The Accounting For Merchandising Operations Book Review

The book Accounting Principles 12th Edition

The book Accounting Principles 12th Edition by Weygandt, Kimmel, and Kieso provides accounting students with an excellent introduction to basic accounting concepts. It is relevant not only for students, but also for aspiring business people around the world. Basic financial accounting concepts are included, from corporate accounting to the small business accounting cycle. There are also self-study exercises at the end of the chapter to assess the student’s understanding of various topics. This essay summarizes Chapter 5 of the book, which deals with accounting for merchandising operations.

Accounting for Merchandising Operations

Accounting for merchandising operations begins by outlining the definition of merchandising operations. In the chapter, the authors define a merchandising company as an enterprise that buys and sells goods with the aim of making a profit. These include wholesalers who sell goods in bulk to the retailers and the retailers who break the products into convenient quantities required by the final consumers. The primary sources of revenue for a merchandiser as described in the chapter is sales while on the other hand, a service company mostly get revenue from service revenue. For both types of entities, expenses must be incurred in the process of generating the revenue. Thus, they must match the revenues earned with the expenses incurred during the financial year. By reading this chapter, a student will gain insight knowledge on the income statement prepared by a merchandising entity at the end of every trading period. Also, it explains the major differences between the income statement for a merchandising firm and a service type firm. As pointed out in this chapter, the significant difference between the two income statements comes out at the point where data for cost of goods sold expenses, and net sales are being reported. There are the multiple-step and single-step formats for the income statement which are discussed in this chapter. While preparing an income statement, it should be noted that any merchandiser is obliged to account for both the sale and purchase of its inventory items. The periodic system appears in an appendix of this chapter whereas the perpetual system is explained in the chapter.

Learning Objectives

The particular learning objectives that should be achieved at the end of chapter five includes identifying the existing differences between the merchandising and service companies. Due to the presence of inventory for a merchandising company, there must be the cost of goods sold, gross profit, and sales revenue. It, therefore, forces a merchandising company to choose between a periodic inventory system and a perpetual inventory system to account for the inventory. Secondly, by the end of the chapter, the learner should be able to explain the recording of purchases and sales revenues with regards a perpetual inventory system. Thirdly, the learner should express the ability to explain various steps in the accounting cycle specifically for a merchandising firm. Last but not least, learning activities in this chapter should enable one to distinguish between a single-step and a multiple-step income statement.

Operating Cycles

According to this chapter, operating cycles for a service company differ significantly from a merchandising company. Service Company receives cash and directs it into services offered to it its customers. In return, the company receives revenue from the clients who are recorded in the accounts receivable. Parts of the money may be plowed back into services if need be to earn more profit leading to the continuity of the circle. Merchandising company, on the other hand, receives cash and channels the amount to buying of inventory known as merchandise inventory after its full acquisition. The operating cycle continues by selling the inventory bought by the firm to its clients. Afterwards, payment is made to the firm in the form of accounts receivable. The operation cycle then follows the same trend again and again to make a complete circle. Both businesses would realize profit by selling inventory at a higher price compared to buying price and charging services at a relatively higher price compared to the expenses for merchandising and service firm respectively.

Income Measurement Process

The chapter illustrates income measurement process for a merchandising company as the sales revenue minus the cost of goods sold which should be equal to gross profit less operating expenses. At the same time, the balancing figure for the two should be equivalent to the net income. In case the value is negative, it would be considered as a loss and not profit to the firm during that financial period. Under the inventory systems, the authors indicated that a merchandising entity is allowed to use either of perpetual or periodic inventory systems or both of them. For the case of the perpetual method which is covered in this chapter, the merchandiser is expected to maintain comprehensive records of each inventory sale and purchase. Periodic inventory systems do not require a firm to keep detailed records since the calculation of the cost of goods sold only happens at the end of the accounting period.

Recording Cost of Goods Purchased

Another part which is discussed in this chapter is recording cost of goods purchased. Merchandise bought for resale is recorded in the merchandise inventory. It is credited for the cost of goods. Typically, the purchases may be made on credit or for cash which must be recorded by the buyer at the time goods are delivered by the trader. When merchandise is purchased for cash, cash is credited and merchandise inventory debited with the same amount. For purchases on account, accounts payable is credited and merchandise inventory debited with the same amount on the same date.

Freight Costs

The chapter further talked about freight costs. When transacting, the agreement between the buyer and the seller should state who to incur the costs of transporting the goods from the seller to the buyer’s premise. There are two circumstances; FOD shipping which requires the buyer to pay for shipping costs and FOB destination where the seller is supposed to pay the freight costs. For the former, merchandise inventory is debited by the buyer while the latter requires that the seller debits fright out. Consequently, purchases may be returned to the seller due to reasons such as damage or defectiveness. The entry should be done in the general journal by debiting accounts payable and crediting merchandise inventory with the same amount. Seller may also allow some discounts such as quantity and purchases discounts. The two are accounted for by recording merchandise inventory at the discounted costs. The chapter summarizes the concept of completing the accounting cycle by stating that both service and merchandising companies require almost similar types of adjusting entries for the recorded inventory to agree with the actual quantity. It should also be noted that sales, cost of goods sold, sales returns and allowances, and freight out should be closed in a merchandising account at the end of the period.

Company’s Income Statement

Company’s income statement is calculated by deducting operating expenses from gross profit. Besides, to find inventory turnover of a company, the cost of goods sold should be divided by average inventory. The chapter did mention some uses of information in the financial statements. Among the applications include helping in evaluating the management of inventory through the help of two ratios and avoiding misuse or theft of inventory.