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Purchases and Sales of Merchandise, Cash Flows Chestnut Corp., a ski shop, opened for business on October 1. It uses a periodic inventory system. The following transactions occurred during the first month of business: Required: For all accounting equations, if a financial statement item is not affected, select "No Entry" and leave the amount box blank or enter "O". If the effect is negative, use the minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. October 1: Purchased three units from Elm Inc. for $250 total, terms 2/10, n/30, FOB destination. Activity Operating Accounts Account Payable Increase, Purchases Increase Statement(s) Balance Sheet and Income Statement Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record inventory purchased (increase to purchases) on account payable increase). How does this entry affect the accounting equation? Balance Sheet Income Statement Net Incor Assets = + Stockholders' + Equity 0 X No Entry Revenues Liabilities Accounts Payable Expenses No Entry 0 -250 X Purchases 250 x October 10: Paid for the October 1 purchase. Activity Operating Accounts Cash Decrease, Account Payable Decrease Statement(s) Balance Sheet only Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record payment of cash (decrease) reducing accounts payable (liability) and recording purchase discount (increase). Discount is 2% if paid within ten days. How does this entry affect the accounting equation? Balance Sheet Income Statement Net Income Assets + + Stockholders' + Equity 0 Revenues Liabilities Accounts Payable Expenses Cash 250 X -250 X No Entry No Entry October 15: Sold one unit for $200 cash. Activity Operating Accounts Cash Increase, Sales Revenue Increase Statement(s) Balance Sheet and Income Statement Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record receipt of cash (increase) for sales revenue (increase). How does this entry affect the accounting equation? Balance Sheet Income Statement Stockholders' + Net Assets Liabilities + Revenues Expenses Income Equity 200 Cash 200 No Entry [ 0 Sales Revenue 200 No Entry 0 200 October 18: Purchased ten units from Wausau Company for $800 total, with terms 2/10, n/30, FOB destination. Activity Operating Accounts Account Payable Increase, Purchase Increase Statement(s) Balance Sheet and Income Statement Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record inventory purchased (increase to purchases) on account payable (increase). How does this entry affect the accounting equation? Balance Sheet Income Statement NE Assets Stockholders' + Equity -800 X No Entry Revenues Expenses Liabilities Accounts Payable Incc No Entry 0 -800 x Purchases 800 x October 25: Sold three units for $200 each, cash. Activity Operating Accounts Cash Increase, Sales Revenue Increase Statement(s) Balance Sheet and Income Statement Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record receipt of cash (increase) for sales revenue (increase). How does this entry affect the accounting equation? Balance Sheet Income Statement Net Assets + Stockholders' + Equity 600 Revenues Expenses Liabilities No Entry Income Cash 600 0 600 No Entry 600 October 27: Paid for the October 18 purchase. Activity Operating Accounts Cash Decrease, Account Payable Decrease Statement(s) Balance Sheet only Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses 6) Record payment of cash (decrease) reducing accounts payable (liability) and recording purchase discount (increase). Discount is 2% if paid within ten days. How does this entry affect the accounting equation? Balance Sheet Income Statement Stockholders' + Net Assets Liabilities + Equity Revenues Expenses Income Cash -8,000 X Accounts Payable 0 x 800 X No Entry No Entry 2. Determine the number of units on hand on October 31. 9 units 3. If Chestnut started the month with $2,000, determine its balance in cash at the end of the month assuming that these are the only transactions that occurred during October. Why has the cash balance decreased when the company reported net income? The cash balance decreased because the entire inventory purchased and paid for was not yet sold. Purchases and Sales of Merchandise, Cash Flows Chestnut Corp., a ski shop, opened for business on October 1. It uses a periodic inventory system. The following transactions occurred during the first month of business: Required: For all accounting equations, if a financial statement item is not affected, select "No Entry" and leave the amount box blank or enter "O". If the effect is negative, use the minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. October 1: Purchased three units from Elm Inc. for $250 total, terms 2/10, n/30, FOB destination. Activity Operating Accounts Account Payable Increase, Purchases Increase Statement(s) Balance Sheet and Income Statement Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record inventory purchased (increase to purchases) on account payable increase). How does this entry affect the accounting equation? Balance Sheet Income Statement Net Incor Assets = + Stockholders' + Equity 0 X No Entry Revenues Liabilities Accounts Payable Expenses No Entry 0 -250 X Purchases 250 x October 10: Paid for the October 1 purchase. Activity Operating Accounts Cash Decrease, Account Payable Decrease Statement(s) Balance Sheet only Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record payment of cash (decrease) reducing accounts payable (liability) and recording purchase discount (increase). Discount is 2% if paid within ten days. How does this entry affect the accounting equation? Balance Sheet Income Statement Net Income Assets + + Stockholders' + Equity 0 Revenues Liabilities Accounts Payable Expenses Cash 250 X -250 X No Entry No Entry October 15: Sold one unit for $200 cash. Activity Operating Accounts Cash Increase, Sales Revenue Increase Statement(s) Balance Sheet and Income Statement Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record receipt of cash (increase) for sales revenue (increase). How does this entry affect the accounting equation? Balance Sheet Income Statement Stockholders' + Net Assets Liabilities + Revenues Expenses Income Equity 200 Cash 200 No Entry [ 0 Sales Revenue 200 No Entry 0 200 October 18: Purchased ten units from Wausau Company for $800 total, with terms 2/10, n/30, FOB destination. Activity Operating Accounts Account Payable Increase, Purchase Increase Statement(s) Balance Sheet and Income Statement Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record inventory purchased (increase to purchases) on account payable (increase). How does this entry affect the accounting equation? Balance Sheet Income Statement NE Assets Stockholders' + Equity -800 X No Entry Revenues Expenses Liabilities Accounts Payable Incc No Entry 0 -800 x Purchases 800 x October 25: Sold three units for $200 each, cash. Activity Operating Accounts Cash Increase, Sales Revenue Increase Statement(s) Balance Sheet and Income Statement Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record receipt of cash (increase) for sales revenue (increase). How does this entry affect the accounting equation? Balance Sheet Income Statement Net Assets + Stockholders' + Equity 600 Revenues Expenses Liabilities No Entry Income Cash 600 0 600 No Entry 600 October 27: Paid for the October 18 purchase. Activity Operating Accounts Cash Decrease, Account Payable Decrease Statement(s) Balance Sheet only Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses 6) Record payment of cash (decrease) reducing accounts payable (liability) and recording purchase discount (increase). Discount is 2% if paid within ten days. How does this entry affect the accounting equation? Balance Sheet Income Statement Stockholders' + Net Assets Liabilities + Equity Revenues Expenses Income Cash -8,000 X Accounts Payable 0 x 800 X No Entry No Entry 2. Determine the number of units on hand on October 31. 9 units 3. If Chestnut started the month with $2,000, determine its balance in cash at the end of the month assuming that these are the only transactions that occurred during October. Why has the cash balance decreased when the company reported net income? The cash balance decreased because the entire inventory purchased and paid for was not yet sold.