Operating Cycle and Nature of Transaction in Merchandising Business

Learning Objectives:

• Describes the nature of transactions in a merchandising business

What is Merchandizing Business? 

A merchandising business is a commercial entity that purchases goods, often from manufacturers or wholesalers, and then sells them directly to consumers. Buying and Selling is the core activity of a merchandising business is to buy products at a wholesale price and sell them at a retail price to customers

Operating Cycle of a Merchandising Business

The operating cycle of a merchandising business involves several key steps that describe the flow of goods and cash within the business:

Purchase of Goods for Resale: The cycle begins with the purchase of inventory (goods) from suppliers or vendors. These goods are intended for resale to customers. The business acquires the inventory either for cash or on credit.

Sale of Goods:

• Cash Sales: If the business sells the goods for cash, the cycle proceeds directly from the sale to the next step.
• Sales on Account (Credit Sales): If the business sells the goods on credit, the cycle involves an additional step:
• The business records the sale in its books, creating an accounts receivable entry for the customer.

Collection of Cash from Accounts:

• For credit sales, the business collects payment from customers. This step completes the cycle by converting accounts receivable back into cash.
• The collected cash can then be used to purchase more inventory, restarting the cycle.

In summary, the operating cycle revolves around the continuous flow of goods (inventory) and cash within a merchandising business. It ensures that inventory is efficiently managed, sales are made, and cash is collected to sustain the business operations.

Nature of Transaction in a Merchandising Business

The nature of transactions in a merchandising business involves buying products from vendors, marking them up, and then selling them to customers. Here’s a more detailed look at these transactions:

• Purchasing Inventory: Merchandising businesses purchase goods from suppliers or manufacturers. These purchases are often made on credit and are recorded in the purchases journal.
• Marking Up Products: After acquiring the inventory, the business will add a markup to the cost of the goods. This markup represents the profit margin the business aims to earn.
• Selling Products: The business sells the products to customers. Sales can be made for cash or on credit. Cash sales are recorded in the cash receipts journal, while credit sales are recorded in the sales journal.
• Managing Inventory: Merchandising businesses must manage their inventory levels to ensure they have enough stock to meet customer demand but not so much that it leads to excessive carrying costs or obsolescence.
• Collecting Receivables: When sales are made on credit, the business needs to collect payment from customers. This involves managing accounts receivable and ensuring timely collection of payments.
• Paying Payables: Similarly, the business must manage its accounts payable by paying suppliers for the inventory purchased on credit.
• Recording Returns and Allowances: Sometimes, customers return products or receive allowances for various reasons. These transactions are also recorded and managed by the business.
• Calculating Cost of Goods Sold (COGS): This is the direct costs attributable to the production of the goods sold by a company. It includes the cost of the merchandise, plus any additional costs necessary to get the merchandise into inventory and ready for sale, such as shipping and handling.
• Determining Gross Profit: Gross profit is calculated by subtracting COGS from sales revenue. It represents the profit a company makes after deducting the costs associated with making and selling its products.
• Operating Expenses: These are the costs that a business incurs as a result of performing its normal business operations, excluding the cost of goods sold. Examples include rent, utilities, and salaries.
• Calculating Net Profit: Finally, the net profit is determined by subtracting operating expenses from the gross profit. This represents the actual profit the business earns after all costs and expenses are accounted for

Activity 1.  Think about it! (15 points) 

 Instruction. Substantially and comprehensively answer the question below using your own words. 

1.  What is the impact of varying payment terms offered by suppliers and customers on the operating cycle of a merchandising business?  

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