FNEC 3605 Ch 6

Sales Discounts (Credit terms to encourage early payment) 2/10, n/30, A 2% discount is offered if payment is made within 10 days, the full amount (net) is due within 30 days Recording the sale of $500 of inventory with a cost of $300

1/ 15 Accounts Receivable 500 Sales Revenue. 500 COGS 300 Inventory 300

Sales Returns -Recording the sale of merchandise for $500 with a cost of $300. Then recording 1/4 because part of the shipment was the wrong color

1/15 Accounts Receivable 500 Sales Revenue. 500 COGS. 300 Inventory. 300 1/20 Sales Returns and Allowances 125 Accounts Receivable. 125 Inventory 75 COGS. 75

Net Cost Method

12/ 1 Inventory .98 x 100= 980 Accounts Payable. 980 12/8 (within the discount period) Accounts Payable 980 Cash 980 12/15 (without the discount period) Accounts Payable 980 Purchase Discount Lost 20 Cash. 1000

Gross Price Method (to record $1000 of merchandise with credit terms of 2/10, n/30)

12/1 Inventory 1000 Accounts Payable 1000 12/8 Accounts Payable 1000 Inventory 20 Cash. 980 12/15 (assuming no discount) Accounts Payable 1000 Cash. 1000

Example: Merchandise costs $1000 plus $50 for shipping with credit terms 2/10 and n/30.

3/1 Inventory 1050 Accounts Payable 1050 3/1 (Shipping not traceable) Inventory 1000 Shipping Expense 50 Accounts Payable 1050 3/5 Accounts Payable 1050 Inventory. 20 Cash 1030

Basic entry for purchase return

Accounts Payable xxx Inventory. xxx or Cash xxx Inventory xxx

Basic Entry to Record a Sale and the Issue Accounting Methods Must Address

Accounts Receivable/ Cash xxx Sales Revenue xxx (To record the sales at the sales price and asset that revenue generated) COGS xxx Inventory xxx

What does 2/10, n/30 mean?

Additional 2% cash discount if paid with 10 days of the invoice date; net amount (Full Amount) is due in 30.

2/10, n/30, A 2% discount is offered if payment is made within 10 days, the full amount (net) is due within 30 days Recording the cash collection within the discount period

Cash (500 x .98)= 490 Sales Discounts 10 Accounts Receivable 500

Basic entry for the purchase of inventory

Inventory xxx Accounts Payable xxx or Inventory xxx Cash. xxx

Transportation costs are _____________ in any calculations for credit term discounts. They are added separately.

NOT INCLUDED

Discounts lost are treated as a

Non-operating expense or "Other Expense" on a multi-step income statement and often classified as interest expense -Think of opportunity cost

Net Sales equals

Sales Revenue - Sales Discounts- Sales Returns

Income Statement Presentation

Sales Revenue 100,000 Less: Sales Discounts. (3000) Less: Sales Returns. (2000) Net Sales. 95,000 COGS. 50,000 Gross Profit. 45,000 Operating Expenses: Continue Income Statement Presentation

Net Sales equals (longer answer)

Sales Revenue- Sales Discounts- Sales Returns- Cost of Goods Sold

Gross Price Method: Note

The inventory is reduced by the amount of the discount, leaving the balance of the inventory at the same amount paid for that inventory. If the discount cannot be traced to specific inventory, the purchase discounts taken account is used and closed to (reduces the total) COGS at the end of the accounting period

Moreover, Net Cost Method means

Using discount rate (so assuming you will get discount within the time period) and then adding purchase discount lost (as an expense) if paid beyond period

Shipping Terms

When shipping costs are the responsibility of the buyer they are included as part of the inventory if they can be traced to specific inventory purchases. If not traced to specific inventory, then they are recorded as Transportation-In (shipping expense) and added to COGS at the end of the period.

Shipping Terms (Seller side)

When shipping costs are the responsibility of the seller, they are treated as an operating expense as incurred Shipping Expense 50 Cash/Accounts Payable 50

Sales Returns and Allowances is a ________ which is reported as a separate line item on the income sheet as a reduction in sales revenues

contrarevenue

The sales discount is a _____________ which is reported as a separate line item on the income statement as a reduction in sales revenues.

contrarevenue

Gross Profit equals

net sales - cost of goods sold