5-291 FUNDAMENTAL ACCOUNTING PRINCIPLES 22ND EDITION SOLUTIONS MANUAL BY WILD, SHAW, CHIAPPETTA Complete download: https://testbankarea.com/download/fundamental-accounting-principles-22nd- edition-solutions-manual-wild-shaw-chiappetta/ Related Download: Test Bank Fundamental Accounting Principles 22nd Edition by Wild, Shaw, Chiappetta Chapter 5 Accounting for Merchandising Operations Questions 1. Merchandising companies report Merchandise Inventory on the balance sheet, service companies do not. Also, merchandising companies report both Sales (of goods) and Cost of Goods Sold on the income statement, while service companies do not. 2. Additional accounts of a merchandising company likely include Merchandise Inventory, Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances (and possibly Delivery Expense). 3. A company can have a net loss if its expenses (absent cost of goods sold) are greater than its gross profit from sales of merchandise. 4. A cash discount can be offered to encourage customers to promptly pay. This provides cash more quickly to the seller and avoids the costs of additional collection activities. Of course, the seller must perform a costs vs. benefits analysis on the merits and terms of any cash discount offered to customers. 5. For a perpetual inventory system, inventory shrinkage is determined by taking a physical count of the inventory available at the end of a period and comparing that amount with the amount recorded in the Merchandise Inventory account. 6. Cash discounts are granted in return for early payment and reduce the amount paid below the negotiated price. Cash discounts are recorded in the accounting records (as a reduction of Merchandise Inventory). Trade discounts are deducted from the
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5-291
FUNDAMENTAL ACCOUNTING PRINCIPLES 22ND EDITION SOLUTIONS MANUAL BY WILD,
Related Download: Test Bank Fundamental Accounting Principles 22nd
Edition by Wild, Shaw, Chiappetta
Chapter 5 Accounting for Merchandising Operations Questions
1. Merchandising companies report Merchandise Inventory on the balance sheet, service companies do not. Also, merchandising companies report both Sales (of goods) and Cost of Goods Sold on the income statement, while service companies do not.
2. Additional accounts of a merchandising company likely include Merchandise Inventory, Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances (and possibly Delivery Expense).
3. A company can have a net loss if its expenses (absent cost of goods sold) are greater than its gross profit from sales of merchandise.
4. A cash discount can be offered to encourage customers to promptly pay. This provides cash more quickly to the seller and avoids the costs of additional collection activities. Of course, the seller must perform a costs vs. benefits analysis on the merits and terms of any cash discount offered to customers.
5. For a perpetual inventory system, inventory shrinkage is determined by taking a physical count of the inventory available at the end of a period and comparing that amount with the amount recorded in the Merchandise Inventory account.
6. Cash discounts are granted in return for early payment and reduce the amount paid below the negotiated price. Cash discounts are recorded in the accounting records (as a reduction of Merchandise Inventory). Trade discounts are deducted from the
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list or catalog price to determine the purchase (negotiated) price. Trade discounts are not recorded in the accounting records.
7. Sales discount is a term used by a seller to describe a cash discount granted to a customer. Purchase discount is a term used by a purchaser to describe a cash discount received from a seller. (It is a matter of perspective: seller versus buyer.)
8. A manager is concerned about the quantity of its purchase returns because the company incurs costs in receiving, inspecting, identifying, and returning the merchandise. More returns create more expenses. By knowing more about returns, the manager can decide if they are a problem and how they can be minimized.
9. The sender (maker) of a debit memorandum records a debit in an account of the recipient; and the recipient records a credit in an account maintained for the sender.
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10. The single-step income statement format presents cost of goods sold and expenses in one list, totals the list, and subtracts the total from net sales in one step. The multiple-step format presents intermediate totals, including gross profit (the difference between net sales and cost of goods sold) and sub-categories of expenses (often by key activities).
11. Apple calls its inventory account “Inventories.” A detailed calculation of cost of goods sold is not presented by Apple.
12. Google titles its cost of sales accounts as “Cost of revenues” Google presents costs of sales separate for “Google (advertising and other)” and “Motorola Mobile (hardware and other)”.
13. Samsung titles its cost of goods sold account “Cost of sales.”
14. Samsung reports a separate gross margin figure on its consolidated income statement. Its 2013 gross profit is ₩90,996,358 (in millions of Korean won).
15. A buyer should attempt to negotiate the shipping terms FOB destination. In this case, title will pass after the goods are safely delivered to the buyer’s business and transportation charges will be the responsibility of the supplier (seller).
QUICK STUDIES
Quick Study 5-1 (10 minutes)
1. G. 6. H.
2. B. 7. I.
3. A. 8. F.
4. J. 9. C.
5. E. 10. D.
Quick Study 5-2 (5 minutes) Answer: d
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Quick Study 5-3 (15 minutes)
Computation of net income:
Krug Service Co.
Revenues ................................................... $14,000 Less: Expenses ......................................... 8,500 Net income ................................................. $ 5,500
Kleiner Merchandising Co.
Sales ........................................................... $ 9,500 Less: Cost of goods sold (see below*) ... 7,200 Gross profit ............................................... 2,300 Less: Operating expenses ....................... 1,450 Net income ................................................. $ 850
*Computation of cost of goods sold: _ Beginning inventory $ 5,000 Plus: Purchases 3,900 Goods available for sale 8,900 Less: Ending inventory 1,700 Cost of goods sold $ 7,200
Quick Study 5-4 (15 minutes)
Nov. 5 Merchandise Inventory 6,000
Accounts Payable ..................................... 6,000 To record credit purchase [(600 x $10].
Nov. 7 Accounts Payable 250
Merchandise Inventory ............................ 250 Returned defective units [(25 x $10].
