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Lecture 8

MGMT 1A Lecture Notes - Lecture 8: Cash Flow Statement, Historical Cost, The Royal And Ancient Golf Club Of St AndrewsPremium


Department
Management
Course Code
MGMT 1A
Professor
Gardner
Lecture
8

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MGMT 1A Lecture 8 Notes - Accounting for Merchandising Operations
I. Types of Business Activities
A. Service Companies
B. Merchandising Companies
C. Manufacturing Companies
II. Accounting for Sales of Manufacturing Companies and Purchases made by
Merchandising Companies
CASE 1: Nike sells shoes with a list price (retail price) of $2000 to Footlocker. Footlocker
receives a 40% Trade Discount (wholesale price). Nike’s cost to manufacture the shoes is 25% of
the RETAIL price. Therefore:
List (Retail): $2000
Wholesale: $1200 (2000*0.6)
Cost to Manufacture: $500 ($2000*0.25)
SELLER - NIKE - GROSS
What is Nike’s journal entry when Nike sells
the shoes on account to Footlocker?
DR. A/R $1200
 CR. SALES $2000
DR. COGS $500
 CR. INVENTORY $500
BUYER - FOOTLOCKER - GROSS
What is Footlocker’s journal entry when
Footlocker buys the shoes on account?
DR. MERCH. INV. $1200
 CR. A/P $1200
What is Nike’s journal entry when Nike
receives payment from Footlocker?
DR. CASH $1200
 CR. A/R $1200
What is Footlocker’s journey entry when
Footlocker pays Nike?
DR. A/P $1200
 CR. CASH $1200
<- T ACCOUNT PREPARED FOR NIKE’S A/R AND
FOOTLOCKER’S A/P
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NIKE
INCOME STATEMENT
FOR THE YEAR ENDED 12/31/17
SALES
1200
COGS
(500)
GROSS MARGIN
700
CASE 2: Nike sells shoes with a list price of $2000 to Footlocker. Footlocker receives a 40%
Trade Discount.
Cash Discount: 2/10, N/30 which means, if Footlocker pays within 10 days, they get a 2%
discount, but if they pay after the 10th day and before the 30th day, they pay the same
amount.
Intuition: Nike would do this to encourage buyers to pay back faster and to increase the
cash flows on their cash flow statement
There should be no reason not to do this because you technically get 2% return within
20 days, which is a deal you can’t get anywhere else in the world.
SELLER - NIKE - GROSS
What is Nike’s journal entry when Nike sells
the shoes on account to Footlocker?
DR. A/R $1200
 CR. SALES $2000
DR. COGS $500
 CR. INVENTORY $500
BUYER - FOOTLOCKER - GROSS
What is Footlocker’s journal entry when
Footlocker buys the shoes on account?
DR. MERCH. INV. $1200
 CR. A/P $1200
What is Nike’s journal entry when Nike
receives payment from Footlocker?
DR. CASH $1176
DR. SALES DISCOUNT $24
 CR. A/R $1200 **
What is Footlocker’s journey entry when
Footlocker pays Nike?
DR. $1200**
 CR. CASH $1176
 CR. MERCH INV. $24
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