1. Quiz will occur either on Wed or Thurs next week. Thursday: Q&A 2 Unit 2: Chapter 5

2. PURCHASE DISCOUNTS Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due. For example 2/10 net 30 The buyer calls this discount a purchase discount. A purchase discount is based on the invoice cost less any returns and allowances granted.

3. Summary of Purchase transactions for buyer (Perpetual system) Purchase discount, purchase return, purchase and freight are recorded on Merchandise Inventory ledger account. P228 T account 2 Summary of Purchase entries

4. Sales transactions for seller (Perpetual system) As companies sell their products, their sales transactions are made of two components: May 4 (BB sold 30 units of $1000 Ipad) Accounts Receivable $30,000 Sales$30,000 COGS$20,000 Merchandise Inventory$20,000 2

5. Sales Tax Remember from G11 Acctg that businesses collect sales tax called HST (13%) for the government. HST payable is a liability account, which eventually goes to the government. We use HST recoverable when the business pays HST to a supplier. At the end of the fiscal period, the business pays net amount of HST (HST payable balance – HST recoverable balance) to the government. 2

6. Freight Costs Seller pays Freight only if the term was FOB Destination If seller had to pay: Freight Expense$50 Bank$50 2

7. Sales Returns and Allowances When the buyer returns merchandise inventory, the seller must record these returns. The seller refers to these transactions as “sales returns and allowances” Seller would debit a contra revenue account to Sales account called, “Sales Returns and Allowance”. By using contra account, managers can easily keep track of both original sales number and sales return number in IS. 2

8. Sales Returns and Allowances If the buyer returned half of what they bought in slide #4 on May 8, we will have to make the following entry: May 8 (Buyer returned 15 units of $1000 Ipad) SalesReturns$15,000 AR$15,000 Merchandise Inventory$10,000 COGS$10,000 2

9. Sales Discounts When buyer pays before 10 days, they get 2% discount (2/10, n/30), then the seller must record this discount amount in “Sales Discounts” account. 2% * 15000 = 300 Cash14700 Sales Discount 300 AR15000 2

10. Summary of Sales transactions for seller (Perpetual system) Sales returns, sales discounts are recorded in contra account of sales account. (Sales Return account and Sales Discount account) Sales return: You must reverse both revenue side and cost side of the transaction. P233 T account 2

11. Classwork / Homework P258 BE5-6, BE5-7 P260 E5-3 2

12. SALES TAXES Sales tax is expressed as a percentage of the sales price on selected goods sold to customers by a retailer. They are collected on most revenues, and paid on many costs. Sales taxes in Ontario is only harmonized sales tax (HST). HST is 13% in Ontario.

13. SALES TAXES ON REVENUES The retailer collects the tax from the customer when the sale occurs, and periodically (usually monthly) remits the collections to the CRA. Sales taxes are not revenue but are a current liability until remitted.

14. ILLUSTRATION 5-10 CALCULATION OF GROSS PROFIT Gross profit is often expressed as a percentage of sales. Gross profit margin = Gross profit / Net Sales Gross profit is calculated by deducting cost of goods sold from net sales as follows:

15. ILLUSTRATION 5-12 CALCULATION OF NET INCOME Net income is the “bottom line” of a company’s income statement. Profit Margin = Net Income / Net Sales Net income is calculated by deducting operating expenses from gross profit as follows:

16. ILLUSTRATION 5-14 This is the format of a multi-step income statement that has both operating and non- operating activities. As shown, the non- operating activities are reported immediately after the company’s primary operating activities.

17. CLASSIFIED BALANCE SHEET On the balance sheet, merchandise inventory is reported as a current asset and appears immediately below accounts receivable. This is because current assets are listed in the order of their liquidity.

18. USING THE INFORMATION IN THE FINANCIAL STATEMENTS It is a large current asset on the balance sheet It becomes a large expense on the income statement It is vulnerable to theft or misuse Inventory is particularly important because:

19. USING THE INFORMATION IN THE FINANCIAL STATEMENTS A balancing act is needed to ensure that a sufficient, but not excessive, quantity of inventory is on hand. Two ratios help evaluate the management of inventory: Inventory turnover Days sales in inventory

20. Classwork / Homework P262 E5.9 (Profitability ratio) P264 P5.3A (Record Inventory transactions – perpetual) P268 P5.8A (Calculate ratios and comment)