Nov. 15 Accounts Payable 5,750
Cash ........................................................... 5,635 Merchandise Inventory* ........................... 115 Paid for purchase less cash discount *[(6,000 - $250) x 2%].
Quick Study 5-5 (10 minutes)
a)
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Aug. 1 Merchandise Inventory 60,000
Accounts Payable ...................................... 60,000 To record credit purchase.
b)
Aug. 11 Accounts Payable 60,000
Cash*........................................................... 58,800 Merchandise Inventory ............................. 1,200 Paid for purchase less cash discount. * [(60,000 x (100% - 2%)].
Quick Study 5-6 (10 minutes)
a)
Sept. 15 Merchandise Inventory 35,000
Accounts Payable 35,000
To record credit purchase.
b)
Sept. 28 Accounts Payable 35,000
Cash ............................................................ 35,000 Paid for purchase and discount period missed.
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Quick Study 5-7 (10 minutes)
Apr. 1 Accounts Receivable ..................................... 3,000 Sales ....................................................... 3,000 To record credit sale.
1 Cost of Goods Sold ........................................ 1,800 Merchandise Inventory ......................... 1,800 To record cost of credit sale.
4 Sales Returns and Allowances ..................... 600 Accounts Receivable ............................ 600 To record sales return.
4 Merchandise Inventory .................................. 360 Cost of Goods Sold ............................... 360 Restore cost of returned goods to inventory.
11 Cash ................................................................. 2,352 Sales Discounts* ............................................ 48 Accounts Receivable ............................. 2,400 Received payment less cash discount *[($3,000 - $600) x 2%].
Quick Study 5-8 (10 minutes) July 31 Cost of Goods Sold .................................... 1,900 Merchandise Inventory ..................... 1,900 To adjust for shrinkage based on physical count [$37,800 - $35,900].
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Quick Study 5-9 (10 minutes) July 31 Sales .............................................................. 160,200 Income Summary ................................. 160,200 To close temporary accounts with credit balances. July 31 Income Summary ......................................... 165,900 Sales Discounts 4,700
Sales Returns and Allowances 6,500
Cost of Goods Sold* ............................ 106,900 Depreciation Expense ......................... 10,300 Salaries Expense ................................. 32,500 Miscellaneous Expenses ..................... 5,000 To close temporary accounts with debit balances. (*$105,000 + $1,900 —from QS 5-8)
Quick Study 5-10 (10 minutes)
1. a
2. b
3. a
4. a
Quick Study 5-11 (10 minutes)
Acid-test ratio = ($1,490 + $2,800) / ($5,750 + $850) = 0.65 Explanation of acid-test ratio: The acid-test ratio is used to evaluate (reflect on) the liquidity of a company. It helps in determining whether a company will be able to meet its current obligations as they come due with its most liquid assets. In this case, the company only has 65 cents available in quick assets to pay $1.00 in current liabilities as they come due. An acid-test ratio less than one usually suggests some concern and encourages further analysis of liquidity.
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Quick Study 5-12 (10 minutes) Similarities: Both the acid-test ratio and current ratio are used to assess liquidity. Both ratios are computed with current liabilities as the denominator. Differences: The current ratio includes all current assets in the numerator. The acid-test ratio includes current assets less inventories and prepaids in its numerator (leaving cash & equivalents, current receivables, and short-term investments). Comparison and Description: Compared with the current ratio, the acid-test ratio is a more stringent test of a company’s ability to meet its current obligations. The acid-test ratio is more stringent as it does not assume a company relies on prepaids and inventory to pay current liabilities. This is because prepaids and inventory assets are not generally available to satisfy current obligations.
Interpretation of gross margin ratio for case a: The ratio of 36.2% implies that for each dollar in net sales the company earns 36.2 cents in gross profit. The company must still deduct other expenses that it incurs in running the business when computing net income.
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Quick Study 5-14 (20 minutes) 1. Multiple-step income statement
adidas Group Income Statement (€ millions)
For Year Ended December 31, 2013
Net sales ...................................................................... €14,492 Cost of sales ............................................................... 7,352 Gross profit ................................................................. 7,140 Operating expenses Royalty and commission income ........................ € 104 Other operating income ......................................... 143 Other operating expenses ..................................... 6,185 Operating profit .......................................................... 1,202 Other revenues and gains (expenses and losses) Financial income .................................................... 26 Financial expenses ................................................. 94 Income before taxes ................................................... 1,134 Income taxes ........................................................... 344 Net income .................................................................. € 790
2. Single-step income statement
adidas Group Income Statement (€ millions)
For Year Ended December 31, 2013
Revenues Net sales .................................................................. €14,492 Royalty and commission income ......................... 104 Other operating income ......................................... 143 Financial income .................................................... 26 Total revenues ........................................................ 14,765 Expenses Cost of sales ........................................................... €7,352 Other operating expenses ..................................... 6,185 Financial expenses ................................................. 94 Income taxes ........................................................... 344 Total expenses ........................................................ 13,975 Net income .................................................................. € 790
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Quick Study 5-15A (5 minutes)
a. Periodic inventory system b. Perpetual inventory system c. Perpetual inventory system d. Perpetual inventory system e. Perpetual inventory system Quick Study 5-16A (10 minutes)
Nov. 5 Purchases 6,000
Accounts Payable ...................................... 6,000 To record credit purchase [(600 x $10].
7 Accounts Payable 250
Purchases Returns & Allowances ........... 250 Returned defective units [(25 x $10].
15 Accounts Payable 5,750
Cash ............................................................ 5,635 Purchases Discounts* ............................... 115 Paid for purchase less cash discount * [(6,000 - $250) x 2%)].
