The document discusses merchandising businesses, which differ from service businesses in that they sell physical goods rather than services. Merchandising businesses must track inventory, including purchases and sales of goods, using either a periodic or perpetual inventory system. Properly accounting for inventory is important because the cost of goods sold expense, calculated from inventory records, is typically one of the largest expenses impacting a merchandising business's net income.

1. The Merchandising Business

2. Service Businesses
• Thus far in the course, I have been taking you
through the bookkeeping procedures for a
service business
– Lawyers, Accountants, Lawn Care, Pool Cleaning,
etc.
– Every business was a service (fees earned,
rendered services, etc)
• Obviously, there are other types of businesses
other than service businesses

3. Types of Businesses
1) The Service Business
– What we have dealt with thus far
– Trading expertise for cash
2) The Merchandising Business
– Our next unit
– Selling physical goods to the consumer
3) The Manufacturing Business
– Towards the end of the semester
– Physically putting together the product

4. The Merchandising Business
• Business that sell Merchandise are known as
Merchandising companies
• Since they sell products, we now must track
the purchase, cost, and sale of these goods
• This is done through tracking the Merchandise
Inventory Account
• This is the only essential difference between a
Service & Merchandise Company

5. The Merchandising Business
• The first thing we have to clear up is the
difference between supplies and merchandise.
• Supplies are purchased for use in running a
business (i.e. office supplies, cleaning
supplies).

6. The Merchandising Business
• Merchandise Inventory is purchased for RE-SALE.
This idea is you buy goods, and re-sell them for a
higher price in order to make money.
• Note: this doesn’t mean that pencils and paper
can’t be inventory. If you are a stationary store,
then these items ARE inventory. The key concept
is “goods for re-sale”.

7. Keeping Track of Inventory
1. The Periodic Inventory Method
 Adjustments are made at the end of
the accounting period to track the
inventory
2. The Perpetual Inventory Method
 Adjustments are continually made
and updated to keep track of the
inventory
The two types of inventory systems have
Different accounting procedures

8. Periodic Inventory
• There were days before computerized accounting
and inventory systems
– larger companies would sell goods out of inventory
with no intention of trying to keep inventory records
up to date, especially with a high volume of sales.
– Sometimes can be hard to keep track of (candy, frozen
food)
• Instead, much like a supplies adjustment, an
inventory count would be made at the end of the
period (periodically).
– This will show how much inventory was missing, all of
which is assumed to have been sold.

9. Perpetual Inventory
• Now thanks to technology, inventory systems can
tell you exactly how much inventory (and what
kind) is in the storeroom or on the floor
(inventory is kept perpetually up to date).
• Every time a cashier scans a product, it records
the sale, but also reduces the inventory level.
• Now inventory counts are done much less
frequently, and are usually just to catch
discrepancies in the records and to account for
theft.

10. Inventory
• Inventory adds an entirely new dimension to
running and evaluating a business.
1. Inventory can become obsolete
– summer clothing not sold by fall, too many of the
hottest toys from last Christmas.
2. Inventory can also cost $$$
– takes up space for which you pay rent, needs to be
stored, stocked, and counted - which takes labour and
inventory soaks up cash to sit there on the floor
– It does nothing, instead of paying the business’ bills.
3. Inventory can also be stolen.

11. Inventory
• Inventory values can also be “played” with to
alter a business’ reported Net Income. How?
– This is because the cost of inventory eventually
makes it to the income statement as an expense
called Cost of Goods Sold. The more you sell, the
higher your cost of goods sold expense.
• The reason all this is significant, is because
inventory is usually significant.
– The single largest expense for a merchandise
business is usually the Cost of Goods Sold expense

12. Cost of Goods Sold
The concept of Cost of Goods Sold (COGS)
• Since now we are selling goods, part of the
cost of generating revenue is the cost of the
items we are selling.
• It is calculated like this:

13. COST OF GOODS SOLD
Cost of Goods Available for Sales during Value of what’s
period left in
Inventory
Beginning
Inventory + Purchases - Purchase + Freight In - Ending = COGS
Returns & Inventory Expense
Purchase
Discounts This is the cost of
We will learn having the merchandise Value of
about these shipped to us. It is goods
next Net deemed to be part of sold
Purchases the cost of obtaining during
the goods, so it goes in the
Inventory. period

14. ON THE INCOME STATEMENT
Sales Revenue is now referred to as Sales
- COGS
This is also known as the ‘mark up’ on your
= Gross Profit goods
- Operating
Expenses These are the ‘expenses’ you are use to
= Net Income (Salaries, Rent, Amortization etc)

15. Inventory
A Class Example
• A business with $20,000 worth of inventory on January 1st makes the
following purchases
– Jan. 10 - $7,500, Jan. 17 - $1,500
– Jan. 21 – Return for $900
• When Inventory was counted on Jan. 31st the business had $14,000
worth of Inventory left
• Sales in January were $40,000
1. Find the COGS
2. Calculate the Net Income

16. Inventory
#1 – COGS (This is also called a schedule of Cost
of Goods Sold)
Beginning Inventory $20,000
Add: Purchases 9,000
Less: Purchase Returns (900)
Total Available 28,100
Less: Ending Inventory (14,000)
Cost of Goods Sold 14,100

17. Inventory
#2 – Net Income
Sales $40,000
Less: Cost of Goods Sold (14,100)
Gross Profit 25,900
Less: Operating Expenses (17,000)
Net Income $8,900

18. Further Practice
• Page 308
– Questions 1-6
• More practice on calculating COGS and Net
Income/Loss