Chapter 5: Merchandising Operations
Difference between Service and Merchandising Companies
Service companies perform services as their primary source of revenue (ex:
accounting firm, law office)
Merchandising companies buy and sell merchandise (ex: WalMart)
Merchandising Company Revenues and Expenses
Revenue: Sales revenue (ex: from the sales of merchandise), Other Revenue (ex:
Expenses are divided into categories: cost of goods sold, operating expenses and
income tax expense.
Merchandising companies may use either (or both) of the fallowing inventory
systems to determine their cost of goods sold and ending inventory: Perpetual or
Inventory is updated constantly for purchases and sales
A physical count is done at least once a year to adjust perpetual records to actual.
This system enables the effective control inventory, which is an important asset.
This type of inventory system does not keep an updated record of all goods
bought, sold and on hand.
Cost of goods sold is only determined at the end of the accounting period once
inventory is counted.
Perpetual Inventory System – Purchase of Merchandise
Purchase (includes all costs to get merchandise to place of business and ready for
Purchase returns and allowances
(Purchases) – (purchase returns and allowances) – (purchase discounts)
= (Net Purchases) + (Freight)
= (Cost of Goods Sold)
Freight paid by the buyer is part of the cost of the merchandise purchased.
FOB (free on board) – this is a l