Quick Study 5-17A (10 minutes)
Apr. 1 Accounts Receivable ........................................ 3,000 Sales .......................................................... 3,000 To record credit sale.
4 Sales Returns and Allowances ........................ 600 Accounts Receivable ............................... 600 To record sales return.
11 Cash .................................................................... 2,352 Sales Discounts* ............................................... 48 Accounts Receivable ................................ 2,400 Received payment less cash discount *($3,000 - $600) x 2%.
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Quick Study 5-18 (10 minutes) a. Both U.S. GAAP and IFRS include broad and similar guidance for the
accounting of merchandise purchases and sales.
b. Under IFRS, reference to finance costs usually refers to interest expense.
c. IFRS permits alternative measures of income to be reported as part of the income statement.
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EXERCISES
Exercise 5-1 (30 minutes) Note: The original missing numbers are blocked.
Net income (loss) ........ $17,950 $16,850 $ (8,400) $42,000 $12,600
Explanations:
a. Find merchandise inventory (ending) by subtracting cost of goods sold from goods available for sale. Find gross profit as the difference between the sales and cost of goods sold. Find net income as the gross profit less the expenses.
b. Find total cost of merchandise purchases by finding the number that makes the total equal the cost of goods sold. Find gross profit from sales less cost of goods sold.
c. Find cost of goods sold from sales less gross profit. Find cost of merchandise purchases by finding the number to make the calculation equal cost of goods sold.
d. Calculate cost of goods sold as usual. Calculate sales as gross profit plus cost of goods sold.
e. Find merchandise inventory (ending) by subtracting cost of goods sold from goods available for sale. Find gross profit from sales less cost of goods sold. Find net income as gross profit less expenses.
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Exercise 5-2 (10 minutes) Operating cycle of a merchandiser with credit sales follows (chronological):
2 (a) inventory made available for sale
5 (b) cash collections from customers
3 (c) credit sales to customers
1 (d) purchases of merchandise
4 (e) accounts receivable accounted for Exercise 5-3 (20 minutes)
In today’s competitive world, organizations must concentrate on meeting their customers’ needs and avoiding dissatisfaction. If these needs are not met and dissatisfaction grows, the customers will deal with other companies or entities. One measure of dissatisfaction of customers is the amount of sold goods that are later returned. Customer dissatisfaction needs to be understood and then dealt with promptly to encourage them to remain loyal. The reasons for the return also need to be determined to allow the problem to be avoided in the future. For example, the returns might arise from product defects, shipping damage, misleading information provided at the time of sale, or fickle customers.
An important early step in controlling returns is to have information about their dollar amount. In addition, managers can set goals for reducing the dollar amount of sales returns. Both objectives can be helped by having the company’s accounting system record the sales value of returned goods in a separate contra account instead of the Sales account. This approach captures the information at the time of the return and allows it to be easily reported.
While a company’s sales return record is important for managers, it is also valuable information for external decision makers. This information can help external users identify organizations focusing on customer satisfaction and product quality. Although management might choose to report the amount of sales returns as evidence of sales satisfaction, their amount is rarely reported in financial statements provided to investors, creditors, and other external users.
Chapter 05 - Accounting for Merchandising Operations
21 Accounts Payable—Frist .................................. 1,100 Merchandise Inventory ............................. 1,100 Received an allowance on purchase.
May 5 Accounts Receivable ....................................... 21,000 Sales ........................................................... 21,000 Sold merchandise on credit (1,500 x $14).
5 Cost of Goods Sold .......................................... 15,000 Merchandise Inventory ............................. 15,000 To record cost of sale (1,500 x $10).
a. May 7 Sales Returns and Allowances ....................... 2,800 Accounts Receivable ................................ 2,800 Accepted a return from a customer (200 x $14).
7 Merchandise Inventory .................................... 2,000 Cost of Goods Sold .................................. 2,000 Returned merchandise to inventory (200 x $10).
b. May 8 Sales Returns and Allowances ........................ 600 Accounts Receivable ................................. 600 Granted allowance for damaged merchandise.
c. May 15 Sales Returns and Allowances ........................ 680 Accounts Receivable ................................. 680 Granted allowance for mis-colored merchandise
and accepted a return from a customer for the mis-colored merchandise [$120 + (40 x $14)].
15 Merchandise Inventory ..................................... 400 Cost of Goods Sold ................................... 400 Returned merchandise to inventory (40 x $10).
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Exercise 5-6 (15 minutes)
May 5 Merchandise Inventory .................................... 21,000 Accounts Payable ..................................... 21,000 Purchased merchandise on credit (1,500 x $14).
a. May 7 Accounts Payable ............................................ 2,800 Merchandise Inventory ............................. 2,800 Returned unwanted merchandise (200 x $14).
b. May 8 Accounts Payable ............................................ 600 Merchandise Inventory ............................. 600 To record allowance for damaged merchandise.
c. May 15 Accounts Payable ............................................ 680 Merchandise Inventory ............................. 680 To record allowance for mis-colored goods and
return of mis-colored merchandise $120 + (40 x $14).
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Exercise 5-7 (30 minutes)
1. BUYER- Santa Fe Company
a) Credit Purchase Merchandise Inventory .................................... 24,000 Accounts Payable ..................................... 24,000 Purchased merchandise on credit.
b) Cash Payment Accounts Payable ............................................ 24,000 Merchandise Inventory* ........................... 720 Cash ........................................................... 23,280 *[24,000 x 3%] Paid account payable within 3% discount period.
2. SELLER – Mesa Company
a) Credit Sale Accounts Receivable ....................................... 24,000 Sales ........................................................... 24,000 Sold merchandise on account.
