Merchandising is one of the largest and most influential industries in the United States.

It is likely that a
number of you will work for a merchandiser. Therefore, understanding the financial statements of merchandising
companies is important. In this chapter, you will learn the basics about reporting merchandising transactions.
In addition, you will learn how t o prepare and analyze a commonly used form of the income statement. The
content and organization of the chapter are as follows.

Operating cycles
Flow of costsperpetual and
periodic inventory
systems

Freight costs
Purchase returns
and allowances
Purchase discounts
Summary of
purchasing
transactions

Sales returns and

allowances
Sales discounts

Adjusting entries
Closing entries
Summary of
merchandising
entries

Income statement
Classified
statement of
financial position

Wal-Mart (USA), Carrefour (FRA), and Tesco (GBR) are called merchandising companies because they buy and sell merchandise rather than
the differences between
perform services as their primary source of revenue. Merchandising comservice and merchandising
panies that purchase and sell directly to consumers are called retailers.
companies.
Merchandising companies that sell to retailers are known as wholesalers.
For example, retailer Walgreens (USA) might buy goods from wholesaler Grupo
Casa Saba SA de CV (MEX); retailer Office Depot (USA) might buy office supplies from wholesaler Corporate Express (NLD). The primary source of revenues
for merchandising companies is the sale of merchandise, often referred to simply as
sales revenue or sales. A merchandising company has two categories of expenses:
cost of goods sold and operating expenses.
Cost sf goods sold is the total cost of merchandise sold during the period.
This expense is directly related to the revenue recognized from the sale of goods.
Illustration 5-1 shows the income measurement process for a merchandising
:

Illustration 5-1
Income measurernent
process for a merchandising
company