1 00:00:18,250 --> 00:00:26,429 Hello folk for you folks at home welcome back what we did before we start taping today was 2 00:00:26,429 --> 00:00:31,589 to take a quiz in here why don't you go ahead and switch it over to the Elmo if you would 3 00:00:31,589 --> 00:00:38,869 so that folks at home can see the quiz we took. This is the quiz we took everybody at 4 00:00:38,869 --> 00:00:48,979 home hopefully you can see that if I think a good idea for you folks at home to just 5 00:00:48,979 --> 00:00:56,850 pause this and take this as if it were quiz for you folks and go ahead and push play when 6 00:00:56,850 --> 00:01:01,909 you were done and see how you would have done. So go ahead and do that but let's go ahead 7 00:01:01,909 --> 00:01:18,790 and go over for the folks here that are live. Think I have the answers right here ok take 8 00:01:18,790 --> 00:01:26,510 a look at that I just did that myself real quick does that look right folks now those 9 00:01:26,510 --> 00:01:31,379 numbers that are highlighted in yellow are answers but they're not necessarily in that 10 00:01:31,379 --> 00:01:35,959 right order that I asked correct? So make sure your looking at the right one so those 11 00:01:35,959 --> 00:01:43,379 are very important equations and I certainly want you to know those you'll be using those 12 00:01:43,379 --> 00:01:48,760 a lot in all your business classes especially your accounting ones. Ok so I'm not going 13 00:01:48,760 --> 00:01:54,599 to read through them I think it's self-explanatory but are there any questions on that quiz? 14 00:01:54,599 --> 00:01:58,560 Those were worth two points each so if you got all five of the yellow numbers right then 15 00:01:58,560 --> 00:02:07,290 you got ten for each one that you got wrong you missed two ok. Did I put in something 16 00:02:07,290 --> 00:02:16,120 extra that you don't need? What did I put? Withdrawals and accumulated depreciation yeah 17 00:02:16,120 --> 00:02:20,310 I put in some things that you didn't need in there I want you to know the equation that 18 00:02:20,310 --> 00:02:25,400 you need to know and have confidence in them just cause you see something extra don't throw 19 00:02:25,400 --> 00:02:33,848 it in there alright because in real life you be able to discern what you need and what 20 00:02:33,848 --> 00:02:48,378 you don't need. Alright any questions on that if not lets switch over to the PowerPoint's 21 00:02:48,378 --> 00:02:53,639 just a quick little review on some of these slide we are talking about merchandising operations 22 00:02:53,639 --> 00:02:59,159 which is the same thing as retailers right? These companies do not manufacture items they 23 00:02:59,159 --> 00:03:07,628 sell but they purchase them for manufactures and then they sell them to the user what is 24 00:03:07,628 --> 00:03:14,860 the main thing merchandisers provide? They provide convenience they provide convenience 25 00:03:14,860 --> 00:03:21,639 ok. We have talked going over to the slide we have talked for chapters one through four 26 00:03:21,639 --> 00:03:27,989 we have talked about service organizations that sell time now were talking about merchandisers 27 00:03:27,989 --> 00:03:33,090 and there is that equation that was there on the quiz they sell products to earn revenues 28 00:03:33,090 --> 00:03:39,789 we gave examples of Wal-Mart or Grocery stores or best buy or Kohl's we talked about the 29 00:03:39,789 --> 00:03:46,949 cycle right you have money you purchase inventory you sell it either on credit or for cash eventually 30 00:03:46,949 --> 00:03:53,550 you get more cash and then you can purchase more inventory to sell correct? Now coming 31 00:03:53,550 --> 00:04:01,560 off of that to me we talked about how there is two main roles of a merchandiser they do 32 00:04:01,560 --> 00:04:08,930 a lot of purchasing from manufacture right? And then of course they sell it to customers 33 00:04:08,930 --> 00:04:16,098 ok. So there is the purchase cycle and then there's the sales cycle correct? What we're 34 00:04:16,098 --> 00:04:20,459 going to talk about today is the purchase cycles were not selling to customers well 35 00:04:20,459 --> 00:04:27,658 talk about that next time. What we're doing now is visioning yourself as the retailer 36 00:04:27,658 --> 00:04:40,769 and you are praising dishwashers form whirlpool and you're purchasing televisions from Sony 37 00:04:40,769 --> 00:04:52,180 your purchasing computer monitors from HP or whatever. We talked about the very important 38 00:04:52,180 --> 00:04:59,209 flow equation that was also on the quiz ok. Now let's start talking about the journal 39 00:04:59,209 --> 00:05:06,980 entries from the perspective of the retailer on the purchase side ok. Let's say on June 40 00:05:06,980 --> 00:05:12,420 twenty Jason Inc. purchased fourteen thousand dollars of merchandise inventory and they 41 00:05:12,420 --> 00:05:21,180 paid cash will there you go right there that's not too hard is it? Now merchandise inventory 42 00:05:21,180 --> 00:05:32,819 is a new account and it is a current asset and merchandise inventory is different from 43 00:05:32,819 --> 00:05:38,660 office supplies or something like that merchandise inventory are items that we have purchase 44 00:05:38,660 --> 00:05:46,310 that we will resale to customers hopefully ok. So merchandise inventory is an asset