BUS103: Introduction to Financial Accounting

Are you a leader? Would you enjoy someday becoming the president or chief executive officer (CEO) of the company you work for? Then you should consider a degree in accounting. The accounting field greatly values individuals with leadership potential. Accounting students with the most job offers and the highest starting salaries are also likely to be the ones who best demonstrate an ability to lead others. Recruiters in public accounting (i.e. auditing, tax, consulting) and private accounting (i.e. financial reporting, cost accounting, financial analysis, internal auditing) alike demonstrate a strong preference for students with leadership potential.

Fortunately, you do not have to run a company to demonstrate leadership abilities to college recruiters. Some examples of leadership potential that would look good on a resume include organizing a successful fund-raiser, participating effectively as an officer in a student club, or taking the lead in a group project. If you do not have a resume yet, stop by the career placement center at your college and ask them to assist you in preparing one. Many students at your level already have a resume, and it takes time to refine and develop an effective one. A well-prepared resume will be important for securing internship opportunities and part-time work in the business field, as well as for landing that first job upon graduation.

Did you know that the chief executive officers (CEO) of many of the largest manufacturing, merchandising, and service organizations in the United States have degrees in accounting? James Dimon of JPMorgan Chase, Gary C. Kelly of Southwest Airlines, Phil Knight of Nike, James J. Mulva of ConocoPhillips, and Indra K. Nooyi of PepsiCo all have degrees in accounting. It is really not that surprising that accounting majors are so successful, as accounting provides an excellent foundation in business. With a strong accounting foundation and the continued development of leadership abilities over your career, you might become a CEO yourself someday.

Your study of accounting began with service companies as examples because they are the least complicated type of business. You are now ready to apply the accounting process to a more complex business - a merchandising company. Although the fundamental accounting concepts for service businesses apply to merchandising businesses, merchandise accounting requires some additional accounts and techniques to record sales and purchases.

The normal flow of goods from manufacturer to final customer is as follows:

Manufacturers produce goods from raw materials and normally sell them to wholesalers. After performing certain functions, such as packaging or labeling, wholesalers sell the goods to retailers. Retailers sell the goods to final customers. The two middle boxes in the diagram represent merchandising companies. These companies buy goods in finished form for resale.

This chapter begins by comparing the income statement of a service company with that of a merchandising company. Then, we describe (1) how to record merchandise-related transactions (2) a classified income statement, and (3) the gross margin percentage. Finally, in the appendix we explain the work sheet and the closing process for a merchandising company.

Exhibit 32: Condensed income statements of a service company and a merchandising company compared