Accounting 2000 Chapter 5 Notes 1 Identify the differences between a service company and a merchandising company 2 Explain the recording of purchases under a perpetual inventory system 3 Explain the recording of sales revenues under a perpetual inventory system 4 Distinguish between a single step and a multiple step income statement 5 Determine cost of goods sold under a periodic system 6 Explain the factors affecting profitability Wholesalers retailers customers Example person who grows carrots walmart walmart customers In this chapter we will buy and sell goods Merchandising Companies Buy and sell goods Primary source of revenue is sales revenue Income Measurement Sales revenue cost of goods Gross profit Sold expense COGS is the total cost of goods sold during the period operating expense net income loss minus 1 Accounting 2000 Chapter 5 Notes Operating Cycles Which generally takes more time Merchandising Company Added the buying and selling of inventory Flow of Costs 2 Accounting 2000 Chapter 5 Notes 7 1 Beginning inventory 5 000 Cost of goods purchased 55 000 from wholesaler purchased Cost of goods available to sell 60 000 Beginning inventory Cost of goods purchased cost of goods available for sale Cost of goods sold 40 000 Ending inventory 20 000 Cost of goods available for sale cost of goods sold ending inventory Companies use either a perpetual inventory system or a periodic inventory system account for inventory Perpetual every time there s a sale it s recorded scanner method Periodic every time there s a purchase they put it on the list At the end of the year they count what they have left They subtract what they have left from what they have available mom and pop method What s the difference Perpetual scanner method o Maintain detailed records of the cost of each inventory purchase and sale o Records continuously show inventory that should be on hand o Company determines cost of goods sold each time a sale occurs 3 Accounting 2000 Chapter 5 Notes Periodic mom pop not actually using this 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 only one timer per accounting period o Calculation of Cost of Goods Sold Example Cindy s Boutique had 5 000 of inventory on hand at the start of the year During the year she purchased 60 000 of inventory At year end she counted inventory with a cost of 8 000 on hand What is her Cost of Goods Sold at year end Beginning inventory Add Purchases net Goods available for sale 5 000 60 000 65 000 Less Ending inventory 8 000 per count at year end Cost of goods sold 57 000 We will learn how to record inventory related transactions using the perpetual system 4 Accounting 2000 Chapter 5 Notes Perpetual method Let s Start with the Purchaser Recording Purchases Can be made using cash or credit accounts payable Normally recorded when goods are received Purchase invoice should support each credit purchase Seller Purchaser Credit terms Freight terms 5 Accounting 2000 Chapter 5 Notes Sauk Stereo the purchaser would record this purchase as 5 4 inventory asset up 3800 accounts payable liab up 3800 Assume upon delivery of the goods on May 6 Sauk Stereo pays Haul It Freight Company 150 for freight charges the entry on Sauk Stereo s books is Purchaser pays freight 5 6 inventory 150 Cash 150 We pay freight people in cash A Purchaser may be dissatisfied because goods are damaged or defective of inferior quality or do not meet specifications Purchase Return or Purchase Allowance return goods keep goods with a price reduction hate it gonna return it I want it to cost less bc its messed up Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing 300 5 8 Accounts payable liab down inventory asset down 300 300 Credit terms may permit buyer to claim a cash discount for prompt payment What were Sauk s credit terms 2 10 n 30 This means 2 discount if paid in 10 days balance due in 30 days 6 Accounting 2000 Chapter 5 Notes Assume Sauk Stereo pays the balance due of 3 500 gross invoice price of 3 800 less purchase returns and allowances of 300 on May 14 the last day of the discount period Prepare the journal entry Sauk Stereo makes to record its May 14 payment bought returned amount earned 3800 300 3500 amount owed 3500 x o2 70 amount discount c3500 70 3430 amount paid 5 14 Accounts payable 3500 cash inventory 3430 70 discount What if Sauk did paid on 5 15 Miss discount period 5 15 accounts payable 3500 cash 3500 What is the inventory balance after these transactions Inventory Purchase 5 4 3800 300 70 Freight 5 6 150 return 5 8 discount 5 14 3580 Now let s see the FLIP SIDE The Seller PW audio Recording Sales of Merchandise 7 Accounting 2000 Chapter 5 Notes Can be made using cash or credit accounts recievable Normally recorded when earned usually when goods transfer from seller to buyer Sales invoice should support each credit sale Assume PW Audio Supply records its May 4 sale of 3 800 to Sauk Stereo on account Illustration 5 5 as follows Assume the merchandise cost PW Audio Supply 2 400 TWO PART ENTRY 5 4 accounts receivable sales revenue 3800 3800 5 4 cost of goods sold COGS 2400 inventory 2400 Sales Returns and Allowances Flipside of purchase returns and allowances Contra revenue Sales not reduced debited because account debit Would obscure importance of sales returns and allowances as a percentage of sales Could distort comparisons Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a 300 selling price assume a 140 cost Assume the goods were not defective 5 8 Sales returns and allowance contra revenue acct 300 accounts receivables asset down 5 8 Inventory cost of goods sold COGS 140 300 140 8 Accounting 2000 Chapter 5 Notes Assume the returned goods were defective and had a scrap value of 50 PW Audio would make the following entries 5 8 sales returns and allowance Accounts receivable 5 8 inventory asset up COGS exp up 300 50 300 50 Sales Discounts Contra revenue acct Offered to customers to promote prompt payment Flipside of purchase discount Contra revenue account debit Assume Sauk Stereo pays the balance due of 3 500 gross invoice price of 3 800 less purchase returns and allowances of 300 on May 14 the last day of the discount period Prepare the journal entry PW Audio Supply makes to record the receipt on May 14 3800 300 3500 amount owed 3500 x 02 70 discount 3500 70 3430 amount paid 5 14 Cash Sales discounts sales rev Accounts