Chapter 2
MR. MOHAMMED BABIKER SPRING
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Purchase of Inventory
Merchant
prepares
purchase
order
Suppliers
send
merchandise
and a bill
Compares
MR. MOHAMMED BABIKER SPRING
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Purchase of Inventory Example
 On May 1, the Sporting Store acquired on
account $2,000 of various items for resale.
 The supplier sent the merchandise along
with a bill stating the quantity, price, and
terms of sale.
 What is the journal entry?
MR. MOHAMMED BABIKER SPRING
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Purchase of Inventory Example
May 1
Inventory
$2,000
Accounts Payable
$2,000
Purchased inventory on account
Inventory
Accounts Payable
2,000
2,000
MR. MOHAMMED BABIKER SPRING
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Recording Purchase Returns
and Allowances Example
 Assume that on May 4 a $100 item was
returned prior to payment of the invoice.
 What is the journal entry?
May 4
Accounts Payable
100
Inventory
100
Merchandise was returned
MR. MOHAMMED BABIKER SPRING
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Recording Purchase Returns
and Allowances Example
 Assume that one of the items of merchandise
is slightly damaged, and the store was given
a $10 allowance.
 What is the journal entry?
May 4
Accounts Payable
10
Inventory
10
Received aMR.purchase
allowance
MOHAMMED BABIKER SPRING
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Recording Purchase Returns
and Allowances Example
Inventory
2,000 100
10
Accounts Payable
100 2,000
10
Bal. 1,890
Bal. 1,890
MR. MOHAMMED BABIKER SPRING
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Purchase Discounts
 Credit terms are stated in expressions such as:
 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 SPRING
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Purchase Discounts Example
 Assume the Sporting Store purchased
merchandise for $1,000 with terms of
2/10, N/30.
 The store paid within the discount period.
 The 2% discount ($20) is deducted from the
amount due ($1,000) and $980 is remitted.
MR. MOHAMMED BABIKER SPRING
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Purchase Discounts Example
 What is the journal entry?
Accounts Payable 1,000
Cash
980
Inventory
20
To record payment of invoice within the
discount period
MR. MOHAMMED BABIKER SPRING
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Recording Transportation Costs
 Transportation costs are the cost of moving
inventory from seller to buyer.
 FOB stands for Free on Board and governs
the passing of title of the goods.
 Selling/buying agreements usually specify
FOB terms.
MR. MOHAMMED BABIKER SPRING
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Recording Transportation Costs
FOB Shipping Point
FOB Destination
MR. MOHAMMED BABIKER SPRING
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Freight Charges Example
 Assume that on May 9 the Sporting Store
paid $60 for freight.
 What is the journal entry?
May 9
Inventory
60
Cash
Paid a freight bill
60
MR. MOHAMMED BABIKER SPRING
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Objective 2
Account for the sale of inventory
MR. MOHAMMED BABIKER SPRING
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Sale of inventory
 The amount a business earns from selling
merchandise is called sales revenue
 Inventory that has been sold to customers is
called cost of goods sold
MR. MOHAMMED BABIKER SPRING
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Sporting Store Example
 Assume that on May 11 the store sold
merchandise costing $1,800 for $2,600
in cash.
 What are the journal entries?
MR. MOHAMMED BABIKER SPRING
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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 MR.
cost
of merchandise sold
MOHAMMED BABIKER SPRING
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Sporting Store Example
 On May 15, the store sold to Maria Gym
$5,000 worth of merchandise with a cost
of $3,000.
 Terms are 2/10, N/30.
Maria Gym
Total
Invoice
Terms 2/10, N/30
$5,000
MR. MOHAMMED BABIKER SPRING
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Sales Discounts and Sales
Returns and Allowances Example
 On May 17, Maria Gym returned $1,500
worth of goods that cost $900.
 In addition, a credit of $100 was allowed
for merchandise that was damaged.
 What are the journal entries?
MR. MOHAMMED BABIKER SPRING
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Sales Discounts and Sales
Returns and Allowances Example
May 17
Sales Returns
1,500
Accounts Receivable
1,500
Received returned merchandise
May 17
Inventory
900
Cost of Goods Sold
900
ReturnedMR.goods
toBABIKER
inventory
MOHAMMED
SPRING
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Sales Discounts and Sales
Returns and Allowances Example
May 17
Sales Allowance
100
Accounts Receivable
100
Credit granted for damaged goods
 There is no entry required for inventory
since the goods were not returned.
MR. MOHAMMED BABIKER SPRING
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Sales Discounts and Sales
Returns and Allowances Example
 On May 20, the store received a check from
Maria Gym for the balance due.
 What is the balance due?
Accounts Receivable May 15 = $5,000
Less May 17 returns and allowances $1,600
Equals May 20 balance
due of $3,400
MR. MOHAMMED BABIKER SPRING
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Sales Discounts and Sales
Returns and Allowances Example
 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 SPRING
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Objective 3
Use sales and gross profit
to evaluate a company.
MR. MOHAMMED BABIKER SPRING
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Sales Revenue
Net sales
=
Sales Revenue less Sales Returns and Sales Discounts
MR. MOHAMMED BABIKER SPRING
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Gross Profit or Gross Margin
Target Corporation
Income Statement (Adapted)
Year Ended December 31, 2000
Net sales revenue (same as Net sales)
Cost of goods sold (same as Cost of sales)
Gross profit (same as Gross margin)
Expenses:
Selling, general, administrative
Depreciation expense
Interest expense
Other expenses, net
Total operating expenses
MR. MOHAMMED BABIKER Net earnings (same as
NetSPRING
income)
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Millions
$33,212
23,029
10,183
7,490
854
393
302
9,039
$ 1,144
Operating Cycle of a Merchandising Business
Purchase and Cash Sale
Purchase and Sale on Account
Cash
Cash
Accounts
Receivable
Inventory
MR. MOHAMMED BABIKER SPRING
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Inventory