Cost of Goods Sold ......................................... 16,000 Merchandise Inventory ............................ 16,000 To record cost of sale.
3. Amount borrowed to pay with discount ....................... $ 23,280 Annual rate of interest ................................................... x 8% Interest per year .............................................................. $1,862.40
Interest per day ($1,862.40 / 365 days) .......................... $5.10* Savings from discount taken ($24,000 - $23,280) $ 720.00
Interest paid on 50-day loan (50 days x $5.10) ............. (255.00) Net savings from borrowing to pay in discount period $ 465.00
*Rounded; if not rounded, the net savings are $464.88 instead of $465.00.
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Exercise 5-8 (25 minutes)
1. Entries for Sydney Company (BUYER):
May 11 Merchandise Inventory .................................. 40,000 Accounts Payable .................................... 40,000 Purchased merchandise on credit.
20 Accounts Payable ........................................... 38,600 Merchandise Inventory* .......................... 1,158 Cash .......................................................... 37,442 Paid balance within the 3% discount period. *($38,600 x .03).
2. Entries for Troy Corporation (SELLER):
May 11 Accounts Receivable ...................................... 40,000 Sales .......................................................... 40,000 Sold merchandise on account.
11 Cost of Goods Sold ......................................... 30,000 Merchandise Inventory ............................ 30,000 To record cost of sale.
13 Sales Returns and Allowances ...................... 1,400 Accounts Receivable ............................... 1,400 Accepted a return from a customer.
13 Merchandise Inventory .................................. 800 Cost of Goods Sold ................................. 800 Returned goods to inventory.
Merchandise Inventory ..................................... 130 Cost of Goods Sold ................................... 130
To record return of merchandise to inventory.
Instructor note: This second entry changes if the goods returned are defective. In this case the returned inventory is recorded at its estimated value, not its cost. To illustrate, if the goods (costing $130) returned are defective and estimated to be worth, say, $50, the following entry is made: Dr. Merchandise Inventory for $50, Dr. Loss from Defective Merchandise for $80, and Cr. Cost of Goods Sold for $130.
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Exercise 5-11 (25 minutes) Adjusting entries
Dec. 31 Sales Salaries Expense ................................... 1,700 Salaries Payable........................................ 1,700 To record accrued salaries.
Dec. 31 Selling Expenses .............................................. 3,000 Prepaid Selling Expenses ........................ 3,000 To record expired prepaid selling expenses.
Dec. 31 Cost of Goods Sold .......................................... 1,550 Merchandise Inventory ............................. 1,550 To record inventory shrinkage ($30,000 - $28,450).
Closing entries
Dec. 31 Sales .............................................................. 529,000 Income Summary ................................... 529,000 To close temporary accounts with
credit balances.
Dec. 31 Income Summary .......................................... 444,750 Sales Returns and Allowances ............. 17,500 Sales Discounts ..................................... 5,000 Cost of Goods Sold ($212,000 + $1,550) ..... 213,550 Sales Salaries Exp. ($48,000 + $1,700) ........ 49,700 Utilities Expense .................................... 15,000 Selling Expenses ($36,000 + $3,000) ........... 39,000 Administrative Expenses ...................... 105,000 To close temporary accounts with debit
balances.
Dec. 31 Income Summary .......................................... 84,250 K. Emiko, Capital.................................... 84,250 To close Income Summary account.
Dec. 31 K. Emiko, Capital ........................................... 33,000 K. Emiko, Withdrawals .......................... 33,000 To close the withdrawals account.
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Exercise 5-12 (10 minutes)
Multiple-Step Income Statement — Sales Related Information Only Sales (gross) ............................................................... $200,000 Less: Sales discounts ............................................ $ 4,000 Sales returns and allowances ..................... 16,000 20,000 Net sales ...................................................................... 180,000
Exercise 5-13 (20 minutes) The employee’s oversight in omitting these goods from the physical count would cause the cost of the physical count of ending inventory to be understated. Therefore, the comparison of the perpetual inventory records with the physical count would incorrectly indicate an additional shrinkage of $3,000. An entry would be made to debit Cost of Goods Sold and credit Merchandise Inventory for this amount. As a result, the company’s ending inventory, current assets, total assets, equity, and net income would all be understated by $3,000.
As a result of this error:
Return on assets would be understated (numerator impact outweighs the denominator impact).
Debt ratio would be overstated because its denominator would be understated.
Current ratio would be understated because its numerator would be understated.
Acid-test ratio would be unaffected because inventory is not a quick asset.
Exercise 5-14 (20 minutes) See the solution explanation in Exercise 5-13. As a result of this error:
Gross margin (gross profit/sales) would be understated because the gross profit would be understated.
Profit margin (net income/sales) would be understated because the net income would be understated.
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Exercise 5-15 (15 minutes) Case X Case Y Case Z
Current ratio computation
Current assets ........................ $5,200 $3,500 $7,410 Current liabilities .................... $2,000 $1,000 $3,800 Current ratio ............................ 2.60 3.50 1.95
Credit Sale Accounts Receivable ....................................... 24,000 Sales ........................................................... 24,000 Sold merchandise on account.
12 Accounts Payable ........................................... 1,400 Purchases Returns and Allowances ...... 1,400 Returned unacceptable merchandise.
20 Accounts Payable ........................................... 38,600 Purchases Discounts .............................. 1,158 Cash .......................................................... 37,442 Paid balance within the 3% discount period.
2. Entries for Troy Corporation (SELLER):
May 11 Accounts Receivable ...................................... 40,000 Sales .......................................................... 40,000 Sold merchandise on account.
13 Sales Returns and Allowances ...................... 1,400 Accounts Receivable ............................... 1,400 Accepted a return from a customer.
