Reflecting on a Credit Sale Transaction in Business

What is the significance of the credit sale transaction between XYZ co and ABC company?

The credit sale transaction between XYZ co and ABC company involves a sale of inventory for a note requiring three payments. How does this transaction impact the financial statements of the companies involved?

Answer:

The business transaction involves a credit sale of inventory by XYZ co to ABC company. The sale incurs an inventory cost of $140,000 and generates revenue of $270,000 to be collected in three installments during 2024.

Reflecting on the credit sale transaction between XYZ co and ABC company, it is essential to understand the impact of this transaction on the financial statements. The sale of inventory results in revenue generation for XYZ co and an increase in inventory cost.

Initially, when XYZ co sells the inventory to ABC company on credit, it recognizes the sale revenue in its financial statements. The revenue from the credit sale will be recorded as Accounts receivable, representing the amount to be received from ABC company in three installments.

On the other hand, the cost of the inventory sold is recognized as Cost of Goods Sold (COGS) in the financial statements. In this case, the inventory cost is $140,000, reflecting the expense incurred by XYZ co in producing the goods sold to ABC company.

As each payment installment is received from ABC company, XYZ co will make corresponding entries to record the cash inflows. The payments received will reduce the Accounts receivable balance on the balance sheet, reflecting the collection of revenue from the credit sale.

Overall, the credit sale transaction between XYZ co and ABC company impacts the financial statements by affecting revenue recognition, inventory cost, and accounts receivable balance. It is crucial for companies to accurately record and analyze such transactions to maintain financial transparency and compliance.