated?
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What is the correct treatment for freight-out costs?
What is the correct treatment for freight-out costs?
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What happens to the discount period if goods are returned?
What happens to the discount period if goods are returned?
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Which account tracks cash discounts received?
Which account tracks cash discounts received?
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Which of the following accurately describes the contra-revenue account for returns?
Which of the following accurately describes the contra-revenue account for returns?
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What is the formula for calculating COGS?
What is the formula for calculating COGS?
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In a periodic inventory system, when is the Merchandise Inventory account used?
In a periodic inventory system, when is the Merchandise Inventory account used?
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When calculating Gross Profit Margin (GPM), what is the Gross Profit divided by?
When calculating Gross Profit Margin (GPM), what is the Gross Profit divided by?
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What is the primary purpose of the Purchases Returns and Allowances account?
What is the primary purpose of the Purchases Returns and Allowances account?
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Which system removes the COGS from the total expenses for analysis?
Which system removes the COGS from the total expenses for analysis?
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What represents the income statement impact from returns and allowances?
What represents the income statement impact from returns and allowances?
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Study Notes
Merchandising Company
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3 Basic Business Types:
- Service Business: Offers services, not products (e.g., doctor, gym). Revenue from fees/rent.
- Manufacturing Company: Converts materials into products for sale to others.
- Merchandising Company: Sells existing goods/products (e.g., wholesalers, retailers). Purchases from manufacturers/wholesalers and resells to public. Generates revenue from merchandise sales.
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Merchandise Inventory:
- Record of goods for sale. Includes all sellable items, from backroom to display.
- Merchandise inventory account represents the total dollar value of goods on hand for sale.
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Calculating Net Income (Merchandising):
- Equation 1: Revenue (Sales) - Cost of Goods Sold (COGS) = Gross Profit
- Equation 2: Gross Profit - Expenses = Net Income. Includes all costs besides COGS (like rent, utilities).
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Cost of Goods Sold (COGS) and Income Statement:
- 3 Key Sections on Merchandising Income Statement: Revenue, COGS, Expenses.
- COGS (the price of the inventory) recorded separately as a schedule or on the statement itself.
- Net Income = Gross Profit - Operating Expenses
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COGS Schedule: Supporting document detailing COGS calculation.
Items Affecting COGS
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Purchase Returns and Allowances:
- Record decreases in purchases due to returned goods.
- Purchases Returns and Allowances is a contra-expense account.
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Purchase Discounts:
- Record decreases to purchases due to cash discounts taken.
- Purchase discounts account records the discount.
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Transportation Costs (Freight-In):
- Costs to transport merchandise.
- Added to the cost of goods acquired.
- Freight-In is part of COGS.
- Freight-Out is a normal operating expense not part of COGS.
Accounting for Merchandisers (Periodic Inventory System)
- Purchases: An expense representing goods bought for resale.
- Sales: Revenue account for merchandisers, recording the drop in inventory from sales but not recorded during the transaction
- Freight-In: Cost of shipping inventory into the company, a COGS component.
COGS Expense
- COGS is an expense distinct from other operating expenses, as it is influenced by factors outside management control.
- Gross Profit Margin (GPM): Gross Profit / Sales. Used for external comparisons.
- Markup: Gross Profit / COGS. Used for internal price setting.
Merchandiser’s Closing Entries
- Modified to include Merchandise Inventory (Ending & Beginning).
- Merchandise Inventory is part of the COGS equation on the Income Statement.
- Includes closing inventory to find the correct CoGS.
Errors in Ending Inventory Counts
- Use the formulas:
- COGS = Beginning Inventory + Purchases - Ending Inventory
- Gross Profit = Sales- Cost of Goods Sold
Returns and Allowances
- Returns: Merchandise returned for refunds.
- Allowances: Post-purchase discounts instead of refunds.
- Returns & Allowances (Sales R&A): contra-revenue account.
- Returns & Allowances (Purchases R&A): contra-expense account.
- Impacts both COGS and Gross Profit calculations.
Terms of Sale
- Terms of Sale: Agreements on payment schedules and discounts.
- COD: Cash on Delivery
- Net 30: Amount due in 30 days.
- 2/10, n/30: 2% discount if paid within 10 days, otherwise due in 30.
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Cash Discounts: Reductions for early payment.
- Discounts Earned (Buyer), Discounts Allowed (Seller)
Harmonized Sales Tax (HST)
- HST: Combines GST and PST in Ontario, at 13% (5% GST+8% PST).
- Businesses with annual sales ≥$30,000 must register.
- Two Accounts: HST Recoverable and HST Payable.
- Can claim Input Tax Credits (ITC) for HST on business purchases.
Periodic vs. Perpetual Inventory Systems
- Perpetual: Tracks inventory after each sale, immediate updates. Used in computer-based systems.
- Periodic: Updates inventory at the end of the accounting period. Used where tracking every transaction is impractical.
- Periodic uses a physical inventory count to determine ending inventory.
Sales Returns and Allowances
- Tracks merchandise returned by customers.
- Contra-accounts; their balances offset portions of Revenue and Purchases.
Sales Discounts and Purchase Discounts
- Sales Discounts: Offered to customers for early payments.
- Purchase Discounts: Received by businesses for early payments.
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Description
This quiz focuses on the fundamentals of merchandising companies, covering the three basic business types, the significance of merchandise inventory, and how to calculate net income. Dive into concepts such as gross profit, expenses, and cost of goods sold to understand the financials behind running a merchandising business.