To record cash payment in discount period. * [$1,500 x 2%] 3) Nov. 7 Cash .................................................................... 196 Purchases Returns and Allowances* ...... 196
To record check received for return of purchases previously paid for with discount already taken.
Finance income ........................................................................ 33.5
Other income ............................................................................ 145.2
Profit before tax expense ................................................... 4,024.4
Income tax expense ................................................................. 1,063.0
Net profit ................................................................................... € 2,961.4
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PROBLEM SET A Problem 5-1A (40 minutes) July 1 Merchandise Inventory ..................................... 6,000 Accounts Payable—Boden ....................... 6,000 Purchased goods on credit, terms 1/15, n/30.
2 Accounts Receivable—Creek........................... 900 Sales ............................................................ 900 Sold goods on credit, terms 2/10, n/60.
2 Cost of Goods Sold ........................................... 500 Merchandise Inventory .............................. 500 To record cost of the July 2 sale.
8 Cash .................................................................... 1,700 Sales ............................................................ 1,700 Sold goods for cash.
8 Cost of Goods Sold ........................................... 1,300 Merchandise Inventory .............................. 1,300 To record cost of the July 8 sale.
11 Accounts Payable—Leight ............................... 200 Merchandise Inventory .............................. 200 Received credit memo from returning goods to supplier.
12 Cash .................................................................... 882 Sales Discounts (2%) ........................................ 18 Accounts Receivable—Creek ................... 900 Collected receivable within the discount period.
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Problem 5-1A (Concluded)
July 16 Accounts Payable—Boden ............................... 6,000 Merchandise Inventory (1%) ..................... 60 Cash ............................................................ 5,940 Paid payable within discount period.
19 Accounts Receivable—Art ............................... 1,200 Sales ............................................................ 1,200 Sold goods on credit, terms 2/15, n/60.
19 Cost of Goods Sold ........................................... 800 Merchandise Inventory .............................. 800 To record cost of the July 19 sale.
21 Sales Returns and Allowances ........................ 200 Accounts Receivable—Art ........................ 200 Issued credit memo for allowance on
goods sold to customer.
24 Accounts Payable—Leight ............................... 2,000 Merchandise Inventory * ........................... 40 Cash ............................................................ 1,960 Paid payable in discount period (*2% x $2,000).
31 Accounts Receivable—Creek........................... 7,000 Sales ............................................................ 7,000 Sold goods on credit with terms 2/10, n/60.
31 Cost of Goods Sold ........................................... 4,800 Merchandise Inventory .............................. 4,800
To record cost of the July 31 sale.
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Problem 5-2A (40 minutes) Aug. 1 Merchandise Inventory ..................................... 7,500 Accounts Payable—Arotek ....................... 7,500 Purchased goods on credit, terms 1/10, n/30.
5 Accounts Receivable—Laird ............................ 5,200 Sales ............................................................ 5,200 Sold goods on credit, terms 2/10, n/60.
5 Cost of Goods Sold ........................................... 4,000 Merchandise Inventory .............................. 4,000 To record the cost of August 5 sale.
9 Delivery Expense ............................................... 125 Cash ............................................................ 125 Paid shipping charges on August 5 sale.
10 Sales Returns and Allowances ........................ 600 Accounts Receivable—Laird .................... 600 Customer returned merchandise.
10 Merchandise Inventory ..................................... 400 Cost of Goods Sold ................................... 400 Returned goods to inventory.
12 Accounts Payable—Waters .............................. 700 Merchandise Inventory .............................. 700 Received a credit memorandum for August 8
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Problem 5-2A (Concluded)
Aug. 15 Cash .................................................................... 4,508 Sales Discounts* ............................................... 92 Accounts Receivable—Laird .................... 4,600 Collected receivable within 2% discount period. *[($5,200 - $600) x 2%]
18 Accounts Payable—Waters .............................. 4,840 Merchandise Inventory * ........................... 47 Cash ............................................................ 4,793 Paid payable within discount period *(1% x $4,700).
19 Accounts Receivable—Tux .............................. 4,800 Sales ............................................................ 4,800 Sold goods on credit, terms 1/10, n/30.
19 Cost of Goods Sold ........................................... 2,400 Merchandise Inventory .............................. 2,400 To record cost of the August 19 sale.
Selling expenses Sales salaries expense .................................. 32,000 Rent expense—Selling space ....................... 8,000 Store supplies expense ................................. 1,500 Advertising expense ...................................... 13,000 Total selling expenses .................................. 54,500 General and administrative expenses Office salaries expense ................................. 28,500 Rent expense—Office space ........................ 3,600 Office supplies expense ................................ 400 Total general and administrative expenses 32,500 Total expenses ................................................. 87,000
Net income .......................................................... $ 49,850
*Cost of goods sold (alternative computation): Merchandise inventory, August 31, 2014 ............................ $ 25,400 Total cost of merchandise purchased (from part 2) .......... 90,100 Merchandise available for sale............................................. 115,500 Merchandise inventory, August 31, 2015 ............................ 41,000 Cost of goods sold ................................................................ $ 74,500
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Problem 5-3A (Concluded) 4. Single-step income statement
VALLEY COMPANY Income Statement
For Year Ended August 31, 2015
Net sales .................................................................. $211,350
Expenses
Cost of goods sold ............................................... $74,500
General and administrative expenses ................ 32,500
Total expenses ..................................................... 161,500
Net income ............................................................... $ 49,850
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Problem 5-4A (30 minutes) Part 1
Closing entries
Aug. 31 Sales ............................................................. 225,600 Income Summary .................................. 225,600 To close temporary accounts with
credit balances.
