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6.1 Define and Describe Merchandising Operations

What is a Merchandising Business?​

A merchandising business is a business that buys finished goods and resells them to customers. The business doesn't manufacture the goods; it purchases them from suppliers and sells them at a markup.

Key Characteristics:

  • Buys finished goods (inventory)
  • Sells those goods to customers
  • Primary revenue source is sales of merchandise
  • Must track inventory (goods on hand)
  • Must calculate cost of goods sold

Types of Merchandising Businesses​

Retail Businesses:

  • Sell directly to end consumers
  • Examples: Clothing stores, grocery stores, electronics shops
  • Luxembourg examples: Fashion boutiques, supermarkets, specialty stores

Wholesale Businesses:

  • Sell to other businesses (retailers, restaurants, etc.)
  • Examples: Distributors, suppliers
  • Luxembourg examples: Food distributors, beverage wholesalers

E-Commerce Businesses:

  • Sell goods online
  • Examples: Online retailers, marketplaces
  • Luxembourg examples: Online shops, Amazon sellers

Mixed Businesses:

  • Combine service and merchandising
  • Examples: Restaurants selling retail items, service businesses with product sales
  • Luxembourg examples: Restaurants selling wine, cafes selling coffee beans

Merchandising vs. Service Businesses​

Service Businesses:

  • Provide services (not goods)
  • Revenue from services rendered
  • No inventory (or minimal supplies)
  • Examples: Consulting, accounting, legal services

Merchandising Businesses:

  • Sell goods (inventory)
  • Revenue from sales of merchandise
  • Must maintain inventory
  • Must calculate cost of goods sold
  • Examples: Retail stores, wholesale operations

Mixed Businesses (Like Marie's Restaurant):

  • Provide both services and sell goods
  • Must account for both separately
  • Service revenue and merchandise sales
  • Service expenses and cost of goods sold

The Merchandising Income Statement​

Merchandising businesses have a different income statement structure than service businesses:

Service Business Income Statement:

Revenue
- Operating Expenses
= Net Income

Merchandising Business Income Statement:

Sales Revenue
- Cost of Goods Sold
= Gross Profit
- Operating Expenses
= Net Income

Key Difference: Merchandising businesses must calculate Cost of Goods Sold (COGS), which represents the cost of inventory that was sold during the period.

Cost of Goods Sold​

Cost of Goods Sold (COGS) is the cost of the merchandise that was sold to customers during the period.

Formula: Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory

Components:

  • Beginning Inventory: Inventory on hand at start of period
  • Purchases: Goods purchased during the period
  • Ending Inventory: Inventory on hand at end of period

Example:

  • Beginning Inventory: €10,000
  • Purchases: €30,000
  • Ending Inventory: €12,000
  • Cost of Goods Sold: €10,000 + €30,000 - €12,000 = €28,000

Gross Profit​

Gross Profit is the difference between sales revenue and cost of goods sold. It represents the profit from selling merchandise before operating expenses.

Formula: Gross Profit = Sales Revenue - Cost of Goods Sold

Example:

  • Sales Revenue: €50,000
  • Cost of Goods Sold: €28,000
  • Gross Profit: €50,000 - €28,000 = €22,000

Gross Profit Margin: Gross Profit Margin % = (Gross Profit Ă· Sales Revenue) Ă— 100

Example:

  • Gross Profit Margin: (€22,000 Ă· €50,000) Ă— 100 = 44%

Inventory​

Inventory (also called merchandise or stock) consists of goods held for sale in the ordinary course of business.

PCN Classification: Class 3 (Inventory Accounts)

  • 321000: Merchandise (Marchandises)
  • 320000: Finished Goods (Produits Finis)
  • 300000: Raw Materials (Matières Premières)

For Retail Businesses:

  • Use 321000: Merchandise

For Restaurants:

  • Food ingredients: May use 300000 (Raw Materials) or 321000
  • Retail items (wine, merchandise): Use 321000

Luxembourg Context​

Common Merchandising Businesses in Luxembourg:

  • Retail clothing stores
  • Supermarkets and grocery stores
  • Electronics and appliance stores
  • Restaurants with retail sales
  • E-commerce businesses
  • Wholesale distributors

Luxembourg Compliance Note:

In Luxembourg, merchandising businesses must:

  • Maintain inventory records according to PCN (Class 3)
  • Value inventory properly (FIFO, weighted average)
  • Calculate cost of goods sold accurately
  • Apply correct VAT rates to different merchandise types
  • File accurate financial statements with RCS

Think It Through​

Marie's restaurant serves meals (service) but also sells wine bottles and coffee beans (merchandise). How should she account for these differently? What accounts would be involved for each type of sale?