Acc 206 Week 3

Decision Cases

Case 1. Assume you are opening a Bed Bath & Beyond store. To finance the business, you need a $500,000 loan, and your banker requires a set of forecasted financial statements. Assume you are preparing the statements and must make some decisions about how to do the accounting for the business. Answer the following questions (refer back to Chapter 5 if necessary):

1. Which type of inventory system will you use? Give your reason. (p. 255) Inventory Systems: Perpetual and Periodic

There are two main types of inventory accounting systems:

• Periodic system

• Perpetual system

2. Show how to compute net purchases and net sales. How will you treat the cost of transportation-in? (pp. 260–263)

Summary of Purchase Returns and Allowances, Discounts, and Transportation Costs

Suppose Austin Sound buys $35,000 of audio/video inventory, takes a discount, and returns some of the goods. Austin Sound also pays some freight in. The following summary shows Austin Sound’s net cost of this inventory. All amounts are assumed for this illustration.

Sale of Inventory

Account for the sale of inventory

After a company buys inventory, the next step is to sell the goods. We shift now to the selling side and follow Austin Sound Center through a sequence of selling transactions.

The amount a business earns from selling merchandise inventory is called sales revenue (often abbreviated as sales). A sale also creates an expense, Cost of Goods Sold, as the seller gives up the asset Inventory. Cost of goods sold is the cost of inventory that has been sold to customers. Cost of goods sold (often abbreviated as cost of sales) is the merchandiser’s major expense.

After making a sale on account, Austin Sound may experience any of the following:

• A sales return: The customer may return goods to Austin Sound.

• A sales allowance: Austin Sound may grant a sales allowance to reduce the cash to be collected from the customer.

• A sales discount: If the customer pays within...