Merchandising Activities

MERCHANDISING COMPANIES

In the preceding chapters we examined organizations that render services to their customers. Merchandising companies earn most of their revenue by selling goods. Goods that are purchased fro purpose of resale to customers are called inventory. The success of most merchandising companies depends on their ability to acquire, distribute, and sell inventory quickly.

The Operating Cycle of a Merchandising Company:
The series of transactions through which a business generates its revenue and its cash receipts from customers are called operating cycle. The operating cycle of a merchandising company consists of the following basic transactions: (1) purchase of merchandise (2) sales of merchandise (3) collection of the accounts receivable from customers. As the word cycle suggests, this sequence of transactions repeats continuously. Some of the cash collected from the customers is used to purchase more merchandise. And the cycle begins a new. This continuous sequence of merchandising transactions is illustrated below.

Comparing Merchandising Activities with Manufacturing Activities:
Most merchandising companies purchase their inventories from other business organization is ready to sell condition. Companies that manufacture their inventories. Such as General Motors, IBM is called manufacturers. Rather than merchandisers. The operating cycle of a merchandising company.

Retailers and Wholesalers:
Merchandising companies including both retailers and wholesalers. A retailer is a business that sells merchandise directly to the public. Retailers may be small or large; they vary in size from giant department stores chains; such as sears and Wal-Mart to small neighborhood businesses, such as gas stations and convenience stores. In fact, more businesses engage in retail sales than in any other type of business activity.
The other major type of merchandising company is the wholesaler. Wholesalers buy large quantities of merchandise from several different manufacturers and then resell this merchandise to many different retailers.

Income Statement of a Merchandising Company:
Selling merchandise introduces a mew and major cost of doing business; the cost to the merchandising company of the goods that it resells to its customers. This cost is term the cost of goods sold. In essence, the cost of goods sold is an expense; however, this item is of such importance to the merchandising company that it is shown separately fro other expenses in the income statement. The difference between revenue from sale of cost of goods sold is called gross profit.
Gross profit is a useful means of measuring the profitability of sales transactions, but it does not represent the overall profitability of the business. A merchandising company has many expenses other than the cost of goods sold. Examples include salaries, rent, advertising and depreciation. The company earns a net income only if its gross profit exceeds the sum of its other expenses.

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