2. Chapter 2 MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

3. Purchase of Inventory Merchant prepares purchase order Suppliers send merchandise and a bill Compares MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

4. Purchase of Inventory Example 4 On May 1, the Sporting Store acquired on account $2,000 of various items for resale. 4 The supplier sent the merchandise along with a bill stating the quantity, price, and terms of sale. 4 What is the journal entry? MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

5. May 1 Inventory $2,000 Accounts Payable $2,000 Purchased inventory on account Inventory Accounts Payable 2,000 2,000 Purchase of Inventory Example MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

6. Recording Purchase Returns and Allowances Example 4 Assume that on May 4 a $100 item was returned prior to payment of the invoice. 4 What is the journal entry? May 4 Accounts Payable 100 Inventory 100 Merchandise was returned MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

7. Recording Purchase Returns and Allowances Example 4 Assume that one of the items of merchandise is slightly damaged, and the store was given a $10 allowance. 4 What is the journal entry? May 4 Accounts Payable 10 Inventory 10 Received a purchase allowance MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

8. Recording Purchase Returns and Allowances Example Inventory 2,000 100 10 Bal. 1,890 Accounts Payable 100 2,000 10 Bal. 1,890 MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

9. Purchase Discounts 4 Credit terms are stated in expressions such as: 4 2/10, N/30, meaning that a discount of 2% is allowed if the invoice is paid within 10 days; otherwise the full (net) amount is due within 30 days. MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

10. Purchase Discounts Example 4 Assume the Sporting Store purchased merchandise for $1,000 with terms of 2/10, N/30. 4 The store paid within the discount period. 4 The 2% discount ($20) is deducted from the amount due ($1,000) and $980 is remitted. MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

11. Purchase Discounts Example 4 What is the journal entry? Accounts Payable 1,000 Cash980 Inventory 20 To record payment of invoice within the discount period MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

12. Recording Transportation Costs 4 Transportation costs are the cost of moving inventory from seller to buyer. 4 FOB stands for Free on Board and governs the passing of title of the goods. 4 Selling/buying agreements usually specify FOB terms. MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

13. Recording Transportation Costs FOB Shipping Point FOB Destination MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

14. Freight Charges Example 4 Assume that on May 9 the Sporting Store paid $60 for freight. 4 What is the journal entry? May 9 Inventory 60 Cash 60 Paid a freight bill MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

15. Objective 2 Account for the sale of inventory MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

16. Sale of inventory 4 The amount a business earns from selling merchandise is called sales revenue 4 Inventory that has been sold to customers is called cost of goods sold MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

17. Sporting Store Example 4 Assume that on May 11 the store sold merchandise costing $1,800 for $2,600 in cash. 4 What are the journal entries? MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

18. Sporting Store Example May 11 Cash 2,600 Sales Revenue 2,600 To record sale of merchandise May 11 Cost of Goods Sold 1,800 Inventory 1,800 To record the cost of merchandise sold MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

19. Sporting Store Example 4 On May 15, the store sold to Maria Gym $5,000 worth of merchandise with a cost of $3,000. 4 Terms are 2/10, N/30. Invoice Maria GymTerms 2/10, N/30 Total$5,000 MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

20. Sales Discounts and Sales Returns and Allowances Example 4 On May 17, Maria Gym returned $1,500 worth of goods that cost $900. 4 In addition, a credit of $100 was allowed for merchandise that was damaged. 4 What are the journal entries? MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

21. Sales Discounts and Sales Returns and Allowances Example May 17 Sales Returns 1,500 Accounts Receivable1,500 Received returned merchandise May 17 Inventory 900 Cost of Goods Sold900 Returned goods to inventory MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

22. Sales Discounts and Sales Returns and Allowances Example 4 There is no entry required for inventory since the goods were not returned. May 17 Sales Allowance 100 Accounts Receivable100 Credit granted for damaged goods MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

23. Accounts Receivable May 15 = $5,000 Less May 17 returns and allowances $1,600 Equals May 20 balance due of $3,400 Sales Discounts and Sales Returns and Allowances Example 4 On May 20, the store received a check from Maria Gym for the balance due. 4 What is the balance due? MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

24. Sales Discounts and Sales Returns and Allowances Example 4 Maria took advantage of the sales terms – 2/10, N/30. May 20 Cash 3,332 Sales Discounts 68 Accounts Receivable 3,400 Cash collected within the discount period MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

25. Use sales and gross profit to evaluate a company. Objective 3 MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

26. Net sales Sales Revenue less Sales Returns and Sales Discounts = Sales Revenue MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

27. Target Corporation Income Statement (Adapted) Year Ended December 31, 2000 Net sales revenue (same as Net sales)$33,212 Cost of goods sold (same as Cost of sales) 23,029 Gross profit (same as Gross margin) 10,183 Expenses: Selling, general, administrative7,490 Depreciation expense 854 Interest expense 393 Other expenses, net 302 Total operating expenses 9,039 Net earnings (same as Net income)$ 1,144 Net sales revenue (same as Net sales)$33,212 Cost of goods sold (same as Cost of sales) 23,029 Gross profit (same as Gross margin) 10,183 Expenses: Selling, general, administrative7,490 Depreciation expense 854 Interest expense 393 Other expenses, net 302 Total operating expenses 9,039 Net earnings (same as Net income)$ 1,144 Millions Gross Profit or Gross Margin MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16

28. Operating Cycle of a Merchandising Business Cash Inventory Cash Inventory Accounts Receivable Accounts Receivable Purchase and Cash SalePurchase and Sale on Account MR. MOHAMMED BABIKER - FALL-15/16 MR. MOHAMMED BABIKER - SPRING 15/16