Chapter 5
Merchandising Operations
Review Questions
1.What is a merchandiser, and what is the name of the merchandise that it sells?
A merchandiser is a business that sells merchandise, or goods, to customers. The
2. What are the two types of merchandisers? How do they differ?
Merchandisers are often identified as either wholesalers or retailers. A wholesaler is a
3. Describe the operating cycle of a merchandiser.
4. What is Cost of Goods Sold (COGS), and where is it reported?
5. How is gross profit calculated, and what does it represent?
Gross profit is calculated as net Sales Revenue minus Cost of Goods Sold and it represents
6. What are the two types of inventory accounting systems? Briefly describe each.
The two types of inventory accounting systems are the periodic inventory system and the
7. What is an invoice?
8. What account is debited when recording a purchase of inventory when using the perpetual
inventory system?
9.What would the credit terms of “2/10, n/EOM” mean?
The credit terms “2/10, n/EOM” means that the purchaser can deduct 2% from the total bill
10.What is a purchase return? How does a purchase allowance differ from a purchase return?
A purchase return is when businesses allow purchasers to return merchandise that is
11. Describe FOB shipping point and FOB destination. When does the buyer take ownership of
the goods, and who typically pays the freight?
FOB shipping point means the buyer takes ownership (title) to the goods after the goods
12. How is the net cost of inventory calculated?
13. What are the two journal entries involved when recording the sale of inventory when using
the perpetual inventory system?
The two journal entries involved when recording the sale of inventory when using the
14.Under the new revenue recognition standard, how is the sale of inventory recorded?
15. Under the new revenue recognition standard, what must companies do at the end of the
period related to sales returns? Describe the journal entries that would be recorded.
Under the new revenue recognition standard, companies must estimate the amount of returns
16. When granting a sales allowance is there a return of merchandise inventory from the
customer? Describe the journal entry(ies) that would be recorded.
17. What is freight out and how is it recorded by the seller?
18. What is inventory shrinkage? Describe the adjusting entry that would be recorded to account
for inventory shrinkage.
Inventory shrinkage is the loss of inventory that occurs because of theft, damage, and errors.
19. What are the four steps involved in the closing process for a merchandising company?
The four-step closing process for a merchandising company are:
Step 1: Make the revenue accounts equal zero via the Income Summary account.
20. Describe the single-step income statement.
21. Describe the multi-step income statement.
22. What financial statement is merchandise inventory reported on, and in what section?
23. What does the gross profit percentage measure, and how is it calculated?
The gross profit percentage measures the profitability of each sales dollar above the cost of
goods sold. The gross profit percentage is computed as follows: Gross Profit / Net Sales
Revenue
24A. When a company has a contract involving multiple performance obligations, how must the
company recognize revenue?
25B. What account is debited when recording a purchase of inventory when using a periodic
inventory system?
26B. When recording purchase returns and purchase allowances under the periodic inventory
system, what account is used?
27B. What account is debited when recording the payment of freight in when using the periodic
inventory system?
The Freight In account is debited when recording the payment of freight when using the
periodic inventory system.
28B. Describe the journal entry(ies) when recording a sale of inventory using the periodic
inventory system.
29B. Is an adjusting entry needed for inventory shrinkage when using the periodic inventory
system? Explain.
An adjusting entry is not needed for inventory shrinkage when using the periodic system. The
30B. Highlight the differences in the closing process when using the periodic inventory system
rather than the perpetual inventory system.
The two main differences in the closing entries are in the first two steps. With Step 1 in the
31B. Describe the calculation of cost of goods sold when using the periodic inventory system.
The Cost of Goods Sold account is calculated by adding Beginning Merchandise Inventory
Short Exercises
S5-1 Comparing periodic and perpetual inventory systems
Learning Objective 1
For each statement below, identify whether the statement applies to the periodic inventory
system, the perpetual inventory system, or both.
a. Normally used for relatively inexpensive goods.
b. Keeps a running computerized record of merchandise inventory.
c. Achieves better control over merchandise inventory.
d. Requires a physical count of inventory to determine the quantities on hand.
e. Uses bar codes to keep up-to-the-minute records of inventory.
SOLUTION
S5-2 Journalizing purchase transactions
Learning Objective 2
Consider the following transactions for Toys and More:
May 8 Toys and More buys $113,300 worth of MegoBlock toys on account with credit terms of
2/10, n/60.
12 Toys and More returns $11,250 of the merchandise to MegoBlock due to damage during
shipment.
15 Toys and More paid the amount due, less the return and discount.
Requirements
1. Journalize the purchase transactions. Explanations are not required.
2. In the final analysis, how much did the inventory cost Toys and More?
SOLUTION
S5-3 Journalizing purchase transactions
Learning Objective 2
Consider the following transactions for Burlington Drug Store:
Feb. 2 Burlington buys $23,800 worth of inventory on account with credit terms of 2/15, n/30,
FOB shipping point.
4 Burlington pays a $50 freight charge.
9 Burlington returns $5,200 of the merchandise due to damage during shipment.
14 Burlington paid the amount due, less return and discount.
Requirements
1. Journalize the purchase transactions. Explanations are not required.
2. In the final analysis, how much did the inventory cost Burlington Drug Store?
SOLUTION
Requirement 1
S5-4 Journalizing sales transactions
Learning Objective 3
Journalize the following sales transactions for Salem Sportswear. Explanations are not required.
The company estimates sales returns at the end of each month.
Jul. 1 Salem sold $20,000 of men’s sportswear for cash. Cost of goods sold is $10,000.
3 Salem sold $62,000 of women’s sportswear on account, credit terms are 3/10, n/30. Cost of
goods is $31,000.
5 Salem received a $4,500 sales return on damaged goods from the customer on July 1. Cost
of goods damaged is $2,250.
10 Salem receives payment from the customer on the amount due, less discount.
SOLUTION
S5-5 Estimating sales returns
Learning Objective 3
On December 31, Jack Photography Supplies estimated that approximately 2% of merchandise
sold will be returned. Sales Revenue for the year was $80,000 with a cost of $48,000. Journalize
the adjusting entries needed to account for the estimated returns.
SOLUTION
S5-6 Journalizing purchase and sales transactions
Learning Objectives 2, 3
Suppose Piranha.com sells 3,500 books on account for $17 each (cost of these books is $35,700)
on October 10, 2018 to The Textbook Store. One hundred of these books (cost $1,020) were
damaged in shipment, so Piranha.com later received the damaged goods from The Textbook
Store as sales returns on October 13, 2018.
Requirements
1. Journalize The Textbook Store’s October 2018 transactions.
2. Journalize Piranha.com’s October 2018 transactions. The company estimates sales returns at
the end of each month.
SOLUTION