978-1133939283 Chapter 6 Lecture Note Part 2

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Teaching Strategy

To help students understand the merchandising or manufacturing company’s multistep income

statement, you may want to reproduce Exhibit 2 and explain it line by line. Exhibit 1 is

helpful in understanding the cost of goods sold computation. Explain the meanings of gross

and net. Students may already be familiar with gross pay and net pay.

Suggest to students that they prepare ashcards to drill themselves on the various

computations included in this section. Be sure to explain the nature of the expense “cost of

goods sold” and to contrast it with selling and administrative expenses.

Compare and contrast the income statements in Exhibits 2 and 3. Note which items appear

exclusively on the multistep income statement. Ask students which form they prefer. This

will lead to a discussion of the advantages and disadvantages of each form. Point out that

the form of the income statement does not change the bottom line.

Short Exercises 2 and 3 and Exercises 2A through 4A pertain to the classi+cation of income

statement accounts and the preparation of both forms of income statement.

Show how trade discounts and cash discounts are computed to arrive at the amount to be

paid. Explain how to determine whether it is advantageous for a buyer to pay within the

discount period.

Short Exercises 7 and 9 provide an excellent way to contrast the journal entries made for

merchandise purchase and sale transactions in the periodic inventory system. Point out that

all problems and examples in the text assume that transportation is performed by a

common carrier.

Section 3: Business Applications

Business Applications

Calculating operating cycle

Liquidity

Lecture Outline

I0. Operating cycle

A0. Purchase of merchandise inventory for cash or credit

B0. Sales of merchandise inventory for cash or on credit

C0. Collection of cash from credit sales

D0. Payment for purchases made on credit

0. Foreign business transactions

A0. Foreign business transactions involve two currencies.

B0. Timing di6erences and related changes in the exchange rate may result in

exchange gains or losses.

Summary

The operating cycle of a merchandising business consists of (1) purchasing merchandise

inventory from suppliers for cash or on credit, (2) selling merchandise to customers for cash

or on credit, (3) collecting cash from customers for credit sales, and (4) paying for purchases

made on credit. To have su9cient cash on hand to pay bills as they are due and to replenish

or posted to a publicly accessible website, in whole or in part.

Chapter 6: Accounting for Merchandising Operations Instructor’s Manual, p. 2

merchandise inventory, management must forecast its future cash needs and arrange for

borrowing as needed during the nancing period, which is the period of time from the

purchase of inventory until it is ultimately sold and payment is collected, less the amount of

time creditors give the company to pay for the inventory.

Most large companies and many small companies engage in international transactions.

When a transaction involves two di6erent currencies, one currency has to be stated in terms

of the other. When a company engages in a transaction in a foreign currency, an exchange

gain or loss will occur if there is a change in the exchange rate between the date of sale and

the date of payment.

Relevant Examples and Exhibits

Exhibit 12 Cash Flows in the Operating Cycle

Exhibit 13 The Financing Period

Teaching Strategy

Ask students to give examples of service businesses and merchandising businesses. Use

Exhibit 12 to lead students through the operating cycle and Exhibit 13 to discuss the

+nancing period. Short Exercise 10 will help students understand the major issues presented

in this section.

Discuss with students that most businesses engage in international transactions. Go through

the examples in the textbook to show how exchange rate di6erences occur and how a gain

or loss related to exchange rates are calculated.

Student Engagement Tactics

1. Divide the students into teams of three and have them go to a retail business, such

as a bookstore, clothing shop, gift shop, grocery store, hardware store or car

dealership, in your local shopping area or a shopping mall. Have them ask to speak to

someone who is knowledgeable about the store’s inventory methods.

2. Have each team of students determine the following:

Merchandise Accounting: Is the company part of a chain or is it a small business?

Does the company sell only merchandise or a combination of merchandise and

services? How are sales recorded? Does the company sell on credit? If so, who

decides who gets credit and what are the typical terms? Does the company buy

merchandise or in the case of a chain, does it order merchandise? If it purchases

merchandise, how are purchases recorded?

Inventory Systems: How is each item of inventory identi+ed? Does the business

have a computerized or manual inventory system? Which inventory system,

periodic or perpetual, is used? How often do employees take a physical inventory?

What procedures are followed in taking a physical inventory? What kinds of

inventory reports are prepared or received?

3. Go over the activity in class to make sure students understand what is required.

Preparation is essential so that the store manager’s time is not wasted. This brie+ng

should include the following:

or posted to a publicly accessible website, in whole or in part.

Chapter 6: Accounting for Merchandising Operations Instructor’s Manual, p. 3

Nature of acceptable business

Expected professional behavior

Nature of data to be gathered (See questions in the learning tool)

Form of report

4. Debrief the activity in class upon completion. Take selected questions from the

learning tool and as each group gives its results, summarize on the board. Have in

mind the summary points you would like to make with regard to merchandising

accounting and inventory systems.

or posted to a publicly accessible website, in whole or in part.