Fundamentals of SENIOR

Accountancy, Business HIGH

and Management 1 (FABM 1) SCHOOL

Self-Learning

Nature of Module

7
Merchandising Business
666
Quarter 4
Fundamentals of Accountancy, Business and Management 1
Quarter 4 – Self-Learning Module 7: Nature of Merchandising Business
First Edition, 2020

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 Fundamentals of
SENIOR
Accountancy, Business HIGH
and Management 1 SCHOOL

(FABM 1)

Self-Learning

Nature of
Module

7
Merchandising Business
12
Quarter 4
Introductory Message
For the facilitator:

Welcome to the Senior High School – Fundamentals of Accountancy,

Business, and Management 1 Quarter 4 Self Learning Module on Nature of
Merchandising Business!

This Self-Learning Module was collaboratively designed, developed, and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st-century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator, you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
For the learner:

Welcome to Fundamentals of Accountancy, Business and Management 1

Quarter 2 Self Learning Module on Nature of Merchandising Business!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectations - This points to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.
 EXPECTATIONS
After going through this module, you are expected to:

1. distinguish between the activities and financial statements of service and

merchandising businesses.
2. define merchandising business; and
3. illustrate the operating of a merchandising business.

PRETEST

Directions: Write true if the statement is correct and false if it is incorrect.

_____1. Merchandising business is the same as the service business.

_____2. Merchandising companies earn income by buying and selling products or
merchandise.
_____3. When this merchandise is sold, the revenue is reported as fees earned, and
its cost is recognized as an expense called the cost of merchandise/goods sold.
_____4. The operating cycle begins with receiving cash from customers, and it ends
with spending for the business.
_____5. A merchandising business must first purchase the merchandise for sale.

RECAP

Directions: Write the correct letter of your answer in the space provided.
_____ 1. Statement 1: To simplify the recording of regular transactions in the next
accounting period, all adjusting entries are reversed.
Statement 2: Reversing entries are never required.
A. Only statement 1 is correct.
B. Only statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.
_____ 2. Statement 1: Not all adjusting entries are to be reversed.
Statement 2: Reversing entry is the exact opposite of adjusting entry made.
A. Only statement 1 is correct.
B. Only statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.
_____3. Reversing entries are
A. made to record a change in the company’s objective
B. optional
C. prepared before preparing a post-closing trial balance
D. required by generally accepted principles
_____ 4. The purpose of the reversing entries is to
A. bring the permanent accounts to zero
B. correct the adjusting entries made
C. simplify the recording of recurring transactions of the next accounting
period
D. update the temporary accounts
_____ 5. Statement 1: Not all of the adjusting entries need reversal.
Statement 2: Reversing entries are done at the start of a new accounting
period.
A. Only Statement 1 is correct.
B. Only Statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.

LESSON

How do the activities of the barber shop, an attorney, and an architect, which
are service businesses, differ from those of a sari-sari store or 7/11, which are
merchandising businesses?

These differences are best illustrated by focusing on the revenues and

expenses in the following condensed income statements:

Service Business Merchandising Business

Fees earned Phpxxx Sales Phpxxx
Operating Expenses (xxx) Cost of goods sold (xxx)
Net income Phpxxx Gross profit Phpxxx
Operating Expenses (xxx)
Net Income Phpxxx

The revenue activities of a service business involve providing services to

customers. On the income statement for a service business, the revenues from
services are reported as fees earned. The operating expenses incurred in providing
the services are subtracted from the fees earned to arrive at net income.

In contrast, the revenue activities of a merchandising business involve the

buying and selling of merchandise. A merchandising business must first purchase
merchandise to sell to its customers. When this merchandise is sold, the revenue is
reported as sales, and its cost is recognized as an expense called the cost of
merchandise sold. The cost of merchandise sold is subtracted from sales to arrive at
gross profit. This amount is called gross profit because it is the profit before
deducting operating expenses. Merchandise on hand (not sold) at the end of an
accounting period is called merchandise inventory. Merchandise inventory is
reported as a current asset on the balance sheet.

MERCHANDISING

➢ Is a type of business that buys and sells merchandise/goods to earn profit

Merchandise
• Represents goods or items intended for sale by a merchandiser in
the normal course of business operations.

THE OPERATING CYCLE

The operations of a merchandising business involve the purchase of

merchandise for sale (purchasing activity), the sale and distribution of the products
to customers (sales activity), and the receipt of cash from customers (collection
activity). This overall process is referred to as the operating cycle. Thus, the
operating cycle begins with spending cash, and it ends with receiving cash from
customers. Operating cycles differ, depending upon the nature of the business and
its operations.

For example, the operating cycles for tobacco, distillery, and lumber industries
are much longer than the operating cycles of the automobile, consumer electronics,
and home furnishings industries.

