Here we have the three most common business types: service firms,
merchandising firms, and manufacturing firms. Lets learn more about them and their activities.
Service firms make up the largest sector in the U.S. economy they provide only services
and basically carry no inventory or an immaterial amount.
Their largest expense tends to be salaries and benefits.
You can see some examples here but clearly are many more.
Merchandising firms can be either wholesalers or retailers.
Wholesalers are merchandisers who sell to retailers. They do not sell directly to the consumer,
so their business model is sometimes called B2B which stands for business to business.
Retailers are merchandisers to sell to consumers.
Their business model is sometimes called B2C which stands for business to consumers.
They use one inventory account which you learned or will learn is
known as merchandise inventory or sometimes called finished goods inventory
or a lot of times, just plain inventory.
Their largest expense tends to be Costs of Goods Sold.
You can see some examples here but there clearly many more. These are just the ones I shopped at this week.
Manufacturing companies use labor and other inputs including plant and equipment to convert raw materials into a finished product.
They sell their products primarily to retailers and wholesalers but also to consumers via outlet stores.
Their largest expense also tends to be Cost of Goods Sold.
They use three inventory accounts: raw materials; work in process; and finished goods inventory.
You can see some examples of manufacturers here but clearly there are many more.
So as we begin to learn about are accounting for merchandisers, it's important to understand
a few of these new account names.
Merchandise inventory, again commonly known as inventory, is a current asset found on the balance sheet.
Sales revenue, sometimes just referred to as sales, is a revenue account found on the income statement.
And while service firms earn service revenue,
merchandisers earn sales revenue.
Costs of Goods Sold which is commonly abbreviated COGS, sometimes it's called the cost of sales,
is an expense account and found on the income statement.
The account's purposes is exactly what the name implies, it is the cost of goods sold.
Another new concept is that of the operating cycle.
Basically an operating cycle is how fast
cash can be used
to perform a service or sell a good and then be turned back into cash.
This slide shows the operating cycle of a service firm. These firms use cash primarily in salaries and supplies to perform their services
and then when they collect the accounts receivable, they've completed the operating cycle.
Remember you heard this term before - operating cycle -
the cutoff for current assets and current liabilities
is one year or one operating cycle, whichever is longer. Most service firms will have
many operating cycles within one year, so the one year cutoff is most appropriate.
This slide shows the operating cycle for a merchandising firm.
Although the operating cycle for a merchandiser is usually longer than a service firm, it still usually isn't one year or more than one year.
These firms use cash primarily in the purchase of inventory and then when they collect the accounts receivable incurred from
the sale of inventory, then they've completed the operating cycle.
The final concept related two merchandising operations is how inventory is tracked and accounted for.
There are two primary methods to track inventory: the periodic method; and the perpetual method.
The periodic inventory tracking system requires a physical count to know how much inventory's on hand.
This system doesn't use inventory tracking software usually because the businesses don't have that sophisticated of software.
When you buy something, often it has a price tag on it from a price gun.
When a cashier rings it up, it is usually just the price from the tag. Your receipt doesn't have
anymore information on it than the number of items you purchased and the price for each.
This system is used by manufacturers and small businesses that don't have point of sale terminals.
If you wanna see this in action, go to your local neighborhood and find a small grocery store
or a convenience store that isn't part of a chain. They'll probably still be using the periodic method.
The perpetual inventory tracking system is the most common method nowadays because of advances in technology. It uses barcodes and
point of sale terminals to scan items into the warehouse and then scan them out when the sale occurs.
Most of your retail shopping experiences from businesses use the perpetual method.
Knowing which tracking system is being used is important because the accounting is different for each method.
But more on that in future videos.
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