Case 1. Assume you are opening a Bed Bath & Beyond store. To finance the business, you need a $500,000 loan, and your banker requires a set of forecasted financial statements. Assume you are preparing the statements and must make some decisions about how to do the accounting for the business. Answer the following questions (refer back to Chapter 5 if necessary):
1. Which type of inventory system will you use? Give your reason. (p. 255) Inventory Systems: Perpetual and Periodic
There are two main types of inventory accounting systems:
• Periodic system
• Perpetual system
2. Show how to compute net purchases and net sales. How will you treat the cost of transportation-in? ...view middle of the document...
• A sales discount: If the customer pays within the discount period—under terms such as 2/10, n/30—Austin Sound collects the discounted amount.
• Freight out: Austin Sound may have to pay delivery expense to transport the goods to the buyer.
Let’s begin with a cash sale.
Sales of retailers, such as Austin Sound, grocery stores, and Old Navy, are often for cash. Suppose Austin Sound made a $3,000 cash sale and issued the sales invoice in Exhibit 5-5.
EXHIBIT 5-5 Sales Invoice
Cash sales of $3,000 are recorded by debiting Cash and crediting Sales Revenue as follows:
Austin Sound sold goods and, therefore, must decrease the Inventory balance. Suppose these goods cost Austin $1,900. A second journal entry is needed to transfer the $1,900 cost of the goods from the Inventory account to Cost of Goods Sold, as follows:
The Cost of Goods Sold account keeps a current balance throughout the period. In this example, cost of goods sold is not $3,000, because that’s the selling price of the goods. Cost of goods sold is always based on the entity’s cost, not the selling price.
After posting, the Cost of Goods Sold account holds the cost of the inventory sold ($1,900 in this case):
The computer automatically records the cost of goods sold entry. The cashier scans the bar code on the product and the computer performs this task.
Sale on Account
Most sales in the United States are made on account (on credit). A $5,000 sale on account is recorded as follows:
These goods cost the seller $2,900, so the related cost of goods sold entry is:
When the cash comes in, the seller records the cash receipt on account as follows:
Sales Discounts and Sales Returns and Allowances
In Class Tip
•These contra-revenue accounts must always be recorded as a debit.
We saw that purchase returns and allowances and purchase discounts decrease the cost of inventory purchases. In the same way, sales returns and allowances and sales discounts decrease the net amount of revenue earned on sales. Sales Returns and Allowances and Sales Discounts are contra accounts to Sales Revenue.
Sales Revenue −Sales Returns and Allowances −Sales Discounts = Net Sales Revenue1
Companies maintain separate accounts for Sales Discounts and Sales Returns and Allowances. Now let’s examine a sequence of JDC sale transactions. Assume JDC is selling to Austin Sound Center.
On July 7, JDC sells stereo components for $7,200 on credit terms of 2/10, n/30. These goods cost JDC $4,700. JDC’s entries to record this credit sale and the related cost of goods sold are:
1Often abbreviated as Net sales.
Assume that the buyer returns $600 of the goods. JDC, the seller, records the sales return as follows:
Accounts Receivable decreases because JDC will not collect cash for the returned goods.
JDC receives the returned merchandise and updates its inventory records. JDC must also decrease Cost of Goods Sold as follows (the returned goods cost JDC $400):...