financial accounting chapter 5
Putting it all together now as the buyer
- Purchase Price + Shipping? FOB shipping - Purchase Returns - Purchase Discounts - Purchase Allowances = Inventory/ Net Purchases
factors that would cause the gross profit to rise are
- higher margin between average selling price and inventory cost - company offers less sales discounts/has less returns - company pays lower costs to its suppliers - company charges a higher markup on its products
think of Plato's Closet for a second, What is our inventory and COGS
- inventory is the cost of all clothing we have in stock. let's assume that our inventory includes 10 pairs of jeans that we paid $5 each for to poor college students. inventory is $50 - COGS is the cost to us of the jeans that we have currently sold. let's assume we have just sold 2 pairs of jeans for $40 each - the revenue is $80, cost of goods is $10 - Profit is $70
Voodoo Dog uses a perpetual inventory system. on jan 10, Voodoo sells 10,000 worth of inventory with terms 1/10, n/30. the customer pays on jan 14. what is the impact that will be made to the inventory on account on Jan 14
1/10: A/R 10k Sales Revenue 10k 1/14: 1%*10k = 100 Cash 9900 Sales Discount 100 A/R 10,000 - no impact inventory
Sales Revenue is 12k. Sales discount amounts to 300 and sales returns total $800. shipping for the gods totaled 500. calculate net sales
12k-300-800 = 10,900
samsung sells 25k worth of cellphones to T Mobile with terms 3/20, n/50 and FOB shipping point. Shipping costs are 1000. samsung accepts 5000 worth of returns. what are the net sales for samsung if t mobile makes the payment in 10 days
19400 Sales - Returns - Discounts 25k -5k- 600
Samsung sells 25k worth of cellphones to TMobile with terms 3/20, n/50 and FOB shipping point, Shipping costs are 1000. samsung accepts 5000 worth of returns. how much cash does samsung receive if payment is made 25 days after the sale date
20k (no discount)
ending inventory is 15k, beginning inventory is 25k and cost of goods purchased is 40k. what is the cost of goods sold
50k is COGS
sports authority purchases 10k worth of inventry from Nike with terms 1/15, n/30 and FOB destination. shipping costs were $300. sports authority returns $1000 worth of goods five days laters and pays the same day. what is the total value of the inventory from Sports Authority
8910 Purchase Price + Shipping - Returns - Discounts 10k- 1k-90
Dick's purchased 20k worth of merchandise inventory on account, they were given the credit term 3/10, n/30. what if Dick missed the deadline and paid on the 11th day. record journal entry
A/P debited 20k Cash debited 20k
since the customer paid by the deadline (balance of $800 in Accounts Receivable) he is entitled to a 10% discount. show entry
Cash 720 Sales Discount 80 A/R 800
Since the customer did not pay by the deadline (balance of 800 in Accounts Receivable) he is not entitiled to a 10% discount. show entry
Cash debited 800 Accounts Receivable credited 800
Gross Profit Rate
Gross Profit Rate = Gross Profit/ Net Sales - this measures the margin by which the selling price exceeds COGs - a higher gross profit rate indiciates that the company is making more off the sales of its merchandise. a higher rate can be due to a high markup on the price the product is selling for or paying a lower price to the suppliers of those products
Dick's Sporting Goods purchased merchandise inventory for $50,000 cash. show the journal entry
Inventory (debited) for 50k Cash (credited) for 50k
Dick's purchased $20k worth of merchandise inventory on account. they were given the credit terms 3/10, n/30. dick's paid on the ninth day. record the payment transaction
JE A/P 20k - recieved discount 3% * 20k = 600 Inventory Cash 20k- 600 = 19400
due to the incorrect size of balls sent to Dicks, Dicks had to return $4000 worth of the inventory previously purchased on account. what is the journal entry assuming we are the buyer
JE: A/P 4k Inventory 4k
Dick's (using the perpetual method) records revenue from sales, on account, of its goods at $20k. the cost of goods sold was 12k. what are the two events to record when Dick's sells the merchandise
JE: Revenue PArt A/R 20k Revenue 20k JE: Expense Part COGS Exp 12k Inventory 12k Gross Profit = Gross Margin = Net Sales Revenues - COGS
given the following: net income is 20k, operating expense is 25k and net sales is 80k. what is the cost of goods sold
Net sales - COGs = GM/GP - Operating Expense = Income from Operations = Net Income COGS = 35k
