CHAPTER – 7

INVENTORY – MERCHANDISING TRANSACTIONS

• A MERCHANDISER OR MERCHANDISING BUSINESS IS ANY THAT BUYS AND SELLS PRODUCTS

• AN INTERMEDIARY BETWEEN THE MANUFACTURERE AND THE END CONSUMER.
• WHOLESALERS BUY QUANTITIES IN BULK
• RETAILERS BUY IN N SMALL QUANTITIES.

SIMILARITIES BETWEEN THE MERCHANDISER AND SERVICE PROVIDER

• both incur expenses in order to generate revenue
• both make investment in fixed assets
• both incur liabilities and pay it off

the major difference between the both is that the service provider need not to maintain to inventory of
goods.

inventory refers to the physical collection of goods.

the time period between the actual sale and cash receipt is known as operating cycle.

merchandisers of perishable products have small operating cycle while merchandisers of expensive
items have long operating cycles.

merchandisers must bear operational and financial risks for holding inventories.

tracking of inventory form the point of purchase to the point of sale.

revenue of merchandisers is known as sales revenue while that of service providers is known as service
revenue.

COGS is an expense account used to track the cost of inventory sold during the accounting year.

gross profit = Sales revenue – COGS

it is used to pay all other expenses of the business.

gross profit – all expenses = net income

under the perpetual inventory system inventory is updated after every purchase and sale.

under the periodic inventory system inventory is updated after at the end of every month.

under perpetual system the inventory account is debited, and account payable account is credited.

for purchases return accounts payable debited while inventory is credited.

purchases allowances occur when buyer agrees to keep the undesirable goods at the reduced price.
the buyer issues a debit memo to inform about purchase returns or allowances. (being accounts payable
debit)

purchase discounts are of two types

• trade discount: - discount from the manufacturer’s suggested sale price/catalogue price/list
price.
• list price – price paid = trade discount
• cash discount: - discount given the customers for the immediate payment

credit terms are the terms indicating when the buyer has the amount due are there any discounts or
not.

the credit days are the maximum number of days the buyer can wait until the full amount is due.

the discount period is the number of days within which the buyer should pay the amount in order to
avail the discount.

for discount: - accounts payable debit and cash and merchandise inventory credit.

for sellers it is sales discounts and for buyers it is purchase discounts.

free onboard point where the goods are transferred from the sellers to the buyers.

fob shipping point means buyer pays and is responsible for any loss or damage. recorded as freight-in
and increases the cost of merchandise in the buyer books.

fob destination means the sellers pays and bears the responsibility of loss or damage, buyer records
increase in the inventory and is recorded as freight out. selling expense

sales of inventory = accounts receivable debit and sales revenue credit

COGS debit and inventory credit

once sold inventory is no longer the asset of the seller. otherwise assets are never in the normal course
of the business.

credit is like a loan from the bank.

card payment includes a small processing fee and is recorded as an expense.

goods are returned under following circumstances: - defective goods late arrival and incorrect
specifications.

contra revenue account sales and allowances account are opened to track the returns.

sales return when undesirable products reach the buyer. and allowances occur when the buyer agrees
to keep the goods at reduced price.

a credit memo is issued.to inform account receivable is credited.

when sales allowances are giving: - a damage occurs during the shipping sales allowances debit and
accounts receivable credit

sales discounts are allowed for the receipt payment as soon as possible. cash and discount account debit
and accounts receivable.

sales discount account is contra which increase with debit and vice versa.

every transaction affect both the buyer and the seller except the transaction for freight.

gross profit expressed as a percentage of sales is gross profit margin.

gross profit margin% = gross profit / sales

it is more meaningful when compared from one period to another or for different companies.

the statement presented by grouping all the revenue and expenses under one different head is known
as single step statement
the statement in which the revenues and expenses are further divided into specific heads is known as
multi income statement.

the expenses incurred as a part of main business operations are known as operating expenses.

operating expenses are of two types selling expenses and administrative expenses.

selling expenses are the expenses related to selling of inventory

administrative expenses are the expenses related to running the business.

multi statement facilitates the breakdown of costs and comparison of performance and is used for
internal purposes.

inventory shrinkage is the difference between the recorded amount and the amount which is less than
that and an adjusting entry is made to correct the error.

cost of goods sold debit merchandise inventory debit.

close the revenue account by debiting the revenue and crediting the income summary

close the expenses account by debiting income summary and crediting all the expenses.

net effect income summary debit credit capital or vice versa

proper management of inventory is crucial for the success of the business. perpetual inventory helps in
maintaining the balance appropriately.

knowledge of manual accounting procedures.

appropriate plans policies procedures laws and regulations.

plan the inventory personnel --- implement detection controls ---- scan tagged items constitutional
research ----- apprehend suspects at alarm sounds.

Canadian environment protection act 1999 cepa

food and drugs add

cash deposited in bank securities with brokerage house and inventory nearby warehouses or onsite
store facility.

HOW TO SAFEGUARD INVENTORY?

inspection and comparison against purchases

building fences

installing alarm systems and video cameras

security guards, dogs or inventory custodians

financial ratio to determine the inventory in hand large amount some other use and if lack of supply

checking of the physical condition regularly

any item difficult to be sold may be sold at reduced price, disposed of or freeing up.

objectives are defined as goals to be accomplished. sales objective tied to inventory and profit objective
tied to finance.

employees to be aware of the stated objectives.to guide their short term and long-term activity.
objectives should be reassessed or changed if failed to meet the requirements.