Learn about merchandising companies. Understand what a merchandising company is, learn what a retail company is, and identify how their income statements work. Updated: 06/11/2022 Table of Contents
A merchandising company is a business that purchases products which the intention of reselling them to consumers. While many companies create or produce the products they are selling to consumers, a merchandising company purchases these products from another company, aiming to resell the products at a higher price to make a profit. Typically, merchandising companies sell a variety of products; however, this can vary as some merchandising companies can be specialty companies. For example, a grocery store is a merchandising company that sells various food products from other businesses and manufacturers. On the other hand, a music store is also a merchandising company, though it is a specialty store, as it consists of instruments from different brands. Merchandising companies are also categorized depending on how they distribute their products. They can either be classified as retail companies or wholesale companies. Types of Merchandising CompaniesWhat is a retail company? A retail company is a business that sells products directly to consumers in a market. For example, a store at the mall that sells apparel is considered a retail company. Customers are able to shop at the store and purchase items directly from the company. A wholesale company sells products in bulk to other businesses, which are typically retailers but can be any kind of business. Wholesalers focus on distributing the products and may even manufacture the products. Prices are typically much higher at a retailer compared to a wholesale company. The retailer aims to make a profit from the merchandise that was purchased from another company, while the wholesaler typically distributes the product at a low cost since it is in bulk and can afford to lower their prices. Merchandising ActivitiesMerchandising activities cover various aspects of the business. A merchandising company is responsible for purchasing products from other companies and selling these products to consumers. Some purchasing systems may be complex for merchandising companies with various products from different sellers. Other purchasing systems may be simple as the same products are easily purchased on a regular basis. It's important for merchandise companies to understand how much to purchase to have enough inventory for the demand. However, they must ensure that these products purchased are expected to sell. The operating cycle refers to the duration and process between the purchase of a product and when it is sold to a consumer. The operating cycle consists of several ongoing steps as products are purchased and sold. These include purchasing inventory, selling merchandise, collecting payments from transactions, and using this income to purchase more products for inventory.
Inventory Systems in Merchandising CompaniesCompanies use different methods to track and record their inventory on hand. There are two main inventory systems that are commonly used: periodic systems and perpetual systems. A periodic inventory system relies on the inventory counts that are placed periodically, whether that is on a weekly, monthly, or yearly basis. Periodic inventory may not be as accurate since these counts are only completed occasionally. Though there are drawbacks to periodic inventory, it is simplified and completed manually. A perpetual inventory system is updated to reflect the current inventory as each sale is completed. The perpetual inventory system uses computer technology, which can be more costly but improves the accuracy of the recorded inventory on hand. As purchases are recorded, the inventory is adjusted to reflect the recent transactions. The perpetual inventory system is generally more precise and preferred for businesses with large amounts of inventory, but a periodic inventory system may work for businesses with smaller amounts of inventory. Inventory Reporting MethodsWhen it comes to reporting inventory, there are two common methods which can be used. These are the first-in, first-out (FIFO) method and the last-in, first-out (LIFO) method. The FIFO method works with the assumption that the first products received or produced will be the first ones to come off the shelf and be purchased by consumers. This means the company believes the products will be sold in an orderly manner, in the same sequence as they are received. What are examples of merchandising companies?Merchandising companies resell products that have been purchased from other companies. Some examples include Amazon and Walmart, however, these companies may also produce their own products. What are merchandising activities?Merchandising activities include the basic purchasing and selling activities required to run the business. A merchandising company must purchase products from other companies in order to sell the products directly to consumers. What is a merchandise income statement?The income statement used for merchandise companies is referred to as the multiple step income statement. Like other income statements, the company can determine its net income, though the multiple step income statement accounts for the cost of goods sold. Register to view this lessonAre you a student or a teacher? Unlock Your EducationSee for yourself why 30 million people use Study.comBecome a Study.com member and start learning now.Become a Member Already a member? Log In Back Resources created by teachers for teachersOver 30,000 video lessons & teaching resources‐all in one place.  Video lessons Quizzes & Worksheets Classroom Integration Lesson Plans I would definitely recommend Study.com to my colleagues. It’s like a teacher waved a magic wand and did the work for me. I feel like it’s a lifeline. Back Create an account to start this course today Used by over 30 million students worldwide Create an account What is the purpose of an adjusting entry for a merchandising company that uses a perpetual inventory system?Summary. The perpetual inventory method has ONE additional adjusting entry at the end of the period. This entry compares the physical count of inventory to the inventory balance on the unadjusted trial balance and adjusts for any difference. The difference is recorded into cost of goods sold and inventory.
When using a perpetual inventory system the purchases account is debited when goods is acquired?In a perpetual inventory system when merchandise is purchased it is debited to an account called Purchases. In a periodic inventory system the Cost of Goods Sold account may be created during the closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the Purchases account.
Is merchandise inventory used in perpetual inventory system?Under perpetual inventory system, the expenses that are incurred to obtain merchandise inventory are added to the cost of merchandise available for sale. These expenses are, therefore, also debited to inventory account under this system.
Which of the following accounts would not appear when using the perpetual inventory system?Answer and Explanation: The correct option is b. purchases. Purchases are measured at the end of each period under the periodic inventory system, not the perpetual inventory system.
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A merchandising company using a perpetual system will make
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