Dick's sells $10k worth of goods to BJ Inc with the following terms: 5/20, n 30 and FOB shipping point. the shipping cost were $500. BJs inc returned 2500 worth of damaged goods to Dick. assume that Bjs inc pays for the goods on th 6th day and after returning the damaged goods. show the entries for BJs (using the perpetual method) calculate the value of their inventory
PURCHASE Inventory debited 10k A/P credited 10k SHIPPING Inventory debited 500 Cash credited 500 RETURN A/P debited 2500 Inventory credited 2500 Discount 5% is what we keep 5% * 7500 = 375 A/P debited 7500 Cash debited 7125 Inventory credited 375
customers returned $200 of balls to Dick's because they were blue (previously purchased on account) the cost of goods was $150. record the two entries for Dick's using the perpetual method
Reverse Revenue Sales Returns debited 200 A/R credited 200 Reverse Expense Inventory debited 150 COGS credited 150
As the Seller
Sales - Sales Return - Sales Discounts - Sales Allowances = Net Sales
Dicks sells $10,000 worth of goods to BJs inc with the following terms: 5/20, n/30 and FOB destination point. the cost of the goods was 3000. the shipping costs were 500. bjs returned $2500 worth of damaged goods to Dicks. the cost to the seller of the returned goods was 750. assume that Bjs inc pays for the goods on the 6th day and after returning the damaged goods. show the entries for Dicks
Sales A/R debited 10k Rev credited 10k COGS debited 3k Inventory credited 3k Shipping Freight Out Expense debited 500 Cash credited 500 Sales Returns Sales Returns debited 2500 A/R credited 2500 Sales Discount 5%*7500 = 375 Cash 7125 Sales Discount 375 A/R 7500 Net Sales= 10k- 2500-375 = 7125
Checking our records, we see that the original price for the 1000 shirts is $5000. as an incentive, we offered our customer 50% off to keep the incorrect shirts. the journal entry to record the allowance is
Sales Returns and Allowances debited 2500 Accounts Receivable credited 2500
what is the purchase discount
WTF is 3/10, n/30 - it implies purchase is made on account it means a discount of 3% will be given to the purchaser if the company pays the discounted price for the merchandise within 10 days. if not, then the company must pay the FULL price within 30 days - 1/10 EOM? it means that a 1% discount will be given if payment is made within the first 10 days of next month n/30? no discount. buyer must pay net price within 30 days n/60? no discount. buyer must pay net price within 60 days n/15 EOM? no discount. buyer must pay net price within the first 15 days of next month - a discount is offered by the seller to accelerate the payment by the purchaser. this will shorten the operating cycle
what is a merchandising business
a merchandising business sells goods, not services. the operating cycle of a merchandising business is usually longer than that of a service company.
what is the difference between a perpetual and periodic inventory management system
a perpetual inventory system determines the cost of goods sold every time a sale occurs. thus, using a perpetual inventory system, a company records revenues and cost of goods sold throughout the period - using this method allows the company to keep track of the amount of inventory perpetually. it will also allow the company to know the cost of inventory on hand. there is more control of inventory using this method periodic inventory system determines the cost of goods at the end of the accounting period. there is no detailed accounting recrods of the goods on hand during the accounting period. thus, using the periodic inventory system, revenues are only recorded throughout the period use following formula COGS = BI + Net Purchases- EI GAFS = BI + Bet Purchases - perpetual is widely used nowadays with the technological advances of computer systems
what is a purchase return
a purchase return occurs when the buyer is not satisfied with the product and decides to send it back
a mutli step will have both gross profit/gross margin and income from operations
a single step will not have either
what is an allowance
an allowance occurs when the seller makes an error. for example, assume we sent the wrong color for an order of 1000 shirts. we would try to convince our customer to keep the shirts because paying for the shipping and restocking fee would be such a hassle. in order to do that, though, we might offer a financial incentive such as 50% off the order, for example
which of the following would affect the gross profit rate if sales are held constant?
