Edwards Shoe Store's recognition of the cost of goods sold at $5,700 for shoes sold at $8,200 reduces gross profit to $2,500 on the income statement and decreases inventory on the balance sheet.
The recognition of the cost of goods sold (COGS) will impact Edwards Shoe Store's financial statements. The appropriate journal entry for the sale would be:
1. Increase in Revenue:
- Debit: Accounts Receivable or Cash (depending on how the sale was made)
- Credit: Sales Revenue
2. Recognition of Cost of Goods Sold (COGS):
- Debit: Cost of Goods Sold (COGS)
- Credit: Inventory
This transaction affects the income statement and balance sheet:
- Income Statement:
- Revenue increases by $8,200.
- Cost of Goods Sold (an expense) increases by the cost of the shoes, which is $5,700.
- This results in a Gross Profit of $8,200 - $5,700 = $2,500.
- Balance Sheet:
- Inventory decreases by $5,700, reflecting the cost of the shoes that were sold.
- Accounts Receivable or Cash increases by $8,200.
In summary, the recognition of the cost of goods sold reduces the company's gross profit and impacts the balance sheet by decreasing the inventory. This recognition is crucial for accurately reflecting the company's profitability and asset values on the financial statements.