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Merchandising companies are called retailers. Merchandising companies that sell to retailers
are known as wholesalers.
Cost of goods sold: the total cost of merchandise sold during the period. Cost of goods
available = inventory + costs of goods purchased.
Companies use one of two systems to account for inventory:
1) Perpetual inventory system: companies keep detailed records of the cost of each
inventory purchase and sale. A company determines the cost of goods sold each
time a sale occurs
2) Periodic inventory system: companies determine the cost of goods sold only at
the end of the accounting period. There are a few steps necessary
 determine the cost of goods on hand at the beginning of the accounting period
 add to it the cost of goods purchased
 subtract the cost of goods on hand at the end of the accounting period.
Internal control: process designed to provide reasonable assurance regarding the
achievement of objectives related to operations, reporting and compliance is consist of all the
related methods and measures adopted within an organization to safeguard assets, enhance
reliability of accounting records, increase efficiency of operations and ensure compliance
with laws and records.
Receivables: amounts due from individuals and companies. Claims that are expected to be
collected in cash.
Types of receivables:
1) Accounts receivable: amounts customers owe on account. They result from the
sale of goods and services.
2) Notes receivable: written promise for amounts to be received. Normally requires
the collection of interest
3) Other receivables: nontrade receivables such as interest receivable, loans to
company officers, advances to employees and income taxes refundable. Usually
separately reported on the balance sheet.
Plant assets: recourses that have three characteristics. They have a physical substance, are
used in the operations of a business, and are not intended for sale to customers. Expected to
be of use to the company for a number of years. They are recorded at costs. Examples are:
land, land improvements, buildings, and equipment.
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Depreciation: the process of allocating the expense the cost of a plant asset over its useful
life in a rational and systematic manner. It is a process of cost allocation, not a process of
asset valuation.
Depreciation is generally computed using one of the following methods: Straight-line, Units-
of-activity, Declining-balance
Obsolescence: the process of becoming out of date before the asset physically wears out.
Two ways to classify corporations:
1) Purpose (profit or non-profit)
2) Ownership (publicly or privately held)
Two ways to classify corporations:
1) Purpose (profit or non-profit)
2) Ownership (publicly or privately held)
Characteristics of a corporation
- Separate legal existence from owners. Owners are not responsible.
- Limited liability of stockholders, usually to their investment.
- Transferable ownership rights. Buy and sell your stock.
- Ability to acquire capital. Low liabilities and transferable stocks.
- Continuous life.
- Corporation management.
- Government regulations. State laws, federal regulations, SEC laws and stock
exchange requirements
- Additional taxes. Owners and company pay different taxes.
Stockholder rights
1) Vote in election of board of directors at annual meeting and vote on actions that
require stockholder approval
2) Share the corporate earnings through receipt of dividends
3) Keep the same percentage ownership when new shares of stock are issued
(preemptive right)
4) Share in assets upon liquidation in proportion to their holdings. (residual claim)

Stock issue consideration:

Authorized stock, usually the authorized shares exceed the initially sold shares, because both
initial and subsequent shares are authorized. Insurance of stock direct or indirect issuing
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common stock to investors Market price of stock the interaction between buyers and sellers
determines the prices per share.