Describe merchandising activities and identify income components for a merchandising company. Merchandisers buy products and resell them. Examples of merchandisers include Wal-Mart, Home Depot, The Limited, and Barnes & Noble. A merchandiser's costs on the income statement include an amount for cost of goods sold. Gross profit, or gross margin, equals sales minus cost of goods sold.

Identify and explain the inventory asset of a merchandising company. The current asset section of a merchandising company's balance sheet includes merchandise inventory, which refers to the products a merchandiser sells and are available for sale at the balance sheet date.

Describe both perpetual and periodic inventory systems. A perpetual inventory system continuously tracks the cost of goods available for sale and the cost of goods sold. A periodic system accumulates the cost of goods purchased during the period and does not compute the amount of inventory or the cost of goods sold until the end of a period.

Analyze and interpret cost flows and operating activities of a merchandising company. Cost of merchandise purchases flows into Merchandise Inventory and from there to Cost of Goods Sold on the income statement. Any remaining inventory is reported as a current asset on the balance sheet.

Compute the acid-test ratio and explain its use to assess liquidity. The acid-test ratio is computed as quick assets (cash, short-term investments, and current receivables) divided by current liabilities. It indicates a company's ability to pay its current liabilities with its existing quick assets. An acid-test ratio equal to or greater than 1.0 is often adequate.

Compute the gross margin ratio and explain its use to assess profitability. The gross margin ratio is computed as gross margin (net sales minus cost of goods sold) divided by net sales. It indicates a company's profitability before considering other expenses.

Analyze and record transactions for merchandise purchases using a perpetual system. For a perpetual inventory system, purchases of inventory (net of trade discounts) are added to the Merchandise Inventory account. Purchase discounts and purchase returns and allowances are subtracted from Merchandise Inventory, and transportation-in costs are added to Merchandise Inventory.

Analyze and record transactions for merchandise sales using a perpetual system. A merchandiser records sales at list price less any trade discounts. The cost of items sold is transferred from Merchandise Inventory to Cost of Goods Sold. Refunds or credits given to customers for unsatisfactory merchandise are recorded in Sales Returns and Allowances, a contra account to Sales. If merchandise is returned and restored to inventory, the cost of this merchandise is removed from Cost of Goods Sold and transferred back to Merchandise Inventory. When cash discounts from the sales price are offered and customers pay within the discount period, the seller records Sales Discounts, a contra account to Sales.

Prepare adjustments and close accounts for a merchandising company. With a perpetual system, it is often necessary to make an adjustment for inventory shrinkage. This is computed by comparing a physical count of inventory with the Merchandise Inventory balance. Shrinkage is normally charged to Cost of Goods Sold. Temporary accounts closed to Income Summary for a merchandiser include Sales, Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold.

Define and prepare multiple-step and single-step income statements. Multiple-step income statements include greater detail for sales and expenses than do single-step income statements. They also show details of net sales and report expenses in categories reflecting different activities.

Record and compare merchandising transactions using both periodic and perpetual inventory systems. Transactions involving the sale and purchase of merchandise are recorded and analyzed under both the periodic and perpetual inventory systems. Adjusting and closing entries for both inventory systems are illustrated and explained.