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Accounting for Merchandise Operations Chapter 4 Income Statement Accounts Sales Revenue account Sales discounts Amounts deducted from sales price if customer meets certain payment terms 2/10, n/30 – 2% discount if paid within 10 days, or entire amount due within 30 days EOM – end of month

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income statement accounts
Income Statement Accounts
  • Sales
    • Revenue account
  • Sales discounts
    • Amounts deducted from sales price if customer meets certain payment terms
      • 2/10, n/30 – 2% discount if paid within 10 days, or entire amount due within 30 days
      • EOM – end of month
    • Sales returns and allowances
      • Amounts returned by customer, or price reductions given for various reasons
income statement accounts3
Income Statement Accounts
  • Presentation of net sales on the income statement
income statement accounts4
Income Statement Accounts
  • Purchases
    • Inventory purchased from suppliers
  • Purchase discounts
    • Discounts received from supplier for prompt payment
  • Purchase returns and allowances
    • Amounts returned to supplier, or price reductions granted by supplier for various reasons
income statement accounts5
Income Statement Accounts
  • Freight-in
    • Amount paid to have merchandise shipped from the supplier
      • Additional cost of the merchandise inventory
  • Delivery expense
    • Amount paid to deliver merchandise to the customer
income statement accounts6
Income Statement Accounts
  • Calculation of the cost of merchandise sold
inventory methods
Inventory Methods
  • Periodic
    • Inventory account does not change during the year
    • Purchases, purchase discounts, purchase returns and allowances are recorded in their respective accounts
    • No entry is made to record the cost of merchandise sold
    • Inventory is counted at year-end and records are adjusted at that time
inventory methods8
Inventory Methods
  • Perpetual
    • Any transaction affecting inventory is recorded in the inventory account
      • Purchases, purchase discounts, purchase returns and allowances, transportation-in accounts are not used
      • Cost of merchandise sold is recorded at the time of the sale
    • Provides “real-time” information on inventory levels and cost of merchandise sold
accounting for merchandise transactions
Accounting for Merchandise Transactions
  • Sales
    • Increase revenue (retained earnings) and increase cash or accounts receivable
  • Sales discounts
    • Sale is recorded at the gross amount
    • If customer pays within the discount period
      • Increase cash by the amount received
      • Decrease accounts receivable by the gross amount
      • Record the sales discount (decrease in retained earnings)
accounting for merchandise transactions10
Accounting for Merchandise Transactions
  • Sales returns and allowances
    • If the sale was for cash
      • Decrease cash
      • Record the sales return (decrease retained earnings)
    • If the sale was on credit
      • Decrease accounts receivable
      • Record the sales return (decrease retained earnings)
    • Record the return of the merchandise
      • Increase inventory
      • Reduce the cost of merchandise sold (increase retained earnings)
accounting for merchandise transactions11
Accounting for Merchandise Transactions
  • Purchases of merchandise from supplier
    • Periodic method
      • Record the purchase (decrease retained earnings)
      • Increase accounts payable or decrease cash
    • Perpetual method
      • Increase inventory
      • Increase accounts payable or decrease cash
accounting for merchandise transactions12
Accounting for Merchandise Transactions
  • Purchase discounts
    • Periodic method
      • Decrease accounts payable by the gross amount
      • Decrease cash by the amount paid
      • Record the purchase discount (increase retained earnings)
    • Perpetual method
      • Decrease accounts payable by the gross amount
      • Decrease cash by the amount paid
      • Decrease inventory by the amount of the discount
accounting for merchandise transactions13
Accounting for Merchandise Transactions
  • Purchase returns and allowances
    • Periodic method
      • Record the amount of the return or allowance (increase retained earnings)
      • Decrease accounts payable or increase cash
    • Perpetual method
      • Decrease inventory
      • Decrease accounts payable or increase cash
accounting for merchandise transactions14
Accounting for Merchandise Transactions
  • Transportation-in
    • Periodic method
      • Record transportation-in (decrease retained earnings)
      • Decrease cash or increase accounts payable
    • Perpetual method
      • Increase inventory
      • Decrease cash or increase accounts payable
statement of cash flows indirect method
Statement of Cash FlowsIndirect Method
  • Cash flows from operating activities may be calculated indirectly by starting with net income and adjusting for various items
    • Add depreciation and other non-cash expenses
    • Add (subtract) decreases (increases) in all current asset accounts except cash
    • Add (subtract) increases (decreases) in all current liability accounts
statement of cash flows indirect method16
Statement of Cash FlowsIndirect Method
  • Dr. B’s easy rule for the indirect method
    • If it sounds good, treat it as something bad
      • Did a current asset increase? That sounds good, so treat it as something bad (subtract the increase from net income)
      • Did a current liability increase? That sounds bad, so treat it as something good (add the increase to net income)