Likewise, the operating cycles for retailers are usually shorter than for
manufacturers because retailers purchase goods in a form ready for sale to the
customer. Of course, some retailers will have shorter operating cycles than others
because of the nature of their products. For example, a jewelry store or an automobile
dealer normally has a longer operating cycle than a consumer electronics store or a
grocery store.

Businesses with longer operating cycles normally have higher profit margins
on their products than businesses with shorter operating cycles. For example, it is
not unusual for jewelry stores to price their jewelry at 30%–50% above cost. In
contrast, grocery stores operate on very small profit margins, often below 5%.
Grocery stores make up the difference by selling their products more quickly.
 COMPARISON OF OPERATING CYCLE CYLE OF A SERVICE BUSINESS
AND A MERCHANDISING BUSINESS

The diagram below shows the comparison of the service and merchandising
operating cycle.

THE OPERATING CYCLE OF A BUSINESS

SERVICE BUSINESS MERCHANDISING BUSINESS

Collection

A/R

Render of
service

NOMINAL ACCOUNTS OF MERCHANDISING BUSINESS

The nature of the nominal accounts of a merchandising business is illustrated

in a Pro-forma Statement of Comprehensive Income shown below. (Figures are
assumed.)

ABM MERCHANDISING
Statement of Comprehensive Income
For the period ended, December 31, 2020

Sales ₱ 100,000
Less: Sales allowances ₱ 10,000
Sales returns 10,000 Selling Activities
Sales discounts 5,000 25,000
Net Sales ₱ 75,000
Less: Cost of sales 60,000 Purchasing Activities
Gross Profit ₱ 15,000
Less: Operating Expenses
Salaries Expense ₱ 6,000
Supplies Expense 1,500 Administrative and
Operating Activities
Freight-out 500 8,000
Net Income ₱ 7,000
 ACTIVITIES

Activity No. 1. Directions: Think of one merchandising business you

want to put up and describe or illustrate the operating cycle of your desired
business.

Activity No. 2. Directions: Based on your answers on activity no. 1, will you allow
to sell goods on the account and why?
 WRAP-UP

To summarize what you have learned from the lesson, answer the following
questions:

1. differentiate the income statement of service business from the income

statement of a merchandising business;

2. illustrate the operating cycle of a merchandising business; and

3. why it is important to purchase first before you sell your merchandise?

VALUING

Based on the activity #1 and #2 you have answered, give some

insights into what you have learned?

POSTTEST

Directions: Identify each item below. Write your answer before the item number.

_____1. Which of the following accounts is used in merchandising but not in service?
A. Depreciation expense
B. Allowance for bad debts
C. Sales return and allowances
D. Freight-out
_____ 2. Which of the following is equal to gross profit plus the cost of sale?
A. Beginning inventory
B. Goods available for sale
C. Ending inventory
D. Sale
_____ 3. Which of the following is equal to fees earned plus operating expenses?
A. Net Income
B. Cost of sales
C. Goods available for sale
D. Gross profit
_____ 4. Statement 1: The operations of a service business involve the purchase of
merchandise for sale (purchasing activity), the sale and distribution of the products
to customers (sales activity).
Statement 2: Operating cycles differ, depending upon the nature of the
business and its operations.
A. Only statement 1 is correct.
B. Only statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.
_____ 5. Statement 1: The revenue activities of a merchandising business involve
providing services to customers.
Statement 2: When merchandise is sold, the revenue is reported as fees
earned, and its cost is recognized as an expense called the cost of merchandise sold.
A. Only statement 1 is correct.
B. Only statement 2 is correct.
C. Both statements are correct.
D. Both statements are incorrect.
 KEY TO CORRECTION

C 5.
5. TRUE D 5.
C 4.
4. FALSE C 4.
B 3. A 3.
3. FALSE C 2. D 2.
2. TRUE A 1. C 1.
1. FALSE
PRETEST RECAP POSTTEST

References

Ballada, W. 2017. Fundamentals of Accountancy, Business, and Management 1.

VDomDane Publishers.

Banggawan, RB. Asuncion, DJ. 2017. Fundamentals of Accountancy, Business, and

Management 1. Real Excellence Publishing.

Ferrer, RC. Millan, CV. 2017. Fundamentals of Accountancy, Business, and

Management 1. Bandolin Enterprise. San Juan, DA. 2018. Fundamentals
of Accounting. Elmoer Publishing

Rabo, JS. Tugas,FC.Salendrez, HE. 2016. Fundamentals of Accountancy, Business,

and Management 1. Vibal Group Inc.

Manuel, Zenaida Vera-Cruz 18th Edition Accounting Process_Basic Concepts and

Procedures

Epstein, Lita, MBA Bookkeeping Workbook for Dummies. Wiley Publishing, Inc.

Hernane, Milagros B.,et.al 2014. Principles of Accounting. Allen Adrian Books Inc.

Valencia, Edwin G. 4th Edition. Basic Accounting (Concepts, Principles, Procedures and
Applications) . Valencia Educational Supply