FABM LESSON 6

• What is the nature of a merchandising business?

  It buys and sells merchandise to earn profit
• How do the activities of a barber shop differ from those of a sari-sari store?

  Barber shops provide services, sari-sari stores sell goods
• What do the revenues of a service business involve?

  Providing services to customers
• How are revenues from services reported on an income statement?

  As fees earned
• What is subtracted from fees earned to arrive at net income in a service business?

  Operating expenses incurred in providing services
• What do merchandising businesses do to generate revenue?

  Buy and sell merchandise
• How is revenue reported when merchandise is sold?

  As sales
• What is the cost recognized as an expense when merchandise is sold?

  Cost of merchandise sold
• What is gross profit?

  Profit before deducting operating expenses
• What is merchandise inventory?

  Merchandise on hand at the end of a period
• How is merchandise inventory reported on the balance sheet?

  As a current asset
• What does merchandise represent?

  Goods intended for sale by a merchandiser
• What are the main activities involved in the operating cycle of a merchandising business?

  • Purchasing merchandise for sale
  • Selling and distributing products to customers
  • Receiving cash from customers
• What does the operating cycle begin and end with?

  Begins with spending cash, ends with receiving cash
• How do operating cycles differ among industries?

  They vary based on the nature of the business
• Which industries typically have longer operating cycles?

  Tobacco, distillery, and lumber industries
• Why do retailers usually have shorter operating cycles than manufacturers?

  They purchase goods ready for sale
• How does the operating cycle of a jewelry store compare to that of a grocery store?

  Jewelry stores have a longer operating cycle
• What is the relationship between operating cycles and profit margins?

  Longer cycles usually have higher profit margins
• What is a typical profit margin for jewelry stores?

  30%–50% above cost
• What is a typical profit margin for grocery stores?

  Often below 5%
• What are the nominal accounts of a merchandising business illustrated in?

  • Pro-forma Statement of Comprehensive Income
  • Figures are assumed
• What activities are compared in the operating cycle of a service business and a merchandising business?

  • Selling Activities
  • Purchasing Activities
  • Administrative and Operating Activities