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UMass Amherst ACCOUNTG 221 - Events Affecting Sales

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Acct. 221 1st Edition Lecture 10 Outline of Last Lecture I. Transportation CostsII. DiscountsIII. Sales Returns and Allowances Outline of Current Lecture  Events Affecting Sales Lost, Damaged or Stolen Inventory Multistep Income Statement Other principals  Gross Margin Percentage Financing Merchandise InventoryCurrent Lecture Events Affecting Sales Sales of inventory often involves Inventory returns Purchases allowances Cash discounts Ex. 1) JPS sold on account merchandise with a list price of $8,500. Payment terms were 1/20 n/30. The merchandise had cost JPS $5,100.  Increase accounts receivable - Debit 8,500 Increases sales revenue (equity)- Credit 8,500 Increases cost of Costs Sold- Debit 5,100 Decrease inventory - Credit 5,100 Ex. 2) The customer in Event 1 returned inventory with a $1000 list price that JPS had sold with 1/10 n/30 payment terms. The merchandise had originally cost JPS $600. Decrease account receivableThese 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.- Credit 1,000 Sales Return- Debit 1,000 Increases Inventory- Debit 600 Decreases COGS- Credit 600 Ex. 3) JPS collected the balance of the account receivable from the customer that purchased the goods in event 1 within the discount period.  Decreases Accounts Receivable - Credit 7,425 Increases Cash- Debit 7,425 Ex. 4) JPS collected the balance of the account receivable from the customer that purchased the goods in event 1 but not within the discount period. Decreases Accounts Receivable- Credit 7,500  Decreases Cash- Credit 7,500 Lost, Damaged or Stolen Inventory Most merchandise companies experience some level of inventory shrinkage Reflects decreases in inventory for reasons other than sales to customers Multistep Income Statement Sales Minus: COGS = Gross Margin Minus: Operating Expenses =Income before taxes Minus: Income Taxes =Net Income Other principals  Lower of Cost or Market: Ending inventory is reported at the lower cost or market (MCM)) Market refers to the replacement cost of the merchandise This practice is in keeping with the generally accepted account principal of conservatism  Gross Margin Percentage This measure indicates how much of each sale dollar is left after deducting the cost of goods sold to cover expenses and provide a profit = Gross Margin/Net Sales- Other things being equal, the company with the higher gross margin percentage is pricing its product higher Financing Merchandise Inventory Borrow Money from bank  interest expense Use cash opportunity cost Purchase on account  higher priced and/or interestNet Sales = Sales Revenue- Sales returns, allowances and discounts Net Sales – COGS = Gross MarginOnly debit Sales revenue when closing ---- always use sales returns, allowances, and


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