it's 45 00:05:46,310 --> 00:05:52,009 a current asset and everything that we have purchased that will be sold to customers goes 46 00:05:52,009 --> 00:05:57,410 into merchandise inventory now of course there might be a lot of different sub groupings 47 00:05:57,410 --> 00:06:02,920 in our detail but it all goes into merchandise inventory. Kara? "Is it always a debit balance 48 00:06:02,920 --> 00:06:08,490 account" merchandising inventory is a current asset and it is a debit balance account as 49 00:06:08,490 --> 00:06:17,439 all assets are. Now let's talk about some different types of terminology in this account 50 00:06:17,439 --> 00:06:21,970 or in this chapter and some of these are similar but are different so I want to make sure you're 51 00:06:21,970 --> 00:06:29,959 paying attention there's one thing called a trade discount and this is used by manufacturers 52 00:06:29,959 --> 00:06:37,418 to offer better prices if you purchase in large quantities. Ok let's look at an example 53 00:06:37,418 --> 00:06:44,790 Matrix Inc. Offers a thirty percent trade discount of orders of one thousand units or 54 00:06:44,790 --> 00:06:50,319 more of their popular product racer each racers has a list price of five dollars and twenty 55 00:06:50,319 --> 00:07:01,899 five. Ok so let's say that they sell a thousand to us as the retailer well a thousand times 56 00:07:01,899 --> 00:07:07,740 the list price of five twenty five if they didn't offer any discount at all we would 57 00:07:07,740 --> 00:07:20,269 have to pay this fifty two fifty, but that is at the amount you have to purchase a thousand 58 00:07:20,269 --> 00:07:26,379 or more to get that thirty percent discount right? So we can take thirty percent of five 59 00:07:26,379 --> 00:07:32,110 two fifty subtract it and we only have an invoice price of thirty six seventy five you 60 00:07:32,110 --> 00:07:39,800 with me? And this isn't a concept that's to foreign to us there are things that if you 61 00:07:39,800 --> 00:07:44,769 purchase in a larger quantity you get a cheaper price can you think of anything like that 62 00:07:44,769 --> 00:07:51,978 in real life? If you purchase in a larger quantity you get a cheaper price? Yeah sometimes 63 00:07:51,978 --> 00:07:57,100 Sam's club kind of works that way right? "Is that why Wal-Mart is so cheap because they 64 00:07:57,100 --> 00:08:02,918 buy so much of something?" well yeah that's a little different concept but Sam's Club 65 00:08:02,918 --> 00:08:09,629 is probably the if you buy twelve things of tooth paste you know which well last you a 66 00:08:09,629 --> 00:08:16,389 while then your unit price is probably cheaper than if you just bought one right? So that 67 00:08:16,389 --> 00:08:26,050 is what a trade discount is to offered as an incentive to purchasing greater quantities 68 00:08:26,050 --> 00:08:33,649 alright, and a lot of times manufacturers can do this because a lot of times some of 69 00:08:33,649 --> 00:08:41,139 the costs or effort to process a n order of a thousand units is not a lot different than 70 00:08:41,139 --> 00:08:46,690 five units right? You see what I'm saying as far as the paper work and all the shipping 71 00:08:46,690 --> 00:08:53,539 stuff they have to do a lot of times it's the same amount of costs so they would rather 72 00:08:53,539 --> 00:09:03,519 they certainly would rather sell one order of a thousand than ten orders of a hundred 73 00:09:03,519 --> 00:09:10,720 that come in during the year does that make sense? Alright lets go to the next thing let's 74 00:09:10,720 --> 00:09:15,490 take a look at an invoice you guys have seen an invoice before right? This is not a new 75 00:09:15,490 --> 00:09:21,730 deal for you let's look at some of the things on this invoice now number one is the seller 76 00:09:21,730 --> 00:09:30,570 that who's selling it and number three is who it's sold to ok. Number tow is the invoice 77 00:09:30,570 --> 00:09:38,080 date and a lot of times there's an invoice number on there, number five is the credit 78 00:09:38,080 --> 00:09:42,679 terms were going to talk about that in a minute let's not worry about that now, now number 79 00:09:42,679 --> 00:09:48,830 seven is the goods that were sold and it looks like what we purchased as the retailer here 80 00:09:48,830 --> 00:09:57,070 was a something called a two fifty back up system and that is item number AC417 ok how 81 00:09:57,070 --> 00:10:03,080 many did we purchase we purchased five hundred of them what was the price per two fifty back 82 00:10:03,080 --> 00:10:09,929 up system it was fifty four so the invoice amount is twenty seven thousand dollars ok 83 00:10:09,929 --> 00:10:17,039 now of course the difference between an invoice for a retailer is versus you and the invoice 84 00:10:17,039 --> 00:10:21,600 you see is your probably not going to purchase five hundred backup systems aren't you you're 85 00:10:21,600 --> 00:10:25,789 probably going to purchase one for yourself and that's it. But think about the quantity 86 00:10:25,789 --> 00:10:33,000 that these retailers purchase in its pretty large isn't it? Now let's talk about what 87 00:10:33,000 --> 00:10:38,370 the heck is this term two that looks like two fractions I don't know what that is let's 88 00:10:38,370 --> 00:10:44,009 talk about that what does that mean in shipping terms of two ten in thirty