CHAPTER 5 NOTES (PART I)
Differences Between a Service Enterprise and a Merchandising Company
(Pg. 218-223)
 In a merchandising company, the primary source of revenues is the _______ of _______________,
referred to as sales revenue or sales.
 Unlike expenses for a service company, expenses for a merchandising company are divided into two
categories:
 Cost of goods sold - the total cost of _____________ sold during the period.
 Operating expenses - ______________ and _________________ expenses.
Purchase and Sale of Inventory
 _______________ is the “merchandise” sold by a merchandising company. An inventory system
is necessary to be able to account for what inventory is available for sale, and what inventory has
already been sold.
 There are two systems used to account for inventory:
o Perpetual
o Periodic
 Periodic System
o _____________ item is added to inventory list
o Only the sale is recognized at the point of sale. The actual cost of the item sold is
accounted for later.
o _________ _____ ____________ ___________ is determined at the end of the
period, after a physical inventory is taken
o COGS= Beginning Inventory + Inventory Purchases – Ending Inventory
 Perpetual System
o
o
o
o
Inventory records are ______________ up to date
____________ item is added to the inventory list
Cost of Goods Sold is determined at the point of sale. There are two transactions that
occur: One to recognize the sale and one to recognize the change in inventory and
COGS.
__________ ____________ taken at the end of the period for control purposes.
Distinguish Between a Single-Step and a Multiple-Step Income Statement
(pg. 230-234)
There are two forms of income statements used by companies:
 _____________-__________ income statement - one step is required in determining net income-subtract total expenses from total revenues.
5-1
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Revenues--includes both operating revenues and other revenues and gains.
Expenses--includes cost of goods sold, operating expenses, as well as other expenses and losses.
 Multiple-step income statement
 Highlights the _____________ of net income.
 Distinguishes between ____________ and ___________________ activities.
 Sales revenues--The income statement for a merchandising concern typically presents gross sales
revenues for the period and deducts the contra revenue accounts (sales returns and allowances and
sales discounts) to arrive at net sales.
 Cost of goods sold is the amount paid for the ________________ sold during the period.
 Gross profit--Cost of goods sold is deducted from net sales to determine gross profit. Gross profit
is the ________________ _______________ of the company.
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Operating expenses - are subtracted from gross profit in order to determine ____________
_________ ______________________.
Operating expenses include _____________ expenses--all of the expenses associated with selling the merchandise from
the solicitation of the sale until the product is in the hands of the buyer.
 _______________ expenses--general expenses relating to general operating activities,
human resources, accounting, clerical, security, etc.
Non-operating activities--unrelated to the company's ___________ _______ of operations.
Other revenues and gains--Interest, dividend, rent revenue, and gain from sale of property.
Other expenses and losses--Interest expense; casualty losses; loss from sale or abandonment of
property, plant, and equipment; and loss from strikes by employees and suppliers.
If you were trying to predict future earnings, which is the more relevant figure, net income or
operating income?
BE 5-1, BE 5-6, P5-5A
Factors Affecting Profitability (Pg. 236-239)
 Profit margin ratio, calculated by dividing net income by sales, is one measure of profitability.
 Profit margin ratio may be altered by changing the percentage of ______________ on the
merchandise sold.
 Operating Expenses to Sales Ratio, calculated by dividing operating expenses by sales revenue, is a
measure of a company's ability to control operating expenses.
There is quite often a trade off between margin and turnover. The type of business you are in will
affect which strategy you choose. Think of businesses in your locality which are diametrically
opposed (i.e. a grocery store with very low prices, low margin, and high turnover, and a dealer in
expensive luxury automobiles with high margin and low turnover).
E 5-6, E 5-8
5-2