Aug. 31 Income Summary ......................................... 175,750 Sales Discounts ................................... 2,250 Sales Returns and Allowances ........... 12,000 Cost of Goods Sold .............................. 74,500 Sales Salaries Expense ........................ 32,000 Rent Expense—Selling Space ............. 8,000 Store Supplies Expense ....................... 1,500 Advertising Expense ............................ 13,000 Office Salaries Expense ....................... 28,500 Rent Expense—Office Space ............... 3,600 Office Supplies Expense ...................... 400 To close temporary accounts with
debit balances.
Aug. 31 Income Summary ......................................... 49,850 K. Valley, Capital ................................... 49,850 To close the Income Summary account.
Aug. 31 K. Valley, Capital .......................................... 8,000 K. Valley, Withdrawals .......................... 8,000 To close the withdrawals account.
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Problem 5-4A (Concluded) Part 2 The first step is to determine the amount of purchases that are subject to a discount during the year:
Invoice cost of merchandise purchases ........... $92,000 Purchase returns and allowances ...................... (4,500) Total cost of merchandise payable .................... $87,500
This amount is used to determine the maximum discount, which is then compared to the actual discount:
Maximum discount available (3% x $87,500) .... $ 2,625 Purchase discounts received ............................. (2,000) Purchase discounts missed ............................... $ 625
As a percent of available discounts ($625/$2,625) ................. 23.8%
This analysis suggests that nearly 24% of available discounts have been missed. As a result, it would appear that cash is not being well managed. Management should try to identify a better system for ensuring that all favorable discounts are taken. It is possible that the 24% of discounts not taken are actually at rates not favorable to the company (meaning that management is worse off expending resources on those discounts)—further information is required to assess this possibility. Part 3 The first step is to compute this year’s sales returns and allowances rate:
Sales ...................................................................... $225,600 Sales returns and allowances ............................ $ 12,000
Percent of returns and allowances to sales ...... 5.3%
This calculation shows that the company’s customers are returning or requiring allowances on items at a higher rate than the 4% rate observed in prior years. It appears that management should investigate the situation to see why there are more dissatisfied customers this year than in prior years.
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Problem 5-5A (60 minutes)
Part 1
Adjustment (a)
Jan 31 Store Supplies Expense ................................... 4,050 Store Supplies ............................................ 4,050 To record store supplies expense ($5,800 - $1,750).
Adjustment (b)
Jan 31 Insurance Expense ............................................ 1,400 Prepaid Insurance ...................................... 1,400 To record expired insurance.
Adjustment (c)
Jan 31 Depreciation Expense—Store Equip ............... 1,525 Accumulated Deprec.—Store Equip ........ 1,525 To record depreciation expense.
Adjustment (d)
Jan 31 Cost of Goods Sold ........................................... 1,600 Merchandise Inventory .............................. 1,600 To adjust inventory for shrinkage ($12,500 - $10,900).
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Problem 5-5A (Continued) Part 2 Multiple-step income statement
NELSON COMPANY Income Statement
For Year Ended January 31, 2015 Sales ......................................................................... $111,950 Less: Sales discounts ............................................ $ 2,000 Sales returns and allowances ..................... 2,200 4,200 Net sales ................................................................... 107,750
Cost of goods sold* ................................................ 40,000
General and administrative expenses Insurance expense ................................................ 1,400 Office salaries expense** ...................................... 17,500 Rent expense—Office space** ............................. 7,500 Total general and administrative expenses ........ 26,400 Total expenses ...................................................... 66,775
Net income ............................................................... $ 975
* $40,000 = $38,400 + $1,600 (shrinkage)
**Salaries and rent expenses are equally divided between selling activities and general and administrative activities.
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Problem 5-5A (Concluded)
Part 3 Single-step income statement
NELSON COMPANY Income Statement
For Year Ended January 31, 2015
Net sales ................................................................ $107,750 Expenses
Cost of goods sold .......................................... $40,000 Selling expenses ............................................. 40,375* General and administrative expense ............. 26,400* Total expenses ................................................ 106,775
Net income ............................................................ $ 975
*From Part 2
Part 4
Current assets Cash ............................................................................. $ 1,000 Merchandise inventory ............................................... 10,900 Store supplies ............................................................. 1,750 Prepaid insurance ....................................................... 1,000* Total current assets .................................................... $ 14,650
Current liabilities ............................................................ $ 10,000
Current ratio ($14,650 / $10,000) ........................................ 1.47
Current liabilities ............................................................ $ 10,000
Acid-test ratio ($1,000 / $10,000) ....................................... 0.10
Net Sales ......................................................................... $107,750 Cost of Goods Sold ........................................................ 40,000
PROBLEM SET B Problem 5-1B (40 minutes) May 2 Merchandise Inventory ..................................... 10,000 Accounts Payable—Havel ......................... 10,000 Purchased goods on credit, terms 1/15, n/30.
4 Accounts Receivable—Heather ....................... 11,000 Sales ............................................................ 11,000 Sold goods on credit, terms 2/10, n/60.
4 Cost of Goods Sold ........................................... 5,600 Merchandise Inventory .............................. 5,600 To record cost of the May 4 sale.
9 Cash .................................................................... 2,500 Sales ............................................................ 2,500 Sold goods for cash.
9 Cost of Goods Sold ........................................... 2,000 Merchandise Inventory .............................. 2,000 To record cost of the May 9 sale.
Problem 5-1B (Concluded) May 17 Accounts Payable—Havel ............................... 10,000 Merchandise Inventory * ........................... 100 Cash ............................................................ 9,900 Paid payable in discount period (*10,000 x 1%).
20 Accounts Receivable—Tameron .................... 2,800 Sales ............................................................ 2,800 Sold goods on credit, terms 2/15, n/60.
