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4: Accounting for Merchandising Firms - Coggle Diagram
4: Accounting for Merchandising Firms
Merchandising Operations
Merchandising businesses involve buying and reselling goods.
Revenues are called sales revenue, with expenses divided into cost of sales and operating expenses.
Operating cycles involve the process from purchasing inventory to selling it.
Inventory Systems
Periodic Inventory System: No detailed records; inventory counted at period-end (e.g., cafes, small stores).
Perpetual Inventory System: Continuous tracking of inventory and cost of goods sold (e.g., supermarkets).
Periodic & Perpetual Inventory
Comparison of periodic and perpetual systems in calculating cost of goods sold and gross profit.
Recording Purchases in Perpetual Inventory Systems
Purchases: Inventory bought on credit or cash.
Purchase Returns and Allowances: Goods returned by customers; impacts inventory and accounts payable.
Freight Costs: Costs of transporting inventory, treated differently based on who pays (buyer or seller).
Purchase Discounts: Reductions for prompt payment; recorded as savings.
Recording Sales in Perpetual Inventory Systems
Two entries required: recording sales revenue and cost of goods sold.
Sales Returns and Allowances
Handling customer returns and their impact on inventory and sales accounts.
Sales returns are contra-revenue accounts, reducing total sales.
Sales Discounts
Discounts offered for prompt payment by customers; recorded as expenses.
Inventory Cost Flow Assumptions
Methods for determining cost of sales
Specific Identification: Tracing individual items (e.g., car dealerships).
FIFO (First-In, First-Out): Oldest inventory sold first.
LIFO (Last-In, First-Out): Newest inventory sold first.
Average Cost: Weighted average cost used for all units.
Financial Statement Effects of Cost Flow Methods
Impacts of FIFO, LIFO, and Average Cost on profit and tax implications.
How inventory valuation affects financial position and tax liabilities.
Consistent Application of Inventory Methods
Importance of consistency in inventory methods for comparability.
Disclosure requirements when changing methods.
Operating Expenses
Classification of expenses: selling, administration, and financial.
Evaluating Profitability
Ratios to measure profitability: Gross Profit Rate and Operating Expenses to Sales Ratio.