UNIT # 11 -INVENTORIES TUTORIAL - INITIAL TUTORIAL - COMPLETED

INSTRUCTIONS FOR UNIT # 11

~ In Unit #10 you prepared closing entries to measure profit or loss and the change to equity. At his point we've established the sequence of recording, adjusting, and closing transactions. Before looking at financial statements, we'll introduce the accounting treatment of inventory. ~ When inventory is acquired it is an asset; when sold it is an expense. In this tutorial we will use the perpetual system in which a company has an information system to track the purchase, sale, and current balance. The sequence of journal entries works this way: ~ When purchased, record to the inventory account and the related accounts payable or cash account. Inventory is recorded at cost. ~ If part of the inventory is returned, reduce the payable and inventory account. ~ When selling inventory with credit, record to accounts receivable and sales. Inventory is sold at price. The difference between price and cost is gross profit or margin. For example, if cost is $50 and price is $ 90, $ 40 is gross profit or margin. A business must have sufficient gross profit to cover it's operating expenses and provide a profit. A second entry must happen when a sale occurs; record to an expense account called cost of merchandise sold. These two entries comply with the matching principle which requires that revenues and expenses be recorded in their proper time period. Therefore, if a sale occurs the matching expense must also be recorded. ~ When selling inventory for cash, follow the same sequence except record to cash. ~ When selling for Visa or Mastercard, record to cash as banks recognize the credit card slip as a deposit to cash. ~ When selling inventory for American Express, record to accounts receivable as American Express requires the seller to send in the slips and they in turn will mail the cash less a deduction for their fee; this deduction is recorded as credit card expense by the seller. For example, on a $ 50 sale, the seller receives $ 45; the $ 5 is treated as credit card expense. ~ When previously sold merchandise is returned, debit to sales returns and allowances and credit to accounts receivable. This shows the reduction to the sale and reduces the receivable. ~ If merchandise is sold at a discount, e.g. 2/10/n30 means 2% discount granted if paid in 10 days; reason: to accelerate cash flow. When this happens, a sales discount account is setup to record the discounts. ~ If taking a discount on merchandise bought, a purchase discount account is setup. ~ Tutorial #11 Initial is setup to record ten entries. Enter the correct accounts( HIT THE SPACE BAR 3 TIMES FOR CREDITS) and amounts in the columns. The column on the right, Accounts, will display a response of " Correct" or "Not correct". It will also display on the left "In balance" or "Not in balance" to assure the equality of debits and credits. The ten entries are: 1. Buying inventory on credit, $ 525. 2. Returning inventory, $ 25. 3. Buying inventory with cash, $ 400.

INSTRUCTIONS FOR UNIT # 11

4. Selling inventory on credit, $ 810; recording the cost of the merchandise sold and the reduction to inventory, $ 400. 5a. Selling inventory for cash, $ $ 100; recording the cost of the merchandise sold and the reduction to inventory, $ 50. 5b. Selling inventory with Visa or Mastercard, $ 90; recording the cost of merchandise sold and reduction to inventory, $ 45. 6. Selling inventory with American Express, $ 90; recording the cost of merchandise Sold and reduction to inventory, $ 45. 7. Recording sales returns of $ 10. The $ 10 was from a credit sale. 8. Collecting cash on a receivable of $ 800; 2% of the $ 800 was a sales discount; 98% was collected as cash. 9. Collecting cash from an American Express sale. The receivable was $ 90, $ 5 was kept by American Express and $ 85 was received as cash. 10. Made a payment on accounts payable. The payable was $ 500, 2% was taken as discount and 98% was paid. ~ Tutorial # 11 Completed has the correct accounts and amounts to include "In balance". ~ These transactions are significant to most companies as they show how buying and selling inventory can change the financial position of a company. With many companies using point of sale terminals and computerized sales and inventory systems, these entries are recorded in "real time", i.e. as they occur. We'll now show the significance of that change to financial position. ~ When a company sells inventory it has bought, the difference between the price to the customer and the cost to the merchant is called gross profit or margin. It is a critical number as the amount of gross profit or margin must be sufficient to cover operating expenses and generate a profit. Accordingly, well compute the gross profit from the above transactions: ~ At the bottom of the Tutorial #11 Initial there is a section titled Computing gross profit or margin and Computing ending inventory. The entries for these computations are based on the transactions you have entered above. Transactions # 1 and 4 have been entered for you to demonstrate how this works. Note how the ending inventory has been computed. A response of " Reconciled " appears to show that calculation. Also, look at the two percents, gross profit rate and cost compliment. They show the percentage of gross profit and product cost (called cost compliment) to net sales. Those percentages are watched carefully by managers to see if the company is "on target" for goals or budgets. ~ When you complete the entering of the ten transactions, look at these computations as they summarize their financial impact. They appear at the bottom of Tutorial #11 Completed.