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Problem 1 C7

A merchandising business purchases tangible goods and resells them to customers. The income statement for a merchandising business is more complex than a service business as it must account for cost of goods sold. The operating cycle involves purchasing inventory, selling it, and using the proceeds to purchase more inventory. Common documents used include sales invoices, bills of lading, statements of account, receipts, checks, purchase requisitions and purchase orders.

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Erica Castro
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409 views5 pages

Problem 1 C7

A merchandising business purchases tangible goods and resells them to customers. The income statement for a merchandising business is more complex than a service business as it must account for cost of goods sold. The operating cycle involves purchasing inventory, selling it, and using the proceeds to purchase more inventory. Common documents used include sales invoices, bills of lading, statements of account, receipts, checks, purchase requisitions and purchase orders.

Uploaded by

Erica Castro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Discussion Question:

1. Describe the nature of merchandising business.


~A merchandising business purchases tangible goods and resells them to
customers. To present and sell their products, these businesses incur costs
such as labor and materials. The two types of merchandising businesses are
retail and wholesale.

2. Distinguish the income statement of a service entity from that of a


merchandising entity.
~Service entities perform service for a few. In ascending profit, a basic income
statement is all that is needed, profit is measured as the difference between
revenues from services and expenses. In contrast, merchandising entities earn
profit by buying and selling goods. The income statement process in
merchandising business is more complex. Net sales minus Cost of Sales equals
Gross Profit add or minus Income or Expense equals Profit.

3. What is the operating cycle of a merchandising business?


~The merchandising entity purchases inventory, sells the inventory and uses
the cash to purchase more inventory-and the cycle continues. For cash sales,
the cycle is from cash to inventory and back to cash. For sales on account, the
cycle is from cash to inventory to accounts receivable and back to cash. In any
industry, the manager strives to shorten the cycle. The faster the sale of
inventory and the collection of cash, the higher the profits.

4. Name and describe at least eight of the more common source


documents used by merchandising business.
~The 8 common source documents are:

Sales invoice is prepared by the seller of goods sent to the buyer. This document
contains name and address of the buyer, the date of sale and information- quantity,
description and price- about the goods sold. It also specifies the amount of sales, and the
transportation payment terms.
The bill of lading is a document issued by the carrier- a trucking, shipping or airline-
that specifies contractual conditions and terms of delivery such as freight terms, time,
place, and the person named to receive the goods.
The statement of account is a formal notice to the debtor detailing the accounts already
due.
The official receipt evidences the receipt of cash by the seller or the authorized
representative. It notes the invoices paid and other details of payment.
Deposit slips are printed forms with depositor’s name, account number and space for
details of the deposit.
A check is a written order to a bank by the depositor to pay the amount specified in the
check from his checking account to a person named in the check. The entity issuing the
check is the payor while the receiver is the payee.
The purchase requisition is a written request to the purchaser of the entity from an
employee or user department of the same entity that goods be purchased.
The purchase order is an authorization made by the buyer to the seller to deliver the
merchandise as detailed in the form.

5. What are the steps followed by large merchandisers in their purchase of


goods?
~Large merchandise always have terms in their purchase of goods. They may
purchase or sold goods either on credit terms or cash on delivery. Who will
shoulder the transportation cost. And percent of discount should be given.

6. Differentiate credit period from discount period.


~Credit period is when goods are sold on account. The length of the credit
period varies across industries and may even vary within an entity. While
discount period is a period covered by the discount, in this case-ten days, is
called the discount period.

7. Contrast trade discount from cash discount.


~Trade discount enables the suppliers to vary prices periodically without the
invoice of revising the price lists and catalog in the other hand cash discount is
computed on the net amount after the trade discount.

8. Who shoulders the transportation costs if the shipping term is FOB


shipping point. FOB destination?
~Term, FOB shipping point is shoulders by the buyer, while the term erm, FOB
shipping destination is shoulders by the seller.

9. Discuss the appropriate treatment of the accounts transportation in


and out.
~The shipping costs borne by the buyer using the periodic inventory system are
debited to transportation in account. In the cost of sales section of the income
statement, the balance in this account is added to purchases in computing for
the net cost of purchases for the period. Shipping costs borne by the seller are
debited to transportation out account. This account which is also called delivery
expense, is an operating expense in the income statement.
10. There are two acceptable inventory systems-perpetual and periodic.
Distinguish one from the other.
~The periodic inventory systems uses an occasional physical count to measure
the level of inventory and the cost of goods sold (COGS). The perpetual system
keeps track of inventory balances continuously, with updates made
automatically whenever a product is received or sold.

11. What are the factors considered in the computation of cost of goods
sold?
~If an entity is able to sell all the goods available for sale during a given
accounting period, the cost of sales would then equal goods that had been
available for sale. In most cases, however, the business will have goods still
unsold at the end of the year. To find the actual cost of sales, the merchandise
inventory at the end of the period is subtracted from the goods available for
sale.

12. What is the justification of the use of the accounts-sale returns and
allowances, purchase returns and allowances? How are these accounts
presented in the income statement?
~Sales returns and allowances is a contra revenue account with a normal debit
balance used to record returns from and allowances to customers. The
account, therefore, has a debit balance that is opposite the credit balance of
the sales account. The refunds and other allowances given by suppliers on
merchandise originally purchased for resale are known as purchase returns
and allowances. Sales returns and allowances are posted in the income
statement as deduction from revenue and are recorded as debit entries in the
company’s book. Purchase return and allowances are posted in the income
statement as a deduction from the gross purchases made by a business in an
accounting period, which results in the net purchase expense after discounts,
returns, and allowances.

13. From the viewpoint of the seller, how do sales discounts differ from
purchases discounts?
~Cash discounts are called purchase discounts from the buyers view point and
sales discount from the sellers view point.
14. Give the pro-forma entries for sales and purchases with value added
tax.
~Value added tax is charged on purchases and sale. On purchases, it will be
VAT input, and on sale it will be VAT output.

15. What are the categories of operating expenses? Discuss and give
examples of each.
~The three categories of operating expenses are distribution costs or selling
expense, administrative expenses, and other operating expenses. Distribution
costs or selling expenses are those expenses related directly to the entity’s
efforts to generate sales. Example are sale salaries and commission, and the
related employer payroll expenses; advertising and store displays; travelling
expenses; store supplies used; depreciation of store property and equipment;
and transportation out. Administrative expenses are those expenses related to
the general administration of the business. These include officers and office
salaries, and the related employer payroll expenses; office supplies used;
depreciation of office property and equipment; business taxes; professional
services; uncollectible accounts expense and other general office expenses.
Other operating expenses are those expenses that are not related to the central
operations of business. These are expenses and looses from peripheral or
incidental transactions of the enterprise. Example are loss on sale of
investment or loss on sale property and equipment.

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