an increase in cost of goods sold
COGS will appear on
both the single step and multi step - both methods will lead to the same net income figure - other items in nonoperating activites would include: dividend revenue, rent revenues, casualty losses (vandalism)
assume you are the buyer in a transaction involving inventory with terms of FOB shipping point. who is the responsible party and what account is impacted by the shipping charges
buyer, inventory
a service company
does not have to purchase inventory which reduces their operating cycle significantly
Dick's sold 1000 worth of merchandise to customers on account. the shipping terms for these orders were FOB destination point. shipping charges totaled $50 and were paid in cash. the goods have been delivered. record the entry for the shipping charges
freight out expense debited 50 cash credited 50 - the $50 is not part of inventory cost since it is not required to get the goods ready for sale. remember the goods had already beens old prior to Dick's shipping them - so if you are the seller of goods, YOU are responsible for shipping then you will debit shipping expense (freight out)
Net Sales - COGS = GP/GM
if we assume there are no returns or discounts, then sales - COGS = GP/Gm. or rearranging, we can solve for COGS
jorts authority purchased merchandise will a price of $1000 and credit terms of 2/10, n/30. assuming 360 days in a year, what is the implied interest rate inherent in the credit terms? what is the campfire is this?
interest rate formula interest = principal * rate * time
A sales discount is based on the sales price
less returns
quality of earnings ratio
net cash provided by operating actvities/ net income - a number significantly greater than 1 indicates more conservative accounting techniques. a number significantly less than 1 indicates more aggresive accounting techniques
Dick's sold $1000 worth of merchandise to customers on account. the shipping terms for these orders were FOB shipping point. shipping charges totaled $50 and were paid in cash. record the entry
no entry
the shipping terms for the above order (20,000 of merchandise inventory) were FOB destination point. the charges totaled $200 and were paid in cash. record the entry
no entry - seller responsible for shipping
Gross Profit - Operating Expense= Inc from Operations
or rearranging we can solve for operating expenses
profit margin ratio
profit margin ratio: net income/net sales - this measures the extent by which the selling price covers all expenses, not only COGS
assume you are the seller in a transaction involving inventory with terms FOB destination point, who is the responsible party and what account is impacted by the shipping charges
seller, freight out
what is the difference between a single step and multi step income statement
single step: income statement subtracts all expenses from all revenues in one step mutli step: income statement is a more detailed income statement that includes gross profit, income from operations, and net income. it is used for companies that sell inventory
a merchandising company
that sells directly to customers is a retailer (Walmart/Target)
how do we account for a seller's shipping charges
the actual shipping is done by FedEx/UPS
the operating cycle
the amount of time it takes to get goods from production to the consumer and recieve the cash
the shipping terms for the above order (20k of merchandise inventory) were FOB shipping point.
the charges totaled 200 and were paid in cash. record the entry Inventory debited 200 Cash credited 200
what are the advantages of the perpetual inventory system
the perpetual system is traditionally used with expensive inventory - maintains better record of current inventory - cost and quantity are available at all times - provides more control of inventory- companies know immediately whether more or less production needs to occur
how are the sales discounts accounted for
to account for a discount to a customer, the contra revenue account, Sales Discounts, must be debited
how are sales returns accounted for
to account for a return, the contra-revenue account, Sales Returns and Allowances, must be debited. we do not make any adjustment to sales since it would be difficult to make changes to financial statements if the goods returned dame from a previous period. furthermore, companies want to have an easy way of keeping track of returns and allowances
Franks and Beans INC uses a PERPETUAL INVENTORY SYSTEM. the company purchased 10,000 of merchandise on Sept 1 with terms 2/15, n/30 from Dog et al. the cost of the goods to Dog et al is $4000. the company returned $1000 worth of merchandise on Sept 4 (which had a cost to Dog et al of $400) and paid the balance on Sept 16
what is the correct journal entry for Dog et al Sept 1 a) A/R debited 10k Rev credited 10k b) COGs debited 4k Inventory credited 4k What is the correct journal entry for Dog et al on Sept 4 a) Sales Returns debtied 1000 a/R credited 1000 Inv debited 400 COGS credited 400 What is the correct journal entry for Dog et al on Sept 16 2% *9k =180 Cash 8820 Sales Discount 180 A/R 9k
What is the FOB shipping point and destination point
when considering shipping, please remember that one party is hiring FedEx or US to do the shipping. the buyer or seller do not do the actual shipping FOB shipping point (freight in) means the buyer is responsible for the shipping charges FOB destination point (freight out) means the seller is responsible for the shipping charges
a merchandising company
will have an extra account on its income statement compared to a service company. that account is cost of goods sold
a merchandising company
will have an extra account under assets compared to a service company. that account is inventory
a wholesaler
will sell goods to businesses that will then sell to customers (Costco/Sams)
