First year

Chapter 5

The operating cycle and merchandising operations

:There are two systems to account for inventory

Perpetual inventory system (purchase – sale) -1

Periodic inventory system (purchase – sale) -2

Perpetual inventory system

:Example1

on 2\1 purchased merchandize from ahmed company, 5900$ price on account , credit -1
terms of 2/15,n/60 and FOB shipping point

On 3/1 returned to Ahmed company UN acceptable merchandise that had a invoice price -2
900$

On 17/1 sent a check to Ahmed Company for the 2/1 purchases, net of the discount and -3
the returned merchandize (assume date of payment 22/1)

on 18/1 paid 330$ for shipping charges on the 2/1 purchases -4

.Require: prepare journal entry to record the above transactions

Answer

Date Explanation Dr Cr
2/1 inventory 5900
A/P 5900
3/1 A/P 900
Inventory 900
17/1 A/P 5000
Cash 4900
Inventory 100
100 = 5000*2%
22/1 A/P 5000
Cash 5000
18/1 Inventory 330
Cash 330
 First year

:Example 2

on 2/1 purchased merchandize from William company, 12.250$ price on account, credit -1
terms of 2/15, n/30 and FOB shipping point

On 3/1 after negotiations received from William a 3.250$ allowance on the 2/1 purchases -2

on 17/1 sent a check to William company paying for the 2/1 purchases, net of the -3
discount and the allowance

On 18/1 paid 330$ for shipping charges on the 2/1 purchases -4

Required: prepare journal entry to record the above transactions

Answer

Date Explanation Dr Cr
2/1 Inventory 12.250
A/P 12.250
3/1 A/P 3.250
Inventory 3.250
17/1 A/P 9000
Cash 8.820
Inventory 180
180 = 9000*2%
18/1 Inventory 330
Cash 330

:Example 3

On 2/1 the company sold merchandize for 5000$, grating the customer terms of 2/15, -1
n/60 and the cost of merchandize is 3000$. That FOB destination

On 3/1 the customer in the 2/1 sales returned merchandize and received credit for -2
1000$. The merchandize which had cost 600$ is returned for the company assume
merchandize is not defective

On 17/1 received payment for the amount due from 2/1 less returned in 3/1 -3

)Assume date of payment 22/1 (

on 18/1 paid 80$ fright charges to transport merchandize to customer -4

: Required: prepare journal entries to record the above transactions

Answer
 First year

Date Explanation Dr Cr
2/1 A/R 5000
Sales revenue 5000

Cost of goods sold 3000

Inventory 3000
3/1 Sales returned and allowance 1000
A/R 1000

Inventory 600
Cost of goods sold 600
17/1 Cash 3920
Sales discount 80
A/R 4000
80 = 4000/* 2%
22/1 Cash 4000
A/R 4000
18/1 Fright out 80
Cash 80

Periodic inventory system

:Example 4

on 2\1 purchased merchandize from ahmed company , 5900$ price on account , credit terms of 2/15,n/60 -11
and FOB shipping point

On 3/1 returned to Ahmed company un acceptable merchandise that had a invoice price 900$ -2

On 17/1 sent a check to Ahmed company for the 2/1 purchases, net od the discount and the returned -3
merchandize (assume date of payment 22/1)

on 18/1 paid 330$ for shipping charges on the 2/1 purchases -4

Require: prepare journal entry to record the above transactions using periodic method

Date Explanation Dr Cr
2/1 Purchase 5900
A/P 5900
3/1 A/P 900
Purchase return and 900
allowance
17/1 A/P 5000
Cash 4900
Purchase cash discount 100
100 = 5000*2%
22/1 A/P 5000
Cash 5000
18/1 Fright in 330
Cash 330
 First year

:Example 5

on 2/1 purchased merchandize from William company, 12.250$ price on account, credit -1
terms of 2/15, n/30 and FOB shipping point

On 3/1 after negotiations received from William 3.250$ allowance on the 2/1 purchases -2

on 17/1 sent a check to William company paying for the 2/1 purchases, net of the -3
discount and the allowance

on 18/1 paid 330$ for shipping charges on the 2/1 purchases -4

Required: prepare journal entry to record the above transactions using period method

Date Explanation Dr Cr
2/1 Purchase 12.250
A/P 12.250
3/1 A/P 3.250
Purchase return and allowance 3.250
17/1 A/P 9000
Cash 8.820
Purchase cash discount 180
180 = 9000*2%
18/1 Fright in 330
Cash 330

:Example 6

On 2/1 the company sold merchandize for 5000$, grating the customer terms of 2/15, -1
n/60 and the cost of merchandize is 3000$. That FOB destination

On 3/1 the customer in the 2/1 sales returned merchandize and received credit for 1000$ -2
. The merchandize which had cost 600$ is returned for the company assume merchandize is
not defective

On 17/1 received payment for the amount due from 2/1 less returned in 3/1 -3

)Assume date of payment 22/1 (

on 18/1 paid 80$ fright charges to transport merchandize to customer -4

Required: prepare journal entries to record the above transactions suing periodic method
 First year

Answer

Date Explanation Dr Cr
2/1 A/R 5000
Sales revenue 5000

3/1 Sales returned and allowance 1000

A/R 1000

17/1 Cash 3920

Sales discount 80
A/R 4000
80 = 4000/* 2%
22/1 Cash 4000
A/R 4000
18/1 Fright out 80
Cash 80

Income statement

Net sales revenue

cost of goods sold )-(

gross margin =

operating expenses )-(

operating income =

other revenue and gains )+(

other expenses and losses )-(

income before taxes =

taxes )-(

net income =

:Some important equations

Net sales = sales revenue – sales return and allowance – sales discount -1

Net purchase = purchase – purchase discount – purchase return and allowance -2

Cost of goods sold = beg inventory + net cost of purchase – end inventory -3
 First year

Goods available for sale = beg inventory + net purchase -4

:Example 7

Argentina Company gathered the following condensed data for the year ended December
31, 2012

Cost of goods sold 750.000$

Net sales 1.250.000$

Operating expenses 275.000$

Interest expense 48.000$

Dividend revenue 38.000$

Loss from employees strike 185.000$

:Required

Prepare a single –step income statement for the year ended December 31.2012 -1

Prepare a multiple –step income statement for the year ended December 31.2012 -2

Answer

Net sales revenue 1.250.000

cost of goods sold 750.000 )-(

gross margin 500.000 =

operating expenses 275.000 )-(

operating income 225.000 =

other revenue and gains )+(

Dividend revenue 38.000
other expenses and losses )-(
Loss from employee strike 185.000
Interest expense 48.000

income before taxes 30.000 =

taxes 0 )-(

net income 30.000 =

 First year

Single -1

: Revenues
Net sales 1.250.000$
Dividend revenue 38.000

Total revenues 1.288.000

: Expenses
Cost of goods sold 750.000
Operating expenses 275.000
Loss from employee strike 185.000
Interest expense 48.000

Total expenses 1.258.000

Net income 30.000$