well what that 89 00:10:44,009 --> 00:10:53,009 means that if you pay within ten days you can knock two percent of the price off. But 90 00:10:53,009 --> 00:11:02,200 if you chose not to do that you owe the full amount in thirty days so if you pay within 91 00:11:02,200 --> 00:11:12,470 ten days you can knock off two percent of the invoice price but if you chose not to 92 00:11:12,470 --> 00:11:25,089 do that you owe the full amount in thirty days you with me? This is on top of it there's 93 00:11:25,089 --> 00:11:35,958 a traded discount Matt and I'm glad you pointed that out a purchase discount is to as an incentive 94 00:11:35,958 --> 00:11:46,450 to pay early a trade discount is to buy it in large quantities make sense? Now this isn't 95 00:11:46,450 --> 00:11:57,919 always two ten net thirty ok you could have going to the Elmo you could have you know 96 00:11:57,919 --> 00:12:05,500 three ten in thirty which would mean you get three percent off if you pay within ten days 97 00:12:05,500 --> 00:12:14,379 otherwise the full amount is due within thirty days or you could have one fifteen in sixty 98 00:12:14,379 --> 00:12:18,559 you get one percent off if you pay within fifteen days but the full amount is due within 99 00:12:18,559 --> 00:12:31,740 sixty or sometimes you'll see something like this two ten in EOM do you know what EOM stand 100 00:12:31,740 --> 00:12:36,169 for? End of month so this would mean if you paid within ten days you would knock off two 101 00:12:36,169 --> 00:12:41,339 percent otherwise the full amount by the end of the month so there's different ways that 102 00:12:41,339 --> 00:12:48,610 you can say that but in this particular example it was two ten in thirty. Ok now how does 103 00:12:48,610 --> 00:12:56,419 this work out? Well let's look at an example on May the seventh Jason Inc. purchased twenty 104 00:12:56,419 --> 00:13:00,730 seven thousand dollars of merchandise inventory this time on account not with cash but on 105 00:13:00,730 --> 00:13:10,299 account and the credit terms are two ten and thirty so when we record this we debit merchandise 106 00:13:10,299 --> 00:13:17,379 inventory increasing that current asset and we increase our accounts payable for twenty 107 00:13:17,379 --> 00:13:29,389 seven thousand alright. Now that was on May seventh and the terms here that was on May 108 00:13:29,389 --> 00:13:35,639 seventh and our terms are two ten and thirty so what day do we have to pay by to enjoy 109 00:13:35,639 --> 00:13:45,200 that ten percent discount? May seventeenth right? If we pay May seventeenth or earlier 110 00:13:45,200 --> 00:13:50,169 we won't have to give them twenty seven thousand we will pay them well figure out how much 111 00:13:50,169 --> 00:13:55,730 we give them but it's less than that. We pay them on May fifteenth so is that within the 112 00:13:55,730 --> 00:14:01,970 date is that within the discount date or within the discount period yes it is so we do not 113 00:14:01,970 --> 00:14:09,399 have to give them twenty seven thousand we only have to give them ninety eight percent 114 00:14:09,399 --> 00:14:15,339 of twenty seven thousand which is the hu7ndred percent minus the two percent discount. So 115 00:14:15,339 --> 00:14:20,269 I get ninety eight percent times twenty seven thousand and that's how much cash we have 116 00:14:20,269 --> 00:14:29,179 to pay we have to give them twenty six for sixty now we debit accounts payable don't 117 00:14:29,179 --> 00:14:35,429 make the mistake of debiting accounts payable for twenty six four sixty cause in our original 118 00:14:35,429 --> 00:14:43,269 entry we credited or increased that liability for twenty seven grand if you mistakenly just 119 00:14:43,269 --> 00:14:50,399 debit it for twenty sic four sixty it's going to imply that you still owe money. So accounts 120 00:14:50,399 --> 00:14:58,429 payable is debited for the full twenty seven thousand it's satisfied it's taken care of 121 00:14:58,429 --> 00:15:03,370 even though we've given them twenty six four sixty well how do you complete this journal 122 00:15:03,370 --> 00:15:09,980 entry you credit merchandise inventory for five fifty now sometimes that seems odd to 123 00:15:09,980 --> 00:15:19,120 people and I'll show you why we do that in a second ok any questions on how we came up 124 00:15:19,120 --> 00:15:25,870 with these numbers let's talk about why these merchandise inventory is credited for five 125 00:15:25,870 --> 00:15:36,559 forty. Ok well if you go back to the original journal entry we debited inventory on five 126 00:15:36,559 --> 00:15:42,948 seven for twenty seven thousand right? On the original journal entry date, but in the 127 00:15:42,948 --> 00:15:51,629 end is that how much we paid for it? No it isn't so how much did we pay for it in the 128 00:15:51,629 --> 00:16:01,039 end twenty six four sixty so by us crediting it merchandise inventory for five forty that 129 00:16:01,039 --> 00:16:05,470 means that merchandise inventory is going to be recoded on the books and twenty six 130 00:16:05,470 --> 00:16:11,909 four sixty which was the true cost of that inventory correct? So what principle does 131 00:16:11,909 --> 00:16:18,570 this follow? Remember the cost principle assets should be stated on your balance sheet at 132 00:16:18,570 --> 00:16:23,750 what they're true cost was right? And our true cost for this inventory when it was all 133 00:16:23,750 --> 00:16:32,669 said and done thus it should be on the books for twenty six four sixty. Cool now looking 134 00:16:32,669 --> 00:16:38,299 back at that account payable you can see to that our original credit was to increase AP 135 00:16:38,299 --> 00:16:45,110 was twenty seven thousand even though we only paid twenty six four sixty we debited it and 136 00:16:45,110 --> 00:16:55,889 our balance is zero we don't owe that manufacture any more money do we? Make sense? Now I asked 137 00:16:55,889 --> 00:17:06,648 you I believe I handed you guys something like this and it said basic purchase journal 138 00:17:06,648 --> 00:17:16,169 entries did you get a chance to try to do that did you have success or did you get confused? 