I.

Merchandising Operations
A. Introduction
1. A merchandising company is an enterprise that buys and sells
goods to earn a profit.
a) Wholesalers sell to retailers such as grocery stores, drugstores,
and restaurants. Examples of retailers would be Wal-Mart,
Safeway, and Toys R Us.
b) Retailers sell to consumers and usually are those who purchase
goods in bulk from manufacturers and sell them to retailers, other
wholesalers, schools and other not-for-profit institutions, and, at
times, directly to consumers. For example, retailer Walgreens
might buy goods from wholesaler McKesson HBOC; Office Depot
might buy office supplies from wholesaler United Stationers.
2. Define merchandise (or merchandise inventory)goods held for
sale to customers in the normal course of business. Note that this
includes only goods held for resale. For example, if a grocery store
decided to sell an old display case, this would not be merchandise
because grocery stores do not normally sell display cases. But a
display case would be merchandise for a furniture store. Merchandise
for one firm may be an asset for another. The merchandise
(display cases) for the furniture store is an asset for the grocery
store.
3. A merchandisers primary source of revenue is sales revenue or
sales.
4. Expenses for a merchandising company are divided into two
categories:
a) cost of goods sold (COGS)total cost of merchandise sold
during the period and
b) Operating expenses (OP)expenses incurred in the process of
earning sales revenue that are deducted from gross profit in
the income statement). Examples are sales salaries and
insurance expense.
5. Gross profit (GP) is equal to Sales Revenue less Cost of Goods
Sold.

6. Income measurement process for a merchandiser:

Sales - COGS = Gross - Operating = Net Income
Profit Exp. (Loss)

B. Operating CyclesOperating Cycles for a service company and a

merchandiser:
1. Service Company operating cycle (to go from cash to cash)
involves performing services which may be on account involving
accounts receivable and finally receiving the cash.
2. Merchandising Company operating cycle (cash to cash) involves:
a) Buy Inventory,
b) Sell Inventory,
c) Obtain Accounts Receivable, and
d) Receive Cash.
C. Inventory SystemsMerchandising entities may use either of the
following inventory systems:
a) Perpetual SystemDetailed records of the cost of each item
are maintained, and the cost of each item sold is determined
from records when the sale occurs. For example, a Ford
dealership has separate inventory records for each vehicle on
the lot.
b) Record purchase of Inventory.
c) Record revenue and record cost of goods sold when the item is
sold.
d) At the end of the period, no entry is needed except to adjust
inventory for losses, etc.
2. Periodic SystemCost of goods sold is determined only at the
end of an accounting period. This system involves:
a) Record purchase of Inventory.
b) Record revenue only when the item is sold.
c) At the end of the period, you must compute cost of goods sold
(COGS):
1) Determine the cost of goods on hand at the beginning of the
accounting period (Beginning Inventory = BI),
2) Add it to the cost of goods purchased (COGP),
3) Subtract the cost of goods on hand at the end of the
accounting period (Ending Inventory = EI) illustrated as
follows:
BI + COGP = Cost of goods available for - E = COGS
sale I
3. Additional Considerations
a) Perpetual systems have traditionally been used by companies
that sell merchandise with high unit values such as
automobiles, furniture, and major home appliances. But with
the use of computers and scanners, many companies now use
the perpetual inventory system.
b) The perpetual inventory system is named because the
accounting records continuouslyperpetuallyshows the
quantity and cost of the inventory that should be on hand at
any time. The periodic system only periodically updates the
cost of inventory on hand.
c) A perpetual inventory system provides better control over
inventories than a periodic inventory since the records always
show the quantity that should be on hand and then any
shortages from the actual quantity and what the records show
can be investigated immediately.