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Chapter 10Lesson Notes H1 Chapter 10 Accounting for a Merchandising Business It made sense for students to study simple service businesses while they learned the accounting cycle Now they will discover the additional accounting procedures needed for the type of businesses they encounter most often in daily life the merchandising business H2 Section 101 The Merchandising Business1 To teach the distinction between a service business and a merchandising business ask the class for examples of businesses in the community and write them on the board Circle the businesses that deal only with the provision of a service Ask the class what the uncircled businesses sell2 Introduce the term merchandising business and ask students to provide a definition The majority of firms the class provided as examples were probably merchandising businesses and most of these are likely to be retailers Make sure students understand the difference between retailers wholesalers and manufacturers DRAFT 3 Ask the class What major general ledger account does a merchandising business have that a service business does not have They will generate account names such as Stock and Inventory Write the name Merchandise Inventory on the board and advise the class that this is the name they will see most often in the textbook Ask them what type of merchandise inventory is owned by a lumber company a food retailer a car dealer etc4 Ask students to classify the merchandise inventory account They should reason that it is an asset because it is owned by a business and has value ie it can be sold Furthermore it is a current asset because a business certainly expects to sell it and convert it into cash within a year5 Tell students that a merchandising business has an extra cost that a service business does not have It has the cost of buying the merchandise that it sells Ask students In which statement or report should cost appearAnswer the income statement Introduce the term Cost of Goods Sold Copyright2013 Pearson Canada IncDRAFT MANUSCRIPT 1 Chapter 10Lesson Notes Hint Search online for the retail profit margin of various goods Students may be surprised to learn how low retail profit margin can be As a general rule of thumb profit margins are higher on luxury items or differentiated products A highend electronic store will have a higher profit margin than a highend grocery store and a highend grocery store will have a higher profit margin than a discount grocer You could also bring up the example of movie tickets and popcorntheatres make almost no money on ticket sales but concession sales of food and drinks are almost entirely profit6 Inform the class that it is convenient and economical for many businesses to calculate the cost of goods sold only at the end of an accounting period when financial statements are needed Hence the method of calculation is called the Periodic Inventory System7 Use nine pieces of chalkor pens or other objectsto show the class how to calculate the cost of goods sold using the periodic inventory system Tell students that you started the year with three pieces of chalk and ask them to record and label this data in their notes Students should make up their own label the label can be any title that has meaning for them DRAFT 8 Next tell students that you purchased six more pieces during the year After they write this down ask them how many you had available to sell during the year Answer nine Have them record and label this data in their notes9 Finally tell them that you counted your chalk at the end of the year and discovered that you had only two pieces left After students record and label this information in their notes ask them to calculate how much chalk you sold during the year They should have no trouble coming up with the correct answer of seven They should write this answer in their notes and label it Hint Ask students what else beside sales could have caused the chalk to leave your business Answer The chalk could have been lost stolen or broken10 Tell students they have just performed the basic calculation that all businesses use when they calculate the cost of goods sold under the periodic inventory system Instruct them to Copyright2013 Pearson Canada Inc DRAFT MANUSCRIPT 2 Chapter 10Lesson Notes change whatever labels they used in their chalk calculation to Beginning inventory Purchases Cost of goods available for sale Ending inventory and Cost of goods sold p 396 11 Instruct students to open their textbooks to page 396 and examine Figure 101 or make a transparency of Master 101 to review the concepts just introduced Hint Stress that the cost of inventory that was not sold belongs on the balance sheet while the cost of Inventory that was sold belongs on the income statement Inventory is an asset but the cost of inventory is an expense p 397 12 Review the calculation on page 397 and introduce the term Physical Inventory pp 39839913 Have students examine Figures 102 and 103 on pages 398 and 399 or use transparencies of Master 102 and Master 103 Draw students attention to the fact that the cost of goods sold is listed right after revenue on the income statement It is deducted from revenue before any other expense is considered and the result of this calculation is a new item on the income statement Gross Profit Ask students why the gross profit figure is so important Answer It is the amount of money a business has available to meet its expenses and to make a net profit Hint Ask students if any of them has ever been hired to count yearend inventory for a business Also ask if they have heard an advertising slogan for a clearance sale along DRAFTthe lines of Wed rather sell it than count it They should now be able to relate these events to the businesss preparation of financial statements p 400 14 You may want to differentiate between the gross profit dollar value and the gross profit margin H2 101 Exercises p 402 1 This exercise includes percentage calculations to test students understanding of the relationship between selling prices cost prices and gross profit Review percentage calculations with your class before beginning this exercise because the calculations for the last four lines of this question are more difficult than the first six2 Exercise 2 explores the elements of the cost of goods sold calculation Remind students that the ending inventory for one year is the beginning inventory for the next Copyright2013 Pearson Canada Inc DRAFT MANUSCRIPT 3
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