139 00:17:16,169 --> 00:17:22,619 Let's take a look and actually what I want to do is and for you folks at home of course 140 00:17:22,619 --> 00:17:31,529 everything is under lessons tab on the handouts for chapter five is basic purchasing journal 141 00:17:31,529 --> 00:17:36,569 entries is there but I want to go ahead and do the bottom one first ok let's go ahead 142 00:17:36,569 --> 00:17:43,160 and read that. On September fifteenth Schneider company purchased some merchandise inventory 143 00:17:43,160 --> 00:17:46,940 from Makarov Inc. with an invoice price of thirty five thousand and credit terms of two 144 00:17:46,940 --> 00:17:53,099 ten net thirty. Schneider Company paid Makarov on September twenty eighth. Prepare the journal 145 00:17:53,099 --> 00:17:59,319 entries for Schneider company the purchaser on the following dates ok well on September 146 00:17:59,319 --> 00:18:09,440 fifteenth we debit merchandise inventory and credit accounts payable for thirty five thousand 147 00:18:09,440 --> 00:18:24,308 ok. Ok now the terms were two ten net thirty right? We bought it on September fifteenth 148 00:18:24,308 --> 00:18:30,200 so when do we need to pay by to get that discount? September twenty fifth when did we pay the 149 00:18:30,200 --> 00:18:36,650 twenty eighth missed the discount didn't we so all it is here well you have to pay the 150 00:18:36,650 --> 00:18:44,589 full thirty five thousand you blew it. "I just didn't know since it wasn't thirty days 151 00:18:44,589 --> 00:18:56,940 I didn't know if you would like pay part of that" yeah what she's asking is why not wait 152 00:18:56,940 --> 00:19:03,480 to day thirty and that's actually a good question in businesses it's like if you don't want 153 00:19:03,480 --> 00:19:09,450 to pay before you need to what this company should have done is pay on day ten not day 154 00:19:09,450 --> 00:19:14,690 five not day six but day ten taken the discount so they missed the discount they might as 155 00:19:14,690 --> 00:19:21,789 well paid on day thirty cause the longer you have the money the better it can maybe earn 156 00:19:21,789 --> 00:19:26,500 some money in a savings account maybe you can sweep it over in a nightly certificate 157 00:19:26,500 --> 00:19:34,650 deposit or some sort of interest earning investment right? But that's a little on this but going 158 00:19:34,650 --> 00:19:44,089 to this that's the journal entry right you missed the discount let's take at what it 159 00:19:44,089 --> 00:19:52,319 is if you made the discount and for you folks at home if you didn't print this out or you 160 00:19:52,319 --> 00:19:59,089 didn't understand it pause it now before we go over the answer and try to do it. Alright 161 00:19:59,089 --> 00:20:03,919 on august first Gilmore company purchased merchandise from Hendren Inc. with an invoice 162 00:20:03,919 --> 00:20:08,569 of sixty thousand and credit terms of two ten net thirty. Gilmore Company paid Hendren 163 00:20:08,569 --> 00:20:14,220 August the eighth. Prepare the journal entries for Gilmore on the following dates. Ok on 164 00:20:14,220 --> 00:20:27,119 august first we debit merchandise inventory and credit account payable for sixty thousand 165 00:20:27,119 --> 00:20:38,538 ok. Ok we had credit terms of two ten net thirty so if we purchased it on august first 166 00:20:38,538 --> 00:20:44,440 what date do we need to get it paid by to get the discount? By the eleventh we paid 167 00:20:44,440 --> 00:20:50,230 the eighth so we got the discount didn't we? So we did not have to give them cash of sixty 168 00:20:50,230 --> 00:20:56,190 thousand did we? So how much cash did we have to give them we only have to give them ninety 169 00:20:56,190 --> 00:21:01,880 eight percent of sixty thousand which is the hundred percent minus the two percent discount 170 00:21:01,880 --> 00:21:12,650 what is the ninety eight percent of sixty thousand? Fifty eight-eight hundred right? 