Carter: Financial Accounting 60.201 Class #21

Financial statement reporting of accounts receivable:

Accounts receivable are reported as current assets on the balance sheet as follows.

Christopher Corporation
Balance Sheet
September 30
Assets
Current Assets
Cash and Cash Equivalents / $10,000
Accounts Receivable / $67,000
Less: Allowance for Uncollectible Accounts / 17,000 / 50,000
Merchandise Inventory / 270,000
Total Current Assets / $330,000
Property, Plant, and Equipment
Land / $70,000
Buildings / 220,000
Machinery and Equipment / 340,000
Total Property, Plant, and Equipment / $630,000
Other Assets / 10,000
Total Assets / $970,000
Liabilities and Stockholders' Equity
Liabilities
Current Liabilities
Accounts Payable / $135,000
Income Taxes Payable / 25,000
Wages Payable / 10,000
Total Current Liabilities / $180,000
Long-term Liabilities / 340,000
Total Liabilities / $510,000
Stockholders' Equity
Common Stock / $350,000
Retained Earnings / 110,000
Total Stockholders' Equity / $460,000
Total Liabilities and Stockholders' Equity / $970,000
Christopher Corporation
Income Statement
For the Month Ended September 30
Net Sales / $600,000
Cost of Goods Sold / 360,000
Gross Profit / $240,000
Operating Expenses
Supplies Expense / $13,000
Wages Expense / 131,000
Insurance Expense / 15,000
Rent Expense / 24,000
Uncollectible Accounts Expense / 12,000
Total Operating Expenses / $195,000
Operating Income / $45,000
Other Revenues and (Expenses) / 1,000
Income Before Taxes / $46,000
Income Taxes Expense / 16,000
Net Income / $30,000

Financial Reporting Summary

The following table summarizes the relationships among the major topics examined in this chapter.

Resources / = / Sources of Resources
Assets / = / Liabilities / + / Stockholders' Equity
Current Assets
Cash and cash equivalents (6)
Accounts receivable (7) / Revenues
Sales (7)
Sales returns & allowances (7)
Operating Expenses
Bank service expense (6)
Uncollectible accounts expense (7)
Other Revenues & Expenses
Interest revenue (6)
Interest expense (6)

Chapter 8: Merchandise Inventory

In this chapter you will learn about how merchandise inventory affects businesses, how it is controlled, accounted for, and reported in financial statements.

What is merchandise inventory?

resource.

products merchandising companies buy from suppliers and sell to customers.

Resources / = / Sources of Resources
Assets / = / Liabilities / + / Stockholders' Equity
Current Assets
Cash and cash equivalents (6)
Accounts receivable (7)
Allowance for uncollectible accounts (7)
Merchandise inventory (8) / Revenues
Sales (7)
Sales returns and allowances (7)
Operating Expenses
Bank service expense (6)
Uncollectible accounts expense (7)
Other Revenues & Expenses
Interest revenue (6)
Interest expense (6)

Merchandising: an overview

Merchandising companies attempt to increase their resources through the continuous process of buying products and selling them to customers at higher prices.

Step 1: the merchandising company purchases merchandise on credit from suppliers.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory / Step 1:
Accounts
payable

Step 2: the merchandising company sells merchandise on credit to customers.

Step 2A: the flow of merchandise to customers.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory / Step 1:
Accounts
payable
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory / Step 2A: Merchandise inventory / Step 1:
Accounts
payable / Step 2A:
Cost of goods sold

Step 2B: the flow of promises (accounts receivable) from customers.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory / Step 2A: Merchandise inventory / Step 1:
Accounts
payable / Step 2A:
Cost of goods sold
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory
Step 2B:
Accounts receivable / Step 2A: Merchandise inventory / Step 1:
Accounts
payable / Step 2A:
Cost of goods sold / Step 2B:
Sales

Step 3: the collection of cash from customers.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory
Step 2B:
Accounts receivable / Step 2A: Merchandise inventory / Step 1:
Accounts
payable / Step 2A:
Cost of goods sold / Step 2B:
Sales
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory
Step 2B:
Accounts receivable
Step 3:
Cash / Step 2A: Merchandise inventory
Step 3:
Accounts receivable / Step 1:
Accounts
payable / Step 2A:
Cost of goods sold / Step 2B:
Sales

