Chapter 5: Merchandising Operations and the Multiple-
Step Income
5.1 Merchandising Operations and Inventory Systems
− Merchandising companies buy and sell merchandise rather than perform services
as their primary source of revenue
o Merchandising companies that purchase and sell directly to consumer are
called retailers
o Merchandising companies that sell to retailers are known as wholesalers
− The primary source of revenue for merchandising companies is the sale of
merchandise, often referred to simply as sales revenue or sales
− A merchandising company has two categories of expenses:
o Cost of goods sold
→ The total cost of merchandise sold during the period. This expense is
directly related to the revenue recognized from the sale of goods
o Operating expenses
→ Incurred in the process of earning sales revenue. Examples include
advertising expense and rent expense. Note that operating expenses
are a category of expenses, not a single line item on the income
statement
− The difference between sales revenue and cost of goods sold is called gross profit
, Operating Cycles
- The operating cycle of a merchandising company is ordinarily longer than that of a
service company. The purchase of merchandise inventory and its eventual sale
lengthen the cycle
Flow of Costs
• For a merchandising company, its inventory process is as follows”
o Beginning inventory plus goods purchased determines the goods available
for sale
o Those goods that are not sold by the end of the accounting period represent
ending inventory
o Goods that are sold are assigned to cost of goods sold
• Companies use one of two systems to account for the cost of inventory:
o Perpetual inventory system
▪ In this, companies keep detailed records of the cost of each inventory
purchase and sale
Step Income
5.1 Merchandising Operations and Inventory Systems
− Merchandising companies buy and sell merchandise rather than perform services
as their primary source of revenue
o Merchandising companies that purchase and sell directly to consumer are
called retailers
o Merchandising companies that sell to retailers are known as wholesalers
− The primary source of revenue for merchandising companies is the sale of
merchandise, often referred to simply as sales revenue or sales
− A merchandising company has two categories of expenses:
o Cost of goods sold
→ The total cost of merchandise sold during the period. This expense is
directly related to the revenue recognized from the sale of goods
o Operating expenses
→ Incurred in the process of earning sales revenue. Examples include
advertising expense and rent expense. Note that operating expenses
are a category of expenses, not a single line item on the income
statement
− The difference between sales revenue and cost of goods sold is called gross profit
, Operating Cycles
- The operating cycle of a merchandising company is ordinarily longer than that of a
service company. The purchase of merchandise inventory and its eventual sale
lengthen the cycle
Flow of Costs
• For a merchandising company, its inventory process is as follows”
o Beginning inventory plus goods purchased determines the goods available
for sale
o Those goods that are not sold by the end of the accounting period represent
ending inventory
o Goods that are sold are assigned to cost of goods sold
• Companies use one of two systems to account for the cost of inventory:
o Perpetual inventory system
▪ In this, companies keep detailed records of the cost of each inventory
purchase and sale
