Accounting for Merchandising Businesses

Chapter 5 Accounting for Merchandising Businesses

213 Example Exercise 5-1 Gross Profit During the current year, merchandise is sold for 250,000 cash and for 975,000 on account. The cost of the merchandise sold is 735,000. What is the amount of the gross profit? Follow My Example 5-1 The gross profit is 490,000 250,000 + 975,000 − 735,000. Practice Exercises: PE 5-1A, PE 5-1B Example Exercise 5-1 Gross Profit The Operating Cycle Products Cash Sales Activity Purchasing Activity Collection Activity Accoun ts Receiv able The operations of a merchandising business involve the pur- chase of merchandise for sale purchasing, the sale of the products to customers sales, and the receipt of cash from customers collection. This overall process is referred to as the operating cycle. Thus, the operating cycle begins with spending cash, and it ends with receiving cash from customers. The operating cycle for a merchandising business is shown to the right. Operating cycles for retailers are usually shorter than for manufacturers be- cause retailers purchase goods in a form ready for sale to the customer. Of course, some retailers will have shorter operating cycles than others because of the na- ture of their products. For example, a jewelry store or an au- tomobile dealer normally has a longer operating cycle than a consumer electronics store or a grocery store. Businesses with longer operating cycles normally have higher profit margins on their products than busi- nesses with shorter operating cycles. For ex- ample, it is not unusual for jewelry stores to price their jewelry at 30–50 above cost. In contrast, grocery stores operate on very small profit margins, often below 5. Grocery stores make up the difference by selling their products more quickly. THE OPERATING CYCLE © C eng age Lear ning 2 01 4 Business Connection HR BLOCK VERSUS THE HOME DEPOT HR Block is a service business that primarily offers tax planning and preparation to its customers. The Home Depot is a large home improvement retailer. The differences in the operations of a service and merchandise business are illustrated in their recent income statements, as shown below. HR Block Condensed Income Statement in millions Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,775 Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,109 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 666 Other expense net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406 As discussed in a later chapter, corporations are subject to income taxes. Thus, the income statements of HR Block and The Home Depot report “income taxes” as a deduction from “income before income taxes” in arriving at net income. This is in contrast to a proprietorship, such as NetSolutions, which is not subject to income taxes. The Home Depot Condensed Income Statement in millions Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,997 Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . 44,693 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,304 Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,465 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,839 Other expense net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566 Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,273 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,935 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,338 Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook andor eChapters. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 214

Chapter 5 Accounting for Merchandising Businesses