Step 4: the payment of cash to suppliers.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory
Step 2B:
Accounts receivable
Step 3:
Cash / Step 2A: Merchandise inventory
Step 3:
Accounts receivable / Step 1:
Accounts
payable / Step 2A:
Cost of goods sold / Step 2B:
Sales
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory
Step 2B:
Accounts receivable
Step 3:
Cash / Step 2A: Merchandise inventory
Step 3:
Accounts receivable
Step 4:
Cash / Step 4:
Accounts payable / Step 1:
Accounts
payable / Step 2A:
Cost of goods sold / Step 2B:
Sales

Bookstore operations:

Step 1: the bookstore buys on account 100 accounting books for $33 each.

Step 2: the bookstore sells on account 100 accounting books for $42 each.

Step 3: the bookstore collects cash from all its customers.

Step 4: the bookstore pays its suppliers.

Step 1: the bookstore buys on account 100 accounting books for $33 each.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory $3,300 / Step 1:
Accounts
payable $3,300

Step 2A: the bookstore sells on account 100 accounting books for $42 each: the flow of merchandise to customers.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory $3,300 / Step 1:
Accounts
payable $3,300
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory $3,300 / Step 2A: Merchandise inventory $3,300 / Step 1:
Accounts
payable $3,300 / Step 2A:
Cost of goods sold $3,300

Step 2B: the bookstore sells on account 100 accounting books for $42 each: the flow of promises (accounts receivable) from customers.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory $3,300 / Step 2A: Merchandise inventory $3,300 / Step 1:
Accounts
payable $3,300 / Step 2A:
Cost of goods sold $3,300
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory $3,300
Step 2B:
Accounts receivable $4,200 / Step 2A: Merchandise inventory $3,300 / Step 1:
Accounts
payable $3,300 / Step 2A:
Cost of goods sold $3,300 / Step 2B:
Sales $4,200

Step 3: the bookstore collects cash from all its customers.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory $3,300
Step 2B:
Accounts receivable $4,200 / Step 2A: Merchandise inventory $3,300 / Step 1:
Accounts
payable $3,300 / Step 2A:
Cost of goods sold $3,300 / Step 2B:
Sales $4,200
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory $3,300
Step 2B:
Accounts receivable $4,200
Step 3:
Cash $4,200 / Step 2A: Merchandise inventory $3,300
Step 3:
Accounts receivable $4,200 / Step 1:
Accounts
payable $3,300 / Step 2A:
Cost of goods sold $3,300 / Step 2B:
Sales $4,200

Step 4: the bookstore pays its suppliers.

Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory $3,300
Step 2B:
Accounts receivable $4,200
Step 3:
Cash $4,200 / Step 2A: Merchandise inventory $3,300
Step 3:
Accounts receivable $4,200 / Step 1:
Accounts
payable $3,300 / Step 2A:
Cost of goods sold $3,300 / Step 2B:
Sales $4,200
Total
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
Step 1: Merchandise inventory $3,300
Step 2B:
Accounts receivable $4,200
Step 3:
Cash $4,200 / Step 2A: Merchandise inventory $3,300
Step 3:
Accounts receivable $4,200
Step 4:
Cash $3,300 / Step 4:
Accounts payable $3,300 / Step 1:
Accounts
payable $3,300 / Step 2A:
Cost of goods sold $3,300 / Step 2B:
Sales $4,200
$900 / $0 / $900

As a result of the four steps shown above,

Assets increased by

$900

Liabilities and stockholders’ equity increased by

$900

Net income was

$900

Net income is not only revenues minus expenses, but results in

increased resources

Stockholders' equity increased through

the closing process

Practice Exercise

The Christopher Corporation began its August operations with 50 units in inventory. Each unit cost the company $10. During August, the company purchased 250 more units at a cost of $10 each. The company sold 230 units during August at a price of $22 each. In August, the company’s operating expenses were $1,500 and its income taxes expense was $440.

Determine the Christopher Corporation’s August cost of goods sold.

A. $5,060 B. $2,300 C. $820 D. $2,760

B. $2,300

230 units sold x $10 cost price per unit) = $2,300

** You now have the background to do text exercise 8.1.