Scarica Financial Accounting e più Appunti in PDF di Contabilità Finanziaria solo su Docsity! LECTURE 4-5 20/01/2022 MERCHANDING OPERATIONS (Chapter 5) There are different inventory systems that affect the accounting entries in the journal and in the ledger but also the way we measure the value of the goods which are in our warehouse, the inventory. The two systems affect both the accounting entries and the measurement of the inventory that will result from those accounting entries. The companies taken into consideration here are merchandising companies. We want to learn how to measure the sales revenue, when to account for it and how to match the expenses incurred in order to buy and to sell the goods that we sold. 1 Merchandising companies are companies that buy finished products (goods) and resell them without changed them (no transformation process inside the company). The primary source of revenues is referred to as sales revenue or sales. You can also find another word turnover that is the same as sales revenue or Income Statement Not yet Statement of Comprehensive Income The Operating Expenses are other expenses which have an operating nature: they are related to the ordinary functioning of the company, but they are not strictly related with the product. So, the link between the operating expenses and the sale revenues is weaker than the link existing between the sale revues and Cost of Goods Sold (COGS) is the total cost of merchandise sold during the period. OPERATING CYCLES It is the set of activities that take place in a specific period of time which are needed in order for the company to function and to achieve its own basic goals which can be to perform a service or to buy goods and resell them to customers or to buy raw materials and other resources to manufacture these things together and then sell the finish products. For the service company, cash is needed at the beginning when the company is incorporated. It will be used in order to perform the services, and from the performance of the services we may immediately get money or not because we can sell the service for cash or for credit. In this case, the company allows customers to receive its cash later (account receivable) than the moment in which the service is actually performed. For the merchandising company, the initial cash given to the company by the shareholders when the company is created in front of the notary public, is used to buy goods. These goods are purchased and physically stored in a warehouse then we take out the goods from the warehouse and we sell them. Also, here we may sell them for cash or for credit (account receivable). Finally, when the money is received the cycle is completed. FLOW OF COSTS During the ordinary course of the life of a company, the company will have a Beginning Inventory at the beginning of the accounting year. The company normally starts the accounting period on the 1st of January with some goods which are already included in the warehouse physically: they can be raw materials, they can be work in progress (manufacturing companies can have products that are not finished yet, and that are physically inside the machines belonging to the beginning inventory), they can be finished products coming inherited from the previous accounting period. Then, during the period, the company will also purchase new raw materials and manufacture new things. The accountant has to track the cost of the beginning inventory plus the Cost of the Goods Purchased during a specific period in order to calculate what we call the Cost of Goods Available for Sale (COGE). Then, during the year, the company will sell some of the finished products manufactured. From the cost of goods available for sale subtracting the Cost of the Goods Sold, it is possible to obtain the cost of goods unsold. 2
