Management Accounting I

July 2021
BMJ Term 1
Tuesday
(6 - 7pm)
debarati@xlri.ac.in
Merchandising Transactions
What’s different?
 Revenue from Sales
• Cash and credit sales: Earned when economic ownership passes from seller to buyer

• Sales returns and allowances

 Returns: goods returned by the buyer

 Allowances: defective goods are kept by the buyer at a reduced price

• Trade discounts: % reduction on list/catalogue price

• Cash discounts: % reduction on invoice price for early cash payment on credit sales;
eg: “2/10, n/45”
Basu, XLRI
 Deciding on Discounts
• M buys goods for 1,000 at 2/10, n/45

• Has to pay 1000 in 45 days or 980 in 10 da ys

• Trade off: Advance payment by 35 days for a discount of 20

• Annual rate of interest currently 15%

 Interest earned for 35 days = 15/100 * 980 * 35/360 = 14.29

 Required rate of interest = 360/35 * 2/98 = 21%

Basu, XLRI
 Purchases
• Purchases

• Purchase returns and allowances

• Purchase discounts

Net Purchases = Purchases – Purchase Returns and Allowances – Purchase Discounts

• Freight on purchases

Basu, XLRI
 Freight Costs
• Chargeable to ‘owner’ of goods

• Shipping terms:

 FOB shipping point: buyer incurs shipping costs

Sold merchandise of 5,000 FOB shipping point; lost in transit
 FOB destination: seller incurs shipping costs
Merchandise of 2,000 FOB destination; catches fire in transit

Net Cost of Purchases = Net Purchases + Freight-in

Basu, XLRI
 Cost of Goods Sold (COGS)
• Periodic inventory system: physical inventory taken

COGS = Beginning Inventory + Net Cost of Purchases – Ending Inventory

• Perpetual inventory system: continuous record of all purchases and sales

• Latter more complex and expensive

• More possible with the advent of computers!

Basu, XLRI
 The rest…

in a while,
Questions for Next Class
5.12

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5.12 contd

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5.13

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5.10

Basu, XLRI