20 Cost of Goods Sold .......................................... 1,450 Merchandise Inventory .............................. 1,450 To record cost of the May 20 sale.
22 Sales Returns and Allowances ....................... 400 Accounts Receivable—Tameron .............. 400 Issued credit memo for allowances on
31 Accounts Receivable—Heather ...................... 7,200 Sales ............................................................ 7,200 Sold goods on credit with terms 2/10, n/60.
31 Cost of Goods Sold .......................................... 3,600 Merchandise Inventory .............................. 3,600 To record cost of the May 31 sale.
Chapter 05 - Accounting for Merchandising Operations
Problem 5-2B (40 minutes) July 3 Merchandise Inventory .................................... 15,000 Accounts Payable—OLB .......................... 15,000 Purchased goods on credit, terms 1/10, n/30.
7 Accounts Receivable—Brill ............................. 11,500 Sales ........................................................... 11,500 Sold goods on credit, terms 2/10, n/60.
7 Cost of Goods Sold .......................................... 7,750 Merchandise Inventory ............................. 7,750 To record cost of the July 7 sale.
11 Delivery Expense .............................................. 300 Cash ........................................................... 300 Paid shipping charges on July 7 sale.
12 Sales Returns and Allowances ....................... 1,850 Accounts Receivable—Brill ..................... 1,850 Customer returned merchandise.
12 Merchandise Inventory .................................... 1,450 Cost of Goods Sold .................................. 1,450 Returned goods to inventory.
14 Accounts Payable—Rupert ............................. 2,000 Merchandise Inventory ............................. 2,000 Received a credit memorandum for July
21 Accounts Receivable—Brown ........................ 11,000 Sales ........................................................... 11,000 Sold goods on credit, terms 1/10, n/30.
21 Cost of Goods Sold .......................................... 7,000 Merchandise Inventory ............................. 7,000 To record cost of the July 21 sale.
Problem 5-3B (40 minutes) 1. Net sales Sales ................................................................................. $332,650 Less: Sales discounts .................................................... (5,875) Sales returns and allowances ............................. (20,000) Net sales .......................................................................... $306,775
2. Cost of merchandise purchased Invoice cost of merchandise purchases ....................... $138,500 Purchase discounts received ........................................ (2,950) Purchase returns and allowances ................................. (6,700) Costs of transportation-in .............................................. 5,750 Total cost of merchandise purchases .......................... $134,600
Total expenses ................................................... 136,000
Net income .......................................................... $ 55,175
*Cost of goods sold (alternative computation): Merchandise inventory, March 31, 2014 .................................. $ 37,500 Total cost of merchandise purchases (from part 2) ............... 134,600 Goods available for sale ............................................................ 172,100 Merchandise inventory, March 31, 2015 .................................. 56,500 Cost of goods sold ..................................................................... $115,600
Chapter 05 - Accounting for Merchandising Operations
For Year Ended March 31, 2015 Net sales ................................................................ $306,775 Expenses Cost of goods sold ........................................... $115,600 Selling expenses* ............................................. 90,350 General and administrative expenses*........... 45,650 Total expenses .................................................. 251,600 Net income ............................................................ $ 55,175
*From Part 3.
Problem 5-4B (30 minutes) Part 1
Closing entries March 31 Sales .................................................................. 332,650 Income Summary .......................................... 332,650 To close temporary accounts with credit balances.
March 31 Income Summary ............................................... 277,475 Sales Discounts ........................................... 5,875 Sales Returns and Allowances ................... 20,000 Cost of Goods Sold ...................................... 115,600 Sales Salaries Expense ................................ 44,500 Rent Expense, Selling Space ....................... 16,000 Store Supplies Expense ............................... 3,850 Advertising Expense .................................... 26,000 Office Salaries Expense ............................... 40,750 Rent Expense, Office Space ........................ 3,800 Office Supplies Expense .............................. 1,100 To close temporary accounts with debit balances.
March 31 Income Summary ............................................... 55,175 C. Barkley, Capital ........................................ 55,175 To close the Income Summary account.
March 31 C. Barkley, Capital ............................................. 3,000 C. Barkley, Withdrawals ............................... 3,000 To close the withdrawals account.
As a percent of available discounts ($1,004/$3,954) .............. 25.4%
This analysis suggests that about 25% of available discounts have been missed. As a result, it would appear that cash is not being well managed. Management should try to identify a better system for ensuring that all favorable discounts are taken. It is possible that the 25% of discounts not taken are actually at rates not favorable to the company (meaning that management is worse off expending resources on those discounts)—further information is required to assess this possibility. It is possible that the discounts not taken are actually not favorable to the company. Part 3
First, we compute this year’s sales returns and allowances rate:
Sales returns and allowances ........................................... $ 20,000
Percent of returns and allowances to sales ..................... 6.0%
This calculation shows that the company’s customers are returning or requiring allowances on items at a higher rate than the 5% rate observed in prior years. It appears that management should investigate the situation to see why there are more dissatisfied customers this year than in prior years.
Chapter 05 - Accounting for Merchandising Operations
Oct. 31 Store Supplies Expense ................................... 6,000 Store Supplies ............................................ 6,000 To record store supplies expense ($9,700 - $3,700).
Adjustment (b)
Oct. 31 Insurance Expense ............................................ 2,800 Prepaid Insurance ...................................... 2,800 To record expired insurance.
Adjustment (c)
Oct. 31 Depreciation Expense—Store Equip ............... 3,000 Accumulated Deprec.—Store Equip ........ 3,000 To record depreciation expense.
