Galaxy Company sold merchandise costing $1,700 for $2,600 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

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The sales return decreases assets (cash)and stockholders' equity (retained earnings)by $2,600.Sales and net income decrease by that same amount.Because the company got the inventory back,the sales return increases assets (merchandise inventory)and stockholders' equity (retained earnings)by $1,700.The expense (cost of goods sold)decreases and net income increases by that same amount.The net effect of both parts of this business event is a decrease to assets and stockholders' equity of $900 (or $2,600 -$1,700).

Galaxy Company Sold Merchandise Costing $1,700 for $2,600 Cash