FABM

• Merchandising company

  An enterprise that buys and sells goods to earn a profit
• Possible activities or transactions in a merchandising business set-up

  • Buying of stocks or items for resale
  • Payment of expenses related to operations
  • Purchase of equipment
  • Obtaining a loan to finance the business
  • Investment of owners
• Merchandise (or merchandise inventory)

  Goods that are held for sale to customers in the normal course of business, including goods held for resale
• Merchandise inventory

  • Candies, canned goods, noodles sold at a grocery store
  • Juice, biscuits sold in a grocery store
  • Medicines sold in a pharmacy
• Merchandiser's primary source of revenue

  Sales revenue or sale
• Expenses for a merchandising company

  • Cost of goods sold (COGS) - the total cost of merchandise sold during the period
  • Operating expenses (OP) - expenses incurred in the process of earning sales revenue that are deducted from gross profit in the income statement
• Gross profit (GP)

  Sales Revenue less the Cost of Goods Sold
• Income measurement process for a merchandiser

  1. Gross Profit = Sales - COGS

  2. Gross Profit - Operating Exp. = Net Income (Loss)
• Purchases

  Goods or items bought for resale
• Types of transactions common for merchandising business

  • Purchase of merchandise - buying of a good from someone in exchange for cash
  • Purchase Return - merchandise must be returned to the vendor or an adjustment is made to the amount due for the merchandise
  • Purchase Discount - deductions from the invoice cost due to prompt payment
  • Purchase Allowances - granted to customers if they keep the merchandise although unsatisfied with what they bought
• Merchandising Company operating cycle (cash to cash)

  1. Buy merchandise inventory

  2. Sell inventory

  3. Obtain Accounts Receivable

  4. Receive cash
• Types of transactions common for merchandising business

  • Sale of merchandise - selling of a good from someone in exchange for cash
  • Sales Return - merchandise must be returned by the customer to the vendor or an adjustment is made
  • Sales Allowances - granted to customers if they keep the merchandise although unsatisfied with what they bought
  • Sales Discount - deductions from the invoice cost due to prompt payment
• Credit terms


  Indicate when payment is due for a company's sales invoice and whether a discount can be taken if the invoice is paid in a shorter period of time
• Credit terms


  • 2/10, net 30 - amount due in 30 days, 2% discount if paid in 10 days
  • 5/10, n/EOM - 5% discount if paid in 10 days, deadline of payment at end of month
• Freight or Transportation Expenses

  Expenses incurred for transporting the merchandise purchased or sold from the place of the seller or buyer
• Freight in


  Cost of transporting the merchandise purchased from the place of the seller
• Freight out


  Cost of transporting the goods sold to the place of the buyer
• Terms of Purchase or Sale


  • FOB shipping point, Freight prepaid
  • FOB shipping point, Freight collect
  • FOB destination, Freight prepaid
  • FOB destination, Freight collect
• FOB Shipping Point


  Goods placed free on board (FOB) the carrier by seller, buyer pays freight costs
• FOB Destination


  Goods placed free on board (FOB) at buyer's business, seller pays freight costs
• Manila seller sold goods costing P20,000 to Davao buyer on account. Freight is P2,000.
• Perpetual inventory system


  System that updates inventory as each sale is made, gives actual inventory counts at any given point and time
• Periodic inventory system

  System that updates inventory at a specific point in time, lacks capability of giving up-to-date inventory count at any given time
• Methods of Inventory Valuation

  • First-In, First-Out (FIFO) - assumes first items added to inventory are first ones sold
  • Last-In, First-Out (LIFO) - assumes last items added to inventory are first ones sold
• Perpetual System

  1. Record purchase of Inventory

  2. Record revenue and record cost of goods sold when the item is sold

  3. At the end of the period, no entry needed except to adjust inventory for losses, etc.
• Periodic System

  1. Record purchase of Inventory

  2. Record revenue only when the item is sold

  3. At the end of the period, compute cost of goods sold (COGS)
• Determining Cost of Goods Sold (COGS) in Periodic System

  1. Determine the cost of goods on hand at the beginning of the accounting period (Beginning Inventory = BI)

  2. Add it to the cost of goods purchased (COGP)

  3. Subtract the cost of goods on hand at the end of the accounting period (Ending Inventory = EI)

  4. BI + COGP = Cost of goods available for sale - EI = COGS
• Cost of Goods Sold (COGS)

  Costs related to purchases, including employee payroll, freight charges and merchandise inventory purchases. Subtracted from net sales to determine gross profit.
• Perpetual systems have traditionally been used by companies that sell merchandise with high unit values such as automobiles, furniture, and major home appliances. With the use of computers and scanners, many companies now use the perpetual inventory system.
• The perpetual inventory system is named because the accounting records continuously — perpetually — show the quantity and cost of the inventory that should be on hand at any time. The periodic system only periodically updates the cost of inventory on hand.
• A perpetual inventory system provides better control over inventories than a periodic inventory, since the records always show the quantity that should be on hand. Then, any shortages from the actual quantity and what the records show can be investigated immediately.
• Purchases of Merchandise: Periodic System

  1. When merchandise is purchased for resale to customers, the account Purchases is debited for the cost of goods purchased

  2. Purchases may be made for cash or on account (credit)

  3. The purchase is normally recorded by the purchaser when the goods are received from the seller
• Each credit purchase should be supported by a purchase invoice. A purchase invoice received by the buyer is actually a sales invoice or a charge invoice prepared by the supplier or vendor.
• Note that only purchases of merchandise are debited to the 'Purchase' account. Acquisition (purchases) of other assets: supplies, equipment, and similar items are debited to their respective accounts.
• Magaling Computer Store started its operations on January 2, 2016. The store is located in Sikat Mall in Bicol. The owner invested PHP 500,000 to start the business. On January 3, 2016, Magaling purchased 20 units of computers on account for PHP 10,000 each. Upon delivery of the units, the supplier, Delta, Inc., issued Charge Invoice No. 145 to Magaling.
• Internal control requires that a physical count be made to determine the veracity of the closing inventory. This is done whether the accountants use perpetual method or periodic method. A list of closing stock is contained in a source document called Inventory Sheet.