Galaxy Company sold merchandise costing $2,100 for $3,200 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? (Consider the effects of both parts of this event.)

Question

Quizplus · Accepted Answer

The sales return will have two effects on the financial statements. First, it will decrease the company's revenue by $3,200 (the amount of the original sale). This will decrease net income and therefore decrease total stockholders' equity by the same amount. Secondly, it will decrease the company's inventory by the cost of the merchandise returned, which is $2,100. This will decrease total assets. Therefore, total assets and total stockholders' equity will both decrease by $2,100 + $3,200 = $5,300. However, since the question asks for the effect of the sales return only, we need to consider the effect of the return on its own, which is a decrease in assets and equity by $2,100 each. Therefore, the correct answer is C.

Galaxy Company Sold Merchandise Costing $2,100 for $3,200 Cash