171 00:21:12,650 --> 00:21:17,000 So we only have to give them cash of fifty eight-eight hundred now were going to go ahead 172 00:21:17,000 --> 00:21:21,970 and decrease the accounts payable for the full amount cause were good were not giving 173 00:21:21,970 --> 00:21:28,279 them any more money we don't owe them any more money so that journal entry doesn't balance 174 00:21:28,279 --> 00:21:38,599 right? What do we credit for twelve hundred we credit merchandise inventory so that the 175 00:21:38,599 --> 00:21:44,009 merchandise inventory will be recorded on our books at the true cost which was in the 176 00:21:44,009 --> 00:21:52,609 end fifty eight-eight hundred alright. "Is the order of the credits matter?" nope you 177 00:21:52,609 --> 00:22:02,230 can switch the you looking at the Elmo you can switch these in any order as long as they're 178 00:22:02,230 --> 00:22:09,519 both credited. Ok alright good appreciate those who read that and tried it you're probably 179 00:22:09,519 --> 00:22:21,369 a little better prepared than other wise alright. Any other questions on that ok? Let's talk 180 00:22:21,369 --> 00:22:30,288 about a few more things ion the purchase cycle oh first of all let's ask us this if we don't 181 00:22:30,288 --> 00:22:38,500 take that discount is it really that big a deal? Yes the answers is yes it's a big deal 182 00:22:38,500 --> 00:22:45,019 its expensive and people might say oh Krug its only an extra two percent it's not that 183 00:22:45,019 --> 00:22:56,849 big of deal it is a big deal and let me tell you why. People are used to thinking 184 00:22:56,849 --> 00:23:04,000 of annually aren't they and like if I had a two percent annual rate on my mortgage or 185 00:23:04,000 --> 00:23:10,940 on my auto loan buy that would be awesome wouldn't it? ok however you have to pay an 186 00:23:10,940 --> 00:23:19,038 extra two percent for how many more days now you can pay by day ten and get the discount 187 00:23:19,038 --> 00:23:25,779 but if you don't pay by day ten when do you have to pay by? Day thirty right? Ok looking 188 00:23:25,779 --> 00:23:31,210 at me here you can pay on day ten and get the discount but otherwise you have to pay 189 00:23:31,210 --> 00:23:37,880 on day thirty that's just an extra twenty days correct? So you're in essence for two 190 00:23:37,880 --> 00:23:47,579 percent more for just twenty more days of credit. Now the way I like to look at this 191 00:23:47,579 --> 00:23:57,058 as follows going to the Elmo we said we get only get twenty more days right now how many 192 00:23:57,058 --> 00:24:03,788 twenty day periods are there in a year? Well a year has three hundred and sixty five days 193 00:24:03,788 --> 00:24:13,558 right? So the true annual cost of that that's two percent for twenty more days the true 194 00:24:13,558 --> 00:24:41,419 cost of that is what bang that out there Sarah? "Thirty six point five percent?" Thirty six 195 00:24:41,419 --> 00:24:51,000 point five percent is that a good rate ok let's say that Jessica was my controller and 196 00:24:51,000 --> 00:24:59,380 I'm the owner of my company ok. Let's say Jessica and I'm the owner and she says hey 197 00:24:59,380 --> 00:25:03,369 Dave I went and secured us a new bank loan and I said really what was the new rate you 198 00:25:03,369 --> 00:25:09,130 got and she says it's an annual interest rate on our new loan of thirty six and a half percent. 199 00:25:09,130 --> 00:25:18,890 Would I be happy with her? No but when we don't take these discounts essentially that 200 00:25:18,890 --> 00:25:24,009 is exactly what has happened isn't it? You'd be better off to take the discount and put 201 00:25:24,009 --> 00:25:31,940 it on a credit card that charges you nineteen percent a year. Very important to make these 202 00:25:31,940 --> 00:25:40,069 discounts when I go work with my clients I often see that they have not made there purchased 203 00:25:40,069 --> 00:25:47,250 discounts do you know what the most common reason they haven't made them is? "They don't 204 00:25:47,250 --> 00:25:58,179 want to pay early?" "Negligence?" it's not because they don't have the money it's just 205 00:25:58,179 --> 00:26:07,210 because of oh it's so busy I missed it again do you have any classes here at school where 206 00:26:07,210 --> 00:26:15,419 there's always the same couple of students that are always four or five minutes late? 207 00:26:15,419 --> 00:26:19,250 Well they'll probably grow up to be the sort of person that's always late two or three 208 00:26:19,250 --> 00:26:26,970 days in their invoices but it makes a big difference doesn't it? Cause think about how 209 00:26:26,970 --> 00:26:34,079 much purchasing think about how much purchasing best buy does in a year think if you added 210 00:26:34,079 --> 00:26:39,589 an extra two percent times the amount that they purchase that would be probably tens 211 00:26:39,589 --> 00:26:45,680 of millions of dollars maybe not that much cause they purchase probably hundreds of millions 212 00:26:45,680 --> 00:26:55,599 per year don't they? That would be somebody would get fired ok for good cause we have 213 00:26:55,599 --> 00:27:00,769 this in our own lives right it's like you get your cable TV bill you we a hundred dollars 214 00:27:00,769 --> 00:27:07,150 if paid by October thirty first if you pay after that a hundred dollars and fifty cents 215 00:27:07,150 --> 00:27:13,759 and you look at your calendar and you missed it you ever had that happen? I've had that 216 00:27:13,759 --> 00:27:19,159 happen in my own life well that's a lot isn't it? if you figure out annual interest rate 217 00:27:19,159 --> 00:27:25,259 it's a lot so the main reasons my clients don't make their purchase discounts is they're 218 00:27:25,259 --> 00:27:30,679 just I'm so busy I'm just missed it I'm just so busy well you need to hire you'd be better 219 00:27:30,679 --> 00:27:40,839 off to hire some help and make those discounts ok. One last thing I want