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Aug. 1 Purchased merchandise from Aron Company for $7,000 under credit terms of 1/10, n/30, FOB destination, invoice dated August 1
D: Merch Inventory $7000
C: Accounts Payable - Aron $7000
Aug. 5 Sold merchandise to Baird Corp. for $4,900 under credit terms of 2/10, n/60, FOB destination, invoice dated August 5. The merchandise had cost $3,000.
D: Accounts Receivable - Baird $4900
C: Sales $4900
Record cost of merchandise sold, $3,000.
D: Cost of Goods Sold $3000
C: Merch Inventory $3000
Aug. 8 Purchased merchandise from Waters Corporation for $6,000 under credit terms of 1/10, n/45, FOB shipping point, invoice dated August 8.
D: Merch Inventory $6000
C: Accounts Payable - Waters $6000
Aug. 9 Paid $120 cash for shipping charges related to the August 5 sale to Baird Corp.
D: Delivery Expense $120
C: Cash $120
Aug. 10 Baird returned merchandise from the August 5 sale that had cost Lowe's $500 and was sold for $1,000. The merchandise was restored to inventory.
D: Sales returns and allowances $1000
C: Accounts Receivable - Baird $1000
The merchandise, which had cost $500, was restored to inventory.
D: Merch Inventory $500
C: COGS $500
Aug. 12 After negotiations with Waters Corporation concerning problems with the purchases on August 8, Lowe's received a credit memorandum from Waters granting a price reduction of $600 off the $6,000 of goods purchased.
D: Accounts Payable - Waters $600
C: Merch Inventory $600
Aug. 14 At Aron's request, Lowe's paid $280 cash for freight charges on the August 1 purchase, reducing the amount owed to Aron.
D: Accounts Payable - Aron $280
C: Cash $280
Aug. 15 Received balance due from Baird Corp. for the August 5 sale less the return on August 10
D: Cash $ 3822
D: Sales Discounts $78
C: Accounts Receivable $3900
Aug. 18 Paid the amount due Waters Corporation for the August 8 purchase less the price allowance from August 12
D: Accounts Payable - Waters $5400
C: Merch Inventory $54
C: Cash $5346
Aug. 19 Sold merchandise to Tux Co. for $4,200 under credit terms of n/10, FOB shipping point, invoice dated August 19. The merchandise had cost $2,100.
D: Accounts Receivable - Tux Co. $4200
C: Sales $4200
Record cost of merchandise sold, $2,100.
D: Cost of Goods Sold $2100
C: Merch Inventory $2100
Aug. 22 Tux requested a price reduction on the August 19 sale because the merchandise did not meet specifications. Lowe's sent Tux a $700 credit memorandum toward the $4,200 invoice to resolve the issue.
D: Sales Returns & Allowances $700
C: Accounts Receivable - Tux $700
Aug. 29 Received Tux's cash payment for the amount due from the August 19 sale less the price allowance from August 22.
D: Cash $3500
C: Accounts Receivable - Tux $3500
Aug. 30 Paid Aron Company the amount due from the August 1 purchase.
D: Accounts Payable - Aron $6720
C: Cash $6720
Net Sales
Gross Sales - Sales returns, allowances, and discounts
Perpetual Inventory System
continually updates accounting records for merchandising transactions—specifically, for those records of inventory available for sale and inventory sold.
Periodic Inventory System
updates the accounting records for merchandise transactions only at the end of a period
FOB Shipping Point
Belongs to the buyer when being shipped
FOB Destination
Belongs to the buyer what it gets delivered
Gross margin ratio
(Net Sales - Cost of Goods Sold) / Net Sales
Merchandiser
earns net income by buying and selling merchandise
Wholesaler
is an intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers
Retailer
is an intermediary that buys products from manufacturers or wholesalers and sells them to consumers.
COGS
expenses of buying and preparing the merchandise
Merchandise Inventory
products that a company owns and intends to sell
The cost of this assets includes the cost incurred to buy the goods, ship them to store, and make them ready for sale.
Acid test Ratio
(Cash and cash equivalents + short-term investments + current receivables)/Current liabilities
Gross profit
Net sales - COGS
Identify the items making up merch inventory
Includes all goods that a company owns and holds for sale: goods in transit, goods on consignment, and goods damaged or obsolete
Identify costs of merch inventory
Includes costs of expenditures necessary to bring an item to a salable condition and location. Includes the cost of invoice minus any discount plus any incidental charges
Analyze the effects of inventory methods for both financial and tax reporting
FIFO: Lowest amount of COGS --> HIGHEST gross profit and net income
LIFO: Highest amount of cost of goods sold --> lowest gross profit and net income (temporary tax advantage)
Weighted average: results between FIFO and LIFO
Specific Identification: results depend on which units are sold
Analyze the effects of inventory errors on current and future financial statements.
If ending inventory is understated, in year 1 COGS is overstated and net income is understated. (Opposite in year 2)
If ending inventory is overstated, in year 1 COGS is understated and net income is overstated. (Opposite in year 2)
Lower of Cost or Market (LCM)
A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost.
Inventory Turnover
COGS/ Average Inventory
Days' Sales in Inventory
ending inventory/COGS x 365
Cost = $ necessary to bring item to salable condition and location
PRICE 75,000
TRANSPORTATION IN 2,400
INSURANCE 300
CLEANING 980
TOTAL COST 78,680
COGS Equation
Unit costs available for sale - Ending Income
Gross Profit
Sales - COGS
Income Statement
COGS = BI + Purchases - EI
If BI = EI, COGS = P
Internal Control System
Protect company assets
Ensure reliable accounting
Go by company policies
Promote efficient operations
These all help avoidable loses.
Sarbanes-Oxley Act (SOX)
Increase confidence in firms financial reports
For public companies
Principles of internal control
1. establish responsibilities
2. maintain adequate records
3. insure assets and bond key employees
4. separate record keeping from custody of assets
5. divide responsibility for related transactions
6. apply technological controls
7. perform regular and independent reviews
Limitations of internal control
*human error
* human fraud
Cost-benefit principle:
Benefits of system must exceed their cost
3 Guidelines to Control of Cash
Handling cash is separate from record keeping
Cash goes directly goes to bank
Cash given by check
Petty Cash
small payments (ex. postage, repairs, and supplies)
Establish the petty cash fund
D: Petty Cash
C: Cash
Reimbursing petty cash
list expenses as debits
credit cash
to increase: increase petty cash, decrease cash
to decrease: decrease petty cash, increase cash
Outstanding checks
are already subtracted from the books balance, and the bank reconciliation must be subtracted from the bank balance
Deposits in transit
Are already added to the book balance and must be added to the bank balance
Bank fees
are already subtracted from the bank balance and must be subtracted from the book balance
NSF checks
Are already subtracted from the bank balance, and must be subtracted from the book balance
Interest earned
Is already added to the bank balance, and must be added to the book balance
IMPORTANT
ONLY ITEMS RECONCILING THE BOOK BALANCE REQUIRE ADJUSTMENT!!
Days' sales uncollected
(accounts receivable/net sales) x 365