Question

Galaxy Company sold merchandise costing $3,400 for $5,800 cash. The merchandise was later returned by the customer for a refund. The company uses the perpetual inventory system. What effect will the sales return have on the financial statements

Answer 1

The sales return will decrease revenue and Cost of Goods Sold on the income statement, decrease cash and increase inventory on the balance sheet, effectively reversing the financial impact of the original sale.

Step-by-step explanation:

Effect of Sales Return on Financial Statements

When Galaxy Company sold merchandise costing $3,400 for $5,800 cash and later processed a sales return, it affects the financial statements as follows:

The revenue on the income statement is decreased by $5,800, which is the sales price of the returned merchandise.

Cost of Goods Sold on the income statement is reduced by $3,400, representing the reversal of the cost of the sold merchandise.

The assets on the balance sheet decrease due to the cash refund to the customer.

Inventory on the balance sheet increases since the returned merchandise is added back to inventory.

This reverse transaction will undo the effect of the original sale and restore the company's financials to their state prior to that transaction, assuming no restocking fee or other costs associated with the return.

Answer 2

Total assets and total equity decrease by $2,400

Step-by-step explanation:

The journal entry to record the sales return is

Sales return Dr $5,800

To account receivable $5,800

(being the sales return is recorded)

Inventory Dr $3,400

To cost of goods sold $3,400

(Being the inventory is recorded)

So as we can see that total assets and total equity decreased by

= $5,800 - $3,400

= $2,400