to point is folks 220 00:27:40,839 --> 00:27:47,288 there are people out there who hope you stay financially ignorant not saying you are now 221 00:27:47,288 --> 00:27:51,648 but they don't even like that I'm going to tell what I'm going to tell you they like 222 00:27:51,648 --> 00:27:58,069 people they like consumers that are financially stupid ok. And they'll send you stuff you 223 00:27:58,069 --> 00:28:03,269 folks getting credit card offers in the mail? I could fill my wall in the basement with 224 00:28:03,269 --> 00:28:08,119 credit card offers now here's the way they used to sell these credit card offers is you 225 00:28:08,119 --> 00:28:21,769 would get an envelope in the mail ok and it would say new credit card only four percent 226 00:28:21,769 --> 00:28:35,859 interest rate and then they'd have an asterisk rate it would say four percent per month and 227 00:28:35,859 --> 00:28:49,210 then down here there would be a message we love you ok. And they want you to be stupid 228 00:28:49,210 --> 00:28:54,900 they want you to think hey a new credit card I don't know much but I know this I know four 229 00:28:54,900 --> 00:29:00,450 percent a pretty low rate we pay more than that on our mortgage a lot more well listen 230 00:29:00,450 --> 00:29:08,740 Einstein its four percent per month it's not annual is it? So what is a four percent per 231 00:29:08,740 --> 00:29:16,460 month roughly speaking what is that on a annual rate? Forty eight percent there sued to be 232 00:29:16,460 --> 00:29:21,909 credit card companies and banks and credit unions and lending authorities that would 233 00:29:21,909 --> 00:29:26,619 try to mask what the annual percentage rate was and that's why they made rules that say 234 00:29:26,619 --> 00:29:34,640 you have to have certain type of font certain size of font what your APR is right annual 235 00:29:34,640 --> 00:29:40,788 percentage rate cause they were trying to deceive they want you folks to be stupid they 236 00:29:40,788 --> 00:29:46,890 want you to be stupid and they want you to go buy a big screen TV on their credit cards 237 00:29:46,890 --> 00:29:50,259 and the big screen TV costs six hundred dollars and before it's all said and done you gave 238 00:29:50,259 --> 00:29:58,019 them nine hundred and eighty dollars. Don't let them take advantage of you these credit 239 00:29:58,019 --> 00:30:01,630 card companies they don't love you I'm going to tell they do not love you they say they 240 00:30:01,630 --> 00:30:11,069 love you they do not love you they want you stay fat dumb and stupid dumb and stupid are 241 00:30:11,069 --> 00:30:16,419 the same things so word to the wise. Alright let's talk about a few more things in regards 242 00:30:16,419 --> 00:30:25,720 to purchasing purchase returns and purchase allowances ok these are very similar things 243 00:30:25,720 --> 00:30:31,669 and they look similar like journal entries but they're actually different ok. Here's 244 00:30:31,669 --> 00:30:35,740 let's talk bout these purchase returns versus purchase allowances ok let's come off there 245 00:30:35,740 --> 00:30:43,269 if we can let's say you're going to purchase some table and let's say that you purchase 246 00:30:43,269 --> 00:30:48,940 ten of these tables that you're sitting at and let's say you pay fifty dollars each for 247 00:30:48,940 --> 00:30:55,201 them and you're going to sell them in your retail store for ninety. Well let's say you 248 00:30:55,201 --> 00:31:00,160 sell how many did I say we purchased? Ten let's say for whatever reason you bought too 249 00:31:00,160 --> 00:31:05,460 many and so you just returned one there was nothing wrong with it you just returned it. 250 00:31:05,460 --> 00:31:09,259 Now chances are you haven't paid for it by then so they just knocked off fifty dollars 251 00:31:09,259 --> 00:31:16,589 to what you owed them right? You guys know what purchased returns right? Ok you buy a 252 00:31:16,589 --> 00:31:22,170 sweater form JC Penny and you take it home and you show your husband and you go does 253 00:31:22,170 --> 00:31:29,789 this look nice on me? And he says oh... ok and you decide you didn't like it and you 254 00:31:29,789 --> 00:31:36,558 take it back and get your money there's nothing wrong with it that's a purchase return they 255 00:31:36,558 --> 00:31:41,740 just knock off what they owe you will see how that looks. Well a purchase allowance 256 00:31:41,740 --> 00:31:47,730 is the following let's say I purchased ten of these tables for fifty dollars each and 257 00:31:47,730 --> 00:31:53,190 so I owe them ten times fifty five hundred dollars ok and let's say that once I unpack 258 00:31:53,190 --> 00:31:58,359 them I notice that one of these has a scratch on it's not real big but maybe a four five 259 00:31:58,359 --> 00:32:05,289 inch scratch on the top. Well I call the manufacturer and I say hey one of these tables that you 260 00:32:05,289 --> 00:32:11,509 sold me for fifty dollars has a scratch on it and they would probably say you can do 261 00:32:11,509 --> 00:32:16,308 one of two things you can send it back to us and will knock off fifty dollars of what 262 00:32:16,308 --> 00:32:24,869 you owe us or if you want keep the table we'll knock thirty five dollars of what you owe 263 00:32:24,869 --> 00:32:30,288 and essentially you'll end up buying the table for fifteen dollars. Does that make sense? 