Accounting for Merchandising

Chapter 6

accounting for merchandising BUSINESSES

EYE OPENERS

1. Merchandising businesses acquire merchandise for resale to customers. It is the selling of merchandise, instead of a service, that makes the activities of a merchandising business different from the activities of a service business.

2. Yes. Gross profit is the excess of (net) sales over cost of merchandise sold. A net loss arises when operating expenses exceed gross profit. Therefore, a business can earn a gross profit but incur operating expenses in excess of this gross profit and end up with a net loss.

3. a. Increase c. Decrease

b. Increase d. Decrease

4. Under the periodic system, the inventory records do not show the amount available for sale or the amount sold during the period. In contrast, under the perpetual system of accounting for merchandise inventory, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. As a result, the amount of merchandise available for sale and the amount sold are continuously (perpetually) disclosed in the inventory records.

5. The multiple-step form of income statement contains conventional groupings for revenues and expenses, with intermediate balances, before concluding with the net income balance. In the single-step form, the total of all expenses is deducted from the total of all revenues, without intermediate balances.

6. The major advantages of the single-step form of income statement are its simplicity and its emphasis on total revenues and total expenses as the determinants of net income. The major objection to the form is that such relationships as gross profit to sales and income from operations to sales are not as readily determinable as when the

multiple-step form is used.

7. Revenues from sources other than the principal activity of the business are classified as other income. Examples would include rent revenue and interest revenue.

8. Examples of such accounts include the...