Chapter 5

Accounting for Merchandising Operations


1. Additional accounts of a merchandising company likely include Merchandise Inventory, Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances (and possibly Delivery Expense).
2. Merchandising companies report Merchandise Inventory on the balance sheet, service companies do not. Also, merchandising companies report both Sales (of goods) and Cost of Goods Sold on the income statement, while service companies do not.
3. A company can have a net loss if its expenses (absent cost of goods sold) are greater than its gross profit from sales of merchandise.
4. A cash discount can be offered to encourage customers to promptly pay. This provides cash more quickly to the seller and avoids the costs of additional collection activities—of course, the seller must do a costs vs. benefits analysis on the merits and terms of any cash discount offered to customers.
5. For a perpetual inventory system, inventory shrinkage is determined by taking a physical count of the inventory available at the end of a period and comparing that amount with the amount recorded in the Merchandise Inventory account.
6. Cash discounts are granted in return for early payment and reduce the amount paid below the negotiated price. Cash discounts are recorded in the accounting records (as a reduction of Merchandise Inventory). Trade discounts are deducted from the list or catalog price to determine the purchase (negotiated) price. Trade discounts are not recorded in the accounting records.
7. Sales discount is a term used by a seller to describe a cash discount granted to a customer. Purchase discount is a term used by a purchaser to describe a cash discount received from a seller. (It is a matter of perspective: seller versus buyer.)
8. A manager is concerned about the quantity of its purchase returns because the company incurs costs in receiving, inspecting, identifying, and...

Similar Essays