264 00:32:30,288 --> 00:32:35,140 With the purchase allowance I don't actually return the product to the manufacturer they 265 00:32:35,140 --> 00:32:39,269 just kind of give me an allowance and I might decide yeah I'll keep the table if I could 266 00:32:39,269 --> 00:32:43,109 buy it for fifteen because I might be able to sell it to a customer and actually make 267 00:32:43,109 --> 00:32:48,819 more money on it than a regular table. There's people like me who are cheap who like to buy 268 00:32:48,819 --> 00:32:56,390 stuff like that when I bought a clothes dryer the clothes dryer was normally two hundred 269 00:32:56,390 --> 00:33:00,720 and eighty bucks or something like that but it had a big long scratch the side it was 270 00:33:00,720 --> 00:33:05,740 till brand new it just had a scratch and there was nothing wrong with it just had a big long 271 00:33:05,740 --> 00:33:11,849 scratch and so they said you can buy it for half price if you want? And I said giddy up 272 00:33:11,849 --> 00:33:18,259 baby right? Cause who cares if my clothes dryer has a scratch on it? Do you ever go 273 00:33:18,259 --> 00:33:21,990 to your friend's house and say I'm going to look at the side of their clothes dryer who 274 00:33:21,990 --> 00:33:29,109 cares? Ok so a purchase return you actually return the good to the manufacturer purchase 275 00:33:29,109 --> 00:33:34,849 allowance you keep it and they knock off of what you owe them make sense? Let's take a 276 00:33:34,849 --> 00:33:41,269 look and see how that looks ok on May ninth Matrix Inc. purchased twenty thousand dollars 277 00:33:41,269 --> 00:33:47,929 of merchandise inventory on account credit terms are two ten net thirty. Ok well that's 278 00:33:47,929 --> 00:33:55,259 the journal entry we debit merchandise inventory we credit accounts payable now on May the 279 00:33:55,259 --> 00:34:01,460 tenth we returned five hundred dollars of defected merchandise to the supplier. We haven't 280 00:34:01,460 --> 00:34:08,079 paid yet so all that happens is we decrease our liability we debit our accounts payable 281 00:34:08,079 --> 00:34:14,079 by five hundred dollars and we also decrease or credit merchandise inventory because we 282 00:34:14,079 --> 00:34:19,800 don't have it anymore. Does that make sense? Now Kara you asked if merchandise inventory 283 00:34:19,800 --> 00:34:25,418 always a debit balance account yes it is always a debit balance account but we know all accounts 284 00:34:25,418 --> 00:34:31,139 are debited and credited right going back to this journal entry when we credit merchandise 285 00:34:31,139 --> 00:34:36,739 inventory since it's a debit balance account that's simply means were decreasing it which 286 00:34:36,739 --> 00:34:42,699 is what reality is right were returning five hundred dollars of merchandise so how much 287 00:34:42,699 --> 00:34:47,730 do we owe them at this point? We owed them twenty thousand then we sent some back and 288 00:34:47,730 --> 00:34:55,050 we decreased it by five hundred what do we owe them at this point? No we owed them twenty 289 00:34:55,050 --> 00:35:01,519 thousand dollars we returned five hundred we only owe them nineteen thousand five hundred 290 00:35:01,519 --> 00:35:09,710 don't we? And t hats if we pay that's if we don't take advantage of the discount here. 291 00:35:09,710 --> 00:35:18,880 So we pay do we pay within the discount period? Yes we do so we don't have to give them the 292 00:35:18,880 --> 00:35:29,579 full nineteen thousand five hundred we only have to give them ninety eight percent of 293 00:35:29,579 --> 00:35:34,179 the nineteen thousand five hundred which in this case is nineteen thousand one hundred 294 00:35:34,179 --> 00:35:41,469 and ten now one thing that they want to point out there is we take the discount based on 295 00:35:41,469 --> 00:35:47,159 the nineteen five don't take it on the twenty thousand cause that's not what you owe them 296 00:35:47,159 --> 00:35:52,050 cause you see what I'm saying cause you sent back five hundred dollars' worth of those 297 00:35:52,050 --> 00:36:03,860 goods take it on the nineteen thousand five hundred. Ok let's talk about what I want to 298 00:36:03,860 --> 00:36:08,820 do now is this I want you to do and we are going to take a few minutes to do this I want 299 00:36:08,820 --> 00:36:16,900 you to do quick study five point three on page two oh nine on two hundred and nine page 300 00:36:16,900 --> 00:36:24,530 two hundred and nine I want you to do quick study five point three for you folks at home 301 00:36:24,530 --> 00:36:28,608 you do it as well, we'll come back in a few minutes and well go over the answers to quick 302 00:36:28,608 --> 00:42:23,199 study five point three roll that music. (36:35-42:20) ok if you folks at home aren't done just pause 303 00:42:23,199 --> 00:42:28,440 it and you can start us up when you are done, but in that transaction on quick study five 304 00:42:28,440 --> 00:42:33,769 point three on march the fifth we purchased five hundred units of product at five dollars 305 00:42:33,769 --> 00:42:40,869 per unit and the terms were two ten net sixty. Ok so the journal entry on March the fifth 306 00:42:40,869 --> 00:42:46,949 would be a debit to merchandise inventory for two five hundred dollars or five times 307 00:42:46,949 --> 00:42:54,380 five