Chapter 7
Inventory: Merchandising Transactions
173
1. Travel
$100
2. Business cards
100
3. Flyers for advertising
300
4. Temporary rental space
200
Total Operating Expenses
$700
Sales Revenue (200 x $7.00)
$1,400
Less
Cost of Goods Sold
1,000
= Gross Profit
400
Less
Operating Expenses
700
= Net Income (Loss)
($300)
Every business has various monthly operating
expenses that will occur regardless of services
or products sold. The sale of merchandise, less
merchandise cost, contributes toward paying
these expenses.
These T-shirts may have been purchased
several months earlier. You are now recognizing
(matching) the cost of the shirts against the
value of the sale. If you only sell 200 T-shirts
(COGS = 200 x $5.00), there is not enough gross
profit to pay operating expenses, resulting in a
net loss of $300.
Operating expenses of the business
Sell 200 T-shirts
________________
figure 7.2
The business needs to sell more T-shirts to provide enough gross profit to pay for operating
expenses. Figure 7.3 shows the results of selling 350 T-shirts and 500 T-shirts.
Sales Revenue (500 x $7.00)
$3,500
Less
Cost of Goods Sold
2,500
= Gross Profit
1,000
Less
Operating Expenses
700
= Net Income (Loss)
$300
By selling 350 T-shirts (COGS = 350 x $5.00),
you manage to break even (which means that
revenues equal expenses). Therefore, you have
not produced net income or suffered a net loss.
By selling 500 T-shirts (COGS = 500 x $5.00),
you have made sufficient gross profit to cover
operating expenses and produce net income.
Sell 350 T-shirts
Sell 500 T-shirts
Sales Revenue (350 x $7.00)
$2,450
Less
Cost of Goods Sold
1,750
= Gross Profit
700
Less
Operating Expenses
700
= Net Income (Loss)
$0
________________
figure 7.3
Perpetual vs. Periodic Inventory
Imagine you are shopping for a particular item at a department store.
You cannot find it on the shelf, so you ask an employee if there are
any left. The employee checks the computer, which says there is one
left.The employee finds it in the storage room, gives it to you and you
go to the cashier.The cashier scans the item, you pay the bill and you
leave the store. If another customer asked for that same item after you
bought it, the computer would show that there are none in stock.
This example illustrates the perpetual inventory system. The
perpetual inventory system
updates
inventory levels after every purchase and sale. Most merchandising companies use technology
such as scanners to update their records for inventory, as well as COGS. All the updates happen
automatically when the item is scanned.
