Cost of Goods Sold for a Merchandising Company – Explained

Merchandising Company

Merchandising companies buy goods and resell them at a higher price than the purchase price. Two types of merchandising company exist i.e. retail merchandising and wholesale merchandising.

The retail merchandising company sells products directly to masses i.e. to direct consumers of the product and the last in the chain of the product purchase to sales link.

On the other hand, the wholesale company buys the merchandises in bulk and sells them to retailers in less of volume. The volume in the wholesale merchandising company is very high than the retail merchandising company.

What are the merchandising activities?

There are many common activities despite structural differences between both retail and wholesale merchandising business. Both of these structures purchase and sell the same product and are engaged in the operating cycle.

The event of purchase means that a customer would buy in exchange for cash The retailer business is the customer of wholesale merchandising business. Further, the size of business would also decide various other factors of the business.

The activity of selling would be to buy goods for cash. Both the retail and wholesale companies are in the operating cycle. That means to purchase for retail business becomes the sale of wholesale business. This is how both these business complements each other.

The nature of merchandising business is trading and not manufacturing. These businesses do not make the products but rather help in the distribution chain of the product. Like all the companies, these companies would also have cost of goods sold statement.

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Cost of goods sold statement preparation for merchandising company is easier than to prepare for a manufacturing company.

Cost of Goods Sold in Merchandising company

Cost of goods sold needs to be deducted from sales in order to arrive at gross profit. It depicts the cost incurred for goods sold during the period.  Cost of goods sold is the sum of the cost of all the products of the merchandising company that were sold during the accounting period.

If the merchandising company use a perpetual system of inventory, cost of goods sold would be calculated at every point of sales being made.

Under the periodic inventory system used by company, cost of goods sold needs to be computed. Under this method, all the goods purchased are entered in the purchases account and not inventory account. 

No adjustment is required to inventory when sales are being made and likewise to cost of goods sold unlike in a perpetual system of inventory. Under this method, at the end of the year, one must look how much inventory was purchased and should count all the inventory physically and compute the cost of goods sold.

After adding opening inventory to the cost of purchases, cost of goods available for sale is obtained. The number of goods available for sale would equal to the cost of goods sold if all the goods on hand were sold with zero inventory on hand. In other words, available inventory is subtracted from goods available for sale to compute the cost of goods sold.

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Computation of cost of good sold under periodic inventory system:

Opening InventoryXXX
Add: PurchasesX
Goods available for saleXXX
Less: Closing inventoryX
Cost of goods soldXXX

Let’s take an example of merchandising company and compute cost of goods sold.

Sinra Inc sells ball pens to office supply stores and other retailers around the world. On the date of April 1, the company’s inventory was $101,000. During the year, the company purchased $1095,000 worth of ball pens.

A physical count of the inventory on March 31 revealed that there was $73,000 worth of pencils remaining. Compute the cost of goods sold for the year.

Opening Inventory101,000
Add: Purchases1095,000
Goods available for sale1196,000
Less: Closing inventory(73,000)
Cost of goods sold1123,000

Retail merchandising shops should take the inventory count at year-end if they are using periodic inventory. The more the count of inventory, it is better for the business as well. This is because the perpetual system updates inventory constantly, but the periodic system doesn’t.

Should consignment goods to be included in inventory for cost of goods sold?

The answer would be negative. The consignment is an arrangement with a third party who acts as middlemen between seller and customer and facilitates the sale of goods. The merchandiser generally acts as middlemen as they would sell these goods directly to retailers or the final consumers.

The merchandiser would not have any title to goods. To make consignment sale, the merchandiser pacts an agreement to receive the commission or some percentage of sales proceeds.

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