hundred and a credit to AP correct? Now what happened on March the seventh? We returned 308 00:42:54,380 --> 00:43:01,429 fifty defected units and this was a purchase return and we received full credit so what's 309 00:43:01,429 --> 00:43:10,130 five times fifty? Its two fifty we decrease our accounts payable and we decrease our merchandise 310 00:43:10,130 --> 00:43:19,269 inventory for two fifty right? So how much at this point do we owe them? Twenty two fifty 311 00:43:19,269 --> 00:43:25,039 do we pay within the discount period? Yes so we don't have to give them twenty two fifty 312 00:43:25,039 --> 00:43:29,818 we only have to give them ninety eight percent of twenty two fifty which in this case is 313 00:43:29,818 --> 00:43:38,960 cash of twenty two-o-five and of course we credit or decrease the accounts payable for 314 00:43:38,960 --> 00:43:47,659 twenty two fifty and we have fully extinguished that liability it's taken care of we don't 315 00:43:47,659 --> 00:43:52,880 owe them anymore do we? Now somebody pointed out something in break that was good when 316 00:43:52,880 --> 00:43:56,818 we say we pay in cash that doesn't mean I'm taking hundred dollar bills and shoving them 317 00:43:56,818 --> 00:44:01,150 in an envelope and sending them we are writing a check right? But that's the same thing as 318 00:44:01,150 --> 00:44:08,230 paying with cash it comes out of our checking account. Alright going back to that any questions 319 00:44:08,230 --> 00:44:16,250 on quick study five point three? Ok a couple last things that I want to go over it will 320 00:44:16,250 --> 00:44:24,800 just take a minute is there's also the item we need to cover of transportation costs now 321 00:44:24,800 --> 00:44:30,900 there are sometimes that the seller pays for transportation and there's sometimes that 322 00:44:30,900 --> 00:44:37,099 the buyer pays for transportation. And it's important to know now the way that they do 323 00:44:37,099 --> 00:44:47,840 this do you know what FOV stands for? Free on board and we're always thinking from the 324 00:44:47,840 --> 00:44:55,679 perspective of the merchandiser so if it is free on board clear to the destination it 325 00:44:55,679 --> 00:45:01,190 is free on board clear to the destination well we are the destination that means its 326 00:45:01,190 --> 00:45:09,989 free clear to here that's the destination that mean that the seller pays for transportation 327 00:45:09,989 --> 00:45:14,639 now if its free on board only up to the point where they ship it this is where they start 328 00:45:14,639 --> 00:45:21,849 to ship it right here. That means while its traveling we are paying for it the buyer is 329 00:45:21,849 --> 00:45:28,880 paying for it. So free on board shipping point it's only free up to the shipping point thus 330 00:45:28,880 --> 00:45:34,730 the buyer has to pay if it's free onboard to the destination that means that whole time 331 00:45:34,730 --> 00:45:44,170 it's free for us and the seller pays. Now the question might come up who owns those 332 00:45:44,170 --> 00:45:51,780 goods while they are being transported well the answer is this whoever is paying for the 333 00:45:51,780 --> 00:45:58,920 transportation owns the goods while they are being transported. So if you see a train full 334 00:45:58,920 --> 00:46:02,480 of stuff moving along or a truck full of stuff moving along on the highway and you're going 335 00:46:02,480 --> 00:46:07,809 I wonder who owns that all I would say is well tell me is the buyer or the seller paying 336 00:46:07,809 --> 00:46:12,550 for the transportation. If the buyer is paying for the transportation then as it is moving 337 00:46:12,550 --> 00:46:19,219 along the road the buyer has it in their inventory on their books. If the seller is paying for 338 00:46:19,219 --> 00:46:25,519 it then they own it does that make sense? "Transportation and something happens?" Ok 339 00:46:25,519 --> 00:46:32,882 then you get into insurance there's usually insurance on it ok. Usually there is some 340 00:46:32,882 --> 00:46:38,159 sort of insurance with the transportation company, but whoever owns the goods is whoever 341 00:46:38,159 --> 00:46:45,599 is paying for the goods while they are being transported. Now lastly let's look at an example 342 00:46:45,599 --> 00:46:51,420 on May the twelfth Jason Inc. purchased eight thousands of merchandise inventory for cash 343 00:46:51,420 --> 00:46:58,340 and they also paid one hundred for transportation costs. I want you to recognize that we debit 344 00:46:58,340 --> 00:47:03,690 merchandise inventory for that full eighty one hundred which includes that one hundred 345 00:47:03,690 --> 00:47:08,780 dollar transportation cost. We don't have a separate expense account called transportation 346 00:47:08,780 --> 00:47:17,780 expense we want to capture those transportation cost in merchandise inventory so we debit 347 00:47:17,780 --> 00:47:25,079 merchandise inventory does that make sense? Any costs that were necessary to get that 348 00:47:25,079 --> 00:47:35,489 as inventory become part of merchandise inventory okay? Ok that is it I'm only giving one homework 349 00:47:35,489 --> 00:47:43,159 question to do but I want to make sure you do it so do exercise five point one for next 350 00:47:43,159 --> 00:47:45,849 time do exercise five point one alright see you guys.