Question

1. Discuss some differences between a service business and a merchandising business. Provide unique examples of each in your discussion. Are there some businesses that incorporate both approaches and have products and services? If so, provide examples of these also.

2. Define Cost of Merchandise Sold in the context of an example of a business. In other words, define it by illustrating it as it pertains to a business you have chosen. As always, make your choice unique from your classmates. How can management decisions in this area affect the bottom line profitability of that business? (Your answer should be specific to the business you have chosen) What factors are controllable? Uncontrollable? -Again, make your answer specific to the example you described.

3. Discuss accrual accounting principles and apply these to a business that you: work for, have worked for, have observed, or have researched. Provide specifics and ensure that your responses are unique.

4. Discuss the practice of purchase/payment discounts. What relationship does accounts payable have to this activity?

5. What is shrinkage? Select a business and provide examples of internal and external shrinkage occurring in that business. How can those be mitigated? Ensure that your posting is unique from your classmates' posts.

Answer 1

Question 1.

Merchandise Business	Service Business
a. Sells things which are tangible. For eg, in car showroom, one purchases car (tangible) by paying for it. b. Needs to stock up inventory Foe Ex. A car seller needs to maintain inventory of car c. Net income = Revenue -operating expense	a. Sells things which are not tangible For Ex. A maid cleans (intangible) your house in return of being paid off. b. No need to stock up inventory. Eg., A maid doesn't need to maintain of any inventory to provide her service. c. Net income = Revenue-cost of goods sold- operating expense

A restaurant provides both merchandise business and service business. In a restaurant, a customer pays for the food (tangible) he consumes. However, some restaurants charge money for providing service (being waited).  

Question 2. Cost of Merchandise cold = Beginning merchandise inventory+Merchandise purchases-Ending merchandise inventory

For eg., In a shoe retailer shop, Cost of shoe sold= Beginning shoe inventory+New shoe purchases - Ending shoe inventory

There are several factors which affect this cost like purchase discount, allowances, freight cost. These items gets added up to the cost of merchandise sold. If we save on these costs, the cost of merchandise sold will be low, which in return would increase the profit.

Controlled costs are those costs which are influenced by or regulated by the management. Whereas, uncontrolled costs are not under the control of the management. For eg., in a shoe retail shop the commission percentage provided to the salesman is decided by the manager and hence is controlled cost. However, the rent provided for the retail shop premises is not under the control of the manager and hence is classified as uncontrolled cost.

Question 3. Accrual accounting principal requires all revenue and expenses to be recorded in the period in which it occurs, rather than the period in which the cash flows related to them occurs. Recording transactions under the accrual principal requires the use of accrual journal entry.

For example, its consider a football manufacturing company. The company sold footballs worth $. 2000 on February 2, 2019 on credit (payment is not received). The journal entry for this transaction would be:

Accounts Receivable	+$2000
Sales		+$2000

  However, payment in cash is received on March 2, 2019. Thus the entries will be

Cash	+$2000
Account Receivable		-$2000

Question 4:

When goods are purchased on credit from a supplier, the purchase discount terms will stipulate the date on which the amount outstanding is to be paid. A purchase discount is availed in case payment is done before the date mentioned in the terms.

For example, A shoe manufacturer buys leather from the supplier for a value of $1500 on 2/10, n/30 terms. This means that an amount of $1500 is due for payment within 30 days. However, a discount of 2% is availed of payment is received within 10 days. Calculation of purchase discount is:

Purchase Price = $1500

Purchase discount % = 2%

Purchase Discount = 2% x 1500 = 30

Amount to pay = 1500-30 = 1470

Thus, if payment is made within 10 days, a discount of 2% ($30) can be availed by the shoe manufacturer. Thus, the net amount payable is $1470.

Relationship of account payable is explained by the journal entry:

On the day of purchase, its not clear if payment will be made within 10 days or not. Thus journal entry would be:

Purchase	+1500
Account Payable		+1500

If payment is made within 10 days, the journal entry would be:

Account Payable	-1500
Cash		-1500
Purchase Discount		-30

The shoe manufacturer pays $1470 and records a purchase discount of $30 to clear accounts payable account of $1500. The purchase discount is adjusted in the purchase. Thus, the net purchase would be = 1500-30=1470.