ACCT 2020 1st Edition Lecture 6 Outline of Last Lecture II. The Basics of Adjusting Entries ContinuedIII. The Adjusted Trial Balance and Financial StatementsIV. Closing the BooksOutline of Current LectureII. Merchandising OperationsIII. Recording Purchases of MerchandiseCurrent LectureMerchandising OperationsMerchandising Companies buy and sell goods- The primary source of revenues is referred to as sales or sales revenueIncome 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 merchandiseFlow of Costs1) 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 Systemo Maintain detailed records of the cost of inventory purchase and saleo Records constantly show inventory that should be on hand for every itemo Company determines COGS (cost of goods sold) each time a sale occurs- Periodic Systemo Do not keep detailed records of the goods on hando Cost of goods sold determined by count at the end of the accounting periodo 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 Systemo Traditionally used for merchandise with high unit valueso Shows the quantity and cost of the inventory that should be on hand at any timeo Provides better control over inventories than a periodic systemRecording 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 purchaseIllustration: Sauk Stereo (the buyer) uses as a purchase invoice the sales invoice prepared by PWAudio Supply Inc. (the seller). Prepare the journal entry for Sauk Stereo for the invoice from PW Audio SupplyMay 4 Inventory $3,800A/P $3,800Freight Costs: terms of saleIllustration: 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 $150Cash $150Purchase 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 pricePurchase Discounts Credit terms may permit buyer to claim a cash discount for prompt payment Advantageso Purchaser saves moneyo Seller gets money faster Terms:o 2/10, n/30: 2% discount if paid within 10 days, otherwise net amount due within 30 dayso 1/10 EOM (end of month): 1% discount if paid within first 10 days of next montho n/10 EOM: net amount due within the first 10 days of the next montho 11th day no discount Should discounts be taken when offered?o Discount of 2% on $3,500 $ 70.00o $3,500 invested at 10% for 20 days 19.18o Savings by taking the discount $ 50.82Recording 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 thebuyer Sales invoice should support each credit saleJournal Entries to Record a Sale#1 Cash or A/R XXX Selling PriceSales Rev XXX#2 COGS XXX CostInventory XXXSales 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 saleso Could distort comparisonsSales Discount Offered to customers to promote prompt payment of the balance due Contra- revenue account (debit) to sales