Acct 221 1st Edition Lecture 10 Outline of Last Lecture I Transportation Costs II Discounts III 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 Inventory Current 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 receivable 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 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 interest Net Sales Sales Revenue Sales returns allowances and discounts Net Sales COGS Gross Margin Only debit Sales revenue when closing always use sales returns allowances and discounts