Problem Solving Survival Guide Volume I: Chapters 1-12 to accompany Accounting Principles, 11th Edition

CHAPTER 5

ACCOUNTING FOR MERCHANDISING OPERATIONS

OVERVIEW

A service entity performs services for its customers to earn service revenue. A merchandising entity sells products to its customers to earn sales revenue. Both types of entities incur expenses in generating revenue. Thus, both must match expenses incurred with revenues earned. This chapter will acquaint you with the income statement for a merchandising entity. The major differences between the income statement for a service type firm and the income statement for a merchandising firm lie with the data reported for net sales revenue and cost of goods sold expense for the merchandiser. Both the single-step and the multiple-step formats for the income statement are discussed in this chapter.

A merchandiser must account for the purchase and sale of its inventory items. The perpetual system is discussed in this chapter and the periodic system is explained in an appendix to this chapter.

SUMMARY OF LEARNING OBJECTIVES

1. Identify the differences between service and merchandising companies. Because of the presence of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual inventory system and a periodic inventory system.
2. Explain the recording of purchases under a perpetual inventory system. The company debits the ...