Chapter 5:

The operating cycle and merchandising operations

Merchandise inventory a merchandising business

Two types:

• Sales

Sales discounts are given by the seller to the customer for early payment of the customer’s account. Usually discount on account so don’t receive anything yet

sales discounts are debited to the sales discounts account and recorded at the time the customers pays

= contra account àincrease on debit

• Purchase discounts

Are taken by the buyer for the early payment of merchandise

These are credited to the purchases discounts account, which reduces costs of goods sold

= contra-account

This one is from point of view of buyer

One on revenue side on one expense side

For merchandiseramount paid is sold

Discounts are listed as following:

Transportation costs

Fob shipping point buyer pays shipping costs, called freight-in

Title of merchandise passes from seller to byer at the point merchandise is shipped

Owner of the product from the moment you buy it

Fob destination seller pays shipping costs, called freight-out

Title of merchandise passes from seller to buyer when the merchandise reaches its destination

Need to know this for midterm/exam: Inventory is very important, companies can save a lot by doing this right. Focus on slides 31 

Inventory systems

Periodic inventory system costs of good sold is calculated at the end of the accounting period àthe balance of merchandise inventory is not correct at all times

Don’t have the resources to identify which type of product i’m selling, but at end of period to assess total costs

We don’t know balance at all times

Costs of goods sold at end of the month

For periodic we use purchase account and account payable

For periodic we use purchases returns and payable for returns

Perpetual inventory system the company’s accounts are continually updated when merchandise transactions occur àthe balance of ..

Know costs of all goods at all time

Perpetual: as soon as you make a sale you know costs of goods sold

After a return merchandise inventory decreases and costs of goods sold increase immediately after

For perpetual we immediately use merchandise inventory and accounts payable

For perpetual we don’t use contra account for returns but update merchandise inventory and payable immediately

Sales on credit – periodic

Only sales and accounts receivable first

Sales on credit – perpetual 

In perpetual use costs of goods sold and merchandise inventory directly after sales

Also in case of return immediately adjust costs of goods sold and merchandise inventory

Inventory costing

Four types

1. Specific identification
2. Average costs
3. First-in, first-out FIFO

First item that enters my inventory is the first one to get sold

4. Last in, firs-out LIFO

The last one I produced gets sold

Costs of goods sold = goods available for sale – ending inventory 

Two methods to calculate, same number

Poor start with ending inventory to calculate costs of good sold

Rich other way around

Perpetual systems- average costs (really important)

First cogs than inventory

Inventory is continuously updated

Take average costs before sale