ACCT 2020 1st Edition Lecture 6 Outline of Last Lecture II The Basics of Adjusting Entries Continued III The Adjusted Trial Balance and Financial Statements IV Closing the Books Outline of Current Lecture II Merchandising Operations III Recording Purchases of Merchandise Current Lecture Merchandising Operations Merchandising Companies buy and sell goods The primary source of revenues is referred to as sales or sales revenue Income Measurement Sales revenue less cost of goods sold equals gross profit less operating expenses equals net income loss Cost of goods sold is the total cost of merchandise Flow of Costs 1 beginning inventory 2 cost of goods purchased cost of available goods cost of goods sold ending inventory companies use either a perpetual inventory system or a periodic inventory system to account for inventory Perpetual System o Maintain detailed records of the cost of inventory purchase and sale o Records constantly show inventory that should be on hand for every item o Company determines COGS cost of goods sold each time a sale occurs Periodic System o Do not keep detailed records of the goods on hand o Cost of goods sold determined by count at the end of the accounting period o Calculation of Cost of Goods Sold These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Beginning inventory 100 000 Add Purchases 800 000 Goods available for sale 900 000 Less Ending Inventory 125 000 COGS 775 000 Advantages of the Perpetual System o Traditionally used for merchandise with high unit values o Shows the quantity and cost of the inventory that should be on hand at any time o Provides better control over inventories than a periodic system Recording Purchases of Merchandise Made using cash or credit A P on account Normally record when goods are received from the seller Purchase invoice should support each credit purchase Illustration Sauk Stereo the buyer uses as a purchase invoice the sales invoice prepared by PW Audio Supply Inc the seller Prepare the journal entry for Sauk Stereo for the invoice from PW Audio Supply May 4 Inventory 3 800 A P 3 800 Freight Costs terms of sale Illustration Assume upon delivery of the goods on May 6 Sauk Stereo pays Public Freight Company 150 for freight charges the entry on Sauk Stereo s book is May 6 Inventory 150 Cash 150 Purchase Returns and Allowances Purchaser may be dissatisfied because goods are damaged or defective of inferior quality or do not meet specifications Purchase return return goods for credit if the sale was made on credit or for a cash refund if the purchase was for cash Purchase allowance may choose to keep the merchandise if the seller will grant a reduction of the purchase price Purchase Discounts Credit terms may permit buyer to claim a cash discount for prompt payment Advantages o Purchaser saves money o Seller gets money faster Terms o 2 10 n 30 2 discount if paid within 10 days otherwise net amount due within 30 days o 1 10 EOM end of month 1 discount if paid within first 10 days of next month o n 10 EOM net amount due within the first 10 days of the next month o 11th day no discount Should discounts be taken when offered o Discount of 2 on 3 500 70 00 o 3 500 invested at 10 for 20 days 19 18 o Savings by taking the discount 50 82 Recording Sales of Merchandise Made using cash or credit on account Sales revenue like service revenue is recorded when the performance obligation is satisfied Performance obligation is satisfied when the goods are transferred from the seller to the buyer Sales invoice should support each credit sale Journal Entries to Record a Sale 1 Cash or A R XXX Sales Rev XXX 2 COGS XXX Inventory XXX Selling Price Cost Sales Returns and Allowances Flip side of purchase returns and allowances Contra revenue to sales revenue debit Sales not reduced debited because o Would obscure importance of sales returns and allowances as a percentage of sales o Could distort comparisons Sales Discount Offered to customers to promote prompt payment of the balance due Contra revenue account debit to sales revenue