Purchase Inventory Costing 2200 On Account From Blue Compa

purchase Inventory That Cost 2200 On Account From Blue Company Unde

Purchase inventory that cost $2,200 on account from Blue Company under terms 1/10, n/30. The merchandise was delivered FOB shipping point. Freight costs of $110 were paid in cash. Returned $200 of the inventory because the inventory was damaged; the freight company agreed to pay the return freight cost. Paid the amount due on the account payable to Blue Company within the cash discount period. Sold inventory that had cost $3,000 for $5,000 on account, under terms 2/10, n/45. Received merchandise returned from a customer; the merchandise originally cost $400 and was sold to the customer for $710 cash during the previous accounting period; the customer paid $710 cash for the returned merchandise. Delivered goods FOB destination in the previous sale. Freight costs of $60 were paid in cash. Collected the amount due on the account receivable within the discount period. Took a physical count indicating that $7,970 of inventory was on hand at the end of the accounting period.

Paper For Above instruction

This paper provides a comprehensive analysis of the acquisition, management, and sale of inventory, exemplified through several transactions. Each step reflects essential accounting practices related to inventory, receivables, payables, and freight costs, demonstrating how these transactions are recorded and impact financial statements.

Introduction

Effective inventory management and accurate recording of transactions are essential components of financial accounting. Inventory transactions not only affect the balance sheet and income statement but also influence cash flow management, profitability, and operational efficiency. The following analysis will examine the typical purchasing, returning, selling, and freight handling processes, illustrating their implications for financial records and management decisions.

Inventory Purchase and Freight Costs

The initial transaction involves purchasing inventory worth $2,200 on account from Blue Company under terms 1/10, n/30. These terms specify a 1% discount if paid within ten days, with the net amount due within thirty days. The merchandise was delivered FOB shipping point, indicating the buyer assumes ownership and risk once the goods leave the seller's shipping dock. Freight costs of $110 were paid in cash, representing transportation costs directly attributable to the acquisition. According to accounting standards (FASB ASC 330-10-30), these freight costs are capitalized as part of the inventory cost because they are necessary to bring the inventory to its intended location and condition (Garrison et al., 2020).

Handling Damaged Inventory and Return Costs

A subsequent transaction involved returning $200 of damaged inventory to Blue Company. As the inventory was damaged, a return was initiated within the discount period, aligning with the company's standard credit policies. The freight carrier agreed to pay for the return freight, reflecting a reversal of transportation costs, which must be recorded appropriately. According to accounting standards, the sale discount benefit is recognized, and the return incurs a reduction in inventory and accounts payable (Kieso et al., 2019). The freight paid by the carrier is recorded as a liability, and the return freight cost reduces overall transportation expenses in the period.

Payment within Discount Period

The company paid the payable to Blue Company within the discount period, taking advantage of the 1% cash discount. The original payable was $2,200 minus $200 returned, totaling $2,000. Applying the 1% discount, the payment was $2,000 × (1 - 0.01) = $1,980. Recording this transaction reduces accounts payable and cash by the discounted amount, reflecting judicious cash management and adherence to terms (Weygandt et al., 2018).

Sale of Inventory and Revenue Recognition

Next, the sale involved inventory that cost $3,000, sold for $5,000 on account, under terms 2/10, n/45. The terms imply a 2% discount if paid within ten days, with the remaining balance due within 45 days. The sale increases revenue and accounts receivable, with the cost of goods sold (COGS) decreasing inventory and increasing expenses, impacting net income. Proper recognition of discounts and sales revenue aligns with revenue recognition standards (IFRS 15).

Return of Merchandise from Customer

The company received merchandise returned from a customer, originally costing $400 and sold for $710. The merchandise was paid for in cash, ensuring the receivable was settled. The return reduces sales revenue and accounts receivable, while inventory increases based on the returned goods. The cost of inventory is also reversed through COGS. Such returns impact gross profit and require proper journal entries to reflect the reduction in sales and inventory (Kieso et al., 2019).

Delivery Terms and Freight Costs

The goods sold under the previous transaction were delivered FOB destination, meaning ownership transferred when goods arrived at the customer's location. Freight costs of $60 were paid by the company in cash, representing delivery expense, which is recorded as freight-out or delivery expense, per standard accounting practices (Garrison et al., 2020). The distinction between FOB shipping point and FOB destination affects who bears freight costs and when inventory and expense recognition occurs.

Collection of Accounts Receivable within Discount Period

The company collected the accounts receivable from the customer within the discount period, allowing the realization of a 2% discount on the amount owed. This collection reduces accounts receivable and increases cash, reflecting efficient receivable management and liquidity (Weygandt et al., 2018). Accurate recording of discounts ensures proper revenue recognition and cash flow tracking.

Inventory Count and End-of-Period Valuation

A physical inventory count at period-end indicated on-hand inventory of $7,970. This figure is crucial for adjusting inventory records post-count and preparing accurate financial statements. Physical counts help identify shrinkage, damages, or errors in recording inventory transactions, essential for inventory valuation under the cost or net realizable value, whichever is lower (Kieso et al., 2019). Consistency in recording and valuation methods ensures reliability of financial reporting.

Conclusion

These interconnected transactions exemplify core principles of inventory and receivable management, emphasizing the importance of accurate recording, adherence to contractual terms, and the impact of logistics decisions like FOB shipping point versus FOB destination. Proper accounting for freight costs, returns, discounts, and physical counts is vital for delivering transparent, reliable financial statements and supporting strategic management decisions. Continued focus on inventory control, supplier and customer relationships, and internal controls will enhance financial performance and compliance.

References

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