RSM220H1 Study Guide - Purch Group, Cash Register, Operating Expense

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20 Apr 2012

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Chapter 7
Merchandise Inventory
The three (3) main types of industries are:
1) Service – which we have been looking at so far
2) Manufacturing -
3) Merchandizing – which we will do in this chapter. They sell products either to
wholesalers or retailers.
In order to know the value of merchandize available for resale at any one time we need to look at the
schedule, which outlines COGS as on page 280 - 281. We would need to know the:
- The Opening or Beginning inventory, which holds the inventory value
at the start of the accounting period.
- The Ending or closing inventory, which holds the value at the end of the
accounting period.
We can use the perpetual or periodic inventory system to determine the value of the stock or inventory.
1) Periodic Inventory Method (small items)
This system does not record the sale of individual items as they are sold and so that method is
used for small items e.g. candy or variety stores sales.
At the end of the fiscal period a physical count or inventory of the items is taken. All the items
on hand are counted at the same time and recorded in their various categories.
Next the quantity times (x) the unit price is calculated for each category and then added
together to give a grand total. The total is then recorded in the Merchandize Inventory
Accounts. As it will be needed for the Cost of Goods Sold (COGS), as well as for the Balance
Sheet in the Current Asset section as shown in (fig. 7-6 P.283)
The Periodic system uses:
- Purchases
- Purchases Return and Allowances
- Purchases Discount
To record the merchandise bought. This system also uses:
- Transportation-In
- Delivery expenses
To record the expenses incurred to deliver the merchandise to customers, as seen in the entries
on pages 296.
2) Perpetual Inventory Method (large items)
This inventory system keeps a record of each item that the company sells. This is done by the
use of a stock card, which updates the quantity of items on hand each time, and item is sold or
bought. This system is used for large items e.g. cars, major appliances, etc.
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A number of companies are now using the just-in-time system where as soon as an item is sold
it’s updated on the computer and so when stock is at a designated low level the computer
system automatically reorder. These point-of-sale terminals are computerized and so when the
cash register records the sale from the clerk’s scanner, the computer will deduct the item
purchased from the stock on hand.
Look at the Merchandizing Chart of Accounts for the Merchandize Company
on page 284, figure 7-7
The perpetual system like the periodic, uses – sales, sales return & allowances
and sales discount to record the retail value or price of the merchandize sold
during the accounting period. This is also done in the periodic inventory system
but in addition the perpetual system also uses the COGS to record the
merchandize sold at cost price. This is done so that current data on COGS and
merchandizing inventory can be obtained throughout the accounting period.
Merchandize inventory should always give the actual value of merchandize on
The Perpetual system also uses:
-Merchandize inventory
-COGS –cost of goods sold
-Transportation on purchases
These accounts provide up to date data on the COGS and on the merchandize
inventory throughout that accounting period.
See the merchandize sales entries on page 302 –303 for a comparison between
the two systems.
How do we determine Net Income – Formula used
Service Industry: Revenue – expenses= net income
Merchandizing company: Revenue – COGS = Gross Profit – Expenses = Net Income
E.g. Net Income 56000- 34000 = 22000-12600 = $9400
Remember that revenue increases O/E so we Cr. to increase it and Dr. to
decrease it.
Expenses decrease O/E so we Dr. to increase it and Cr. To decrease it
Cost of Goods Sold
This is the sum paid to buy the goods for resale. The details of it are found in a schedule as on
(Page 280) and so the details of COGS don’t have to be in the income statement.
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