Adjustment (d)
Oct. 31 Cost of Goods Sold ........................................... 2,700 Merchandise Inventory .............................. 2,700 To adjust inventory for shrinkage ($24,000 - $21,300).
Sales ......................................................................... $227,100 Less: Sales discounts ............................................ $ 1,000 Sales returns and allowances ..................... 5,000 6,000 Net sales ................................................................... 221,100 Cost of goods sold * ............................................... 78,500 Gross profit .............................................................. 142,600 Expenses Selling expenses Depreciation expense—Store equipment ......... 3,000 Sales salaries expense** .................................... 31,500 Rent expense—Selling space**.......................... 13,000 Store supplies expense ...................................... 6,000 Advertising expense ........................................... 17,800 Total selling expenses ........................................ 71,300 General and administrative expenses Insurance expense .............................................. 2,800 Office salaries expense** .................................... 31,500 Rent expense—Office space** ........................... 13,000 Total general and administrative expenses ...... 47,300 Total expenses ....................................................... 118,600 Net income ............................................................... $ 24,000
* $78,500 = $75,800 + $2,700 (shrinkage) ** Salaries and rent expenses are equally divided between selling and general and administrative.
Part 3 Single-step income statement
FOSTER PRODUCTS COMPANY Income Statement
For Year Ended October 31, 2015
Net sales ................................................................... $221,100 Expenses
Cost of goods sold ............................................. $78,500 Selling expenses ................................................ 71,300* General and administrative expense ................ 47,300* Total expenses ................................................... 197,100
Net income ............................................................... $ 24,000 * From part 2
Chapter 05 - Accounting for Merchandising Operations
5 Cash .................................................................101 25,000 S. Rey, Capital ..........................................301 25,000 Additional investment by owner.
11 Accounts Receivable—Alex’s Eng. Co ............106.1 5,500 Unearned Computer Services Revenue ..........236 1,500 Computer Services Revenue .................403 7,000 Completed work on project.
13 Accounts Receivable—Liu Corp. ...................106.5 5,200 Sales .........................................................413 5,200 Sold merchandise on credit.
13 Cost of Goods Sold ........................................502 3,560 Merchandise Inventory ...........................119 3,560 To record cost of Jan. 13 sale.
20* Sales Returns and Allowances .....................414 500 Accounts Receivable—Liu Corp. ...........106.5 500 Customer returned defective goods.
* Business Solutions leaves the cost of defective products in its costs of goods sold. If it did not, the following entry would have been recorded:
Loss from Defective Merchandise ...... 808 320 Cost of Goods Sold ......................... 502 320
22 Cash .................................................................101 4,653 Sales Discounts ..............................................415 47 Accounts Receivable—Liu Corp ............106.5 4,700 Collected accounts receivable. January 13 sale ..................................... $5,200 January 20 return ................................... 500 Amount due from Liu ............................. $4,700 Discount at 1% ....................................... 47 Cash received from Liu ......................... $4,653
24 Accounts Payable ..........................................201 496 Merchandise Inventory ............................119 496 Returned merchandise for credit.
26 Accounts Receivable—KC, Inc ......................106.8 5,800 Sales .........................................................413 5,800 Sold merchandise on credit.
26 Cost of Goods Sold ........................................502 4,640 Merchandise Inventory ...........................119 4,640 To record cost of Jan. 26 sale.
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Serial Problem — SP 5 (Continued)
Feb. 1 Prepaid Rent ...................................................131 2,475 Cash .........................................................101 2,475 Paid three months’ rent in advance.
3 Accounts Payable ..........................................201 8,504 Merchandise Inventory ...........................119 90 Cash .........................................................101 8,414 Paid account payable within discount period. January 26 purchase ........................ $9,000 Less credit allowed .......................... (496) Accounts payable to Kansas Corp. $8,504 Less discount at 1% x $9,000 .......... (90) Amount due to Kansas Corp. .......... $8,414
5 Advertising Expense ......................................655 600 Cash .........................................................101 600 Purchased ad in local newspaper.
23 Accounts Receivable—Delta Co. ...................106.7 3,220 Sales .........................................................413 3,220 Sold merchandise on credit.
23 Cost of Goods Sold ........................................502 2,660 Merchandise Inventory ...........................119 2,660 To record cost of Feb. 23 sale.
27 Mileage Expense ............................................676 192 Cash .........................................................101 192 Reimbursed Rey for business mileage.
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Serial Problem — SP 5 (Continued)
Mar. 8 Computer Supplies ........................................126 2,730 Accounts Payable ...................................201 2,730 Purchased supplies on credit.
25 Accounts Receivable—Wildcat Services ........... 106.2 2,800 Sales .........................................................413 2,800 Sold merchandise on credit.
25 Cost of Goods Sold ........................................502 2,002 Merchandise Inventory ...........................119 2,002 To record cost of March 25 sale.
30 Accounts Receivable—IFM Co. .....................106.4 2,220 Sales .........................................................413 2,220 Sold merchandise on credit.
30 Cost of Goods Sold ........................................502 1,048 Merchandise Inventory ...........................119 1,048 To record cost of March 30 sale.
31 Mileage Expense ............................................676 128 Cash .........................................................101 128 Reimbursed Rey for business mileage.
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Serial Problem — SP 5 (Continued) Part 2 Ledger accounts as of March 31 before posting of March 31 adjusting entries
Accounts receivables, net ..... 13,102 13,102 10,930 10,930
Inventories, net ..................... 1,764 791
Deferred tax assets .............. 3,453 2,583
Vendor non-trade receivables ... 7,539 7,762
Other current assets ............ 6,882 _______ 6,458 _______
Total current assets ............... $73,286 $57,653 Total quick assets .................. $53,648 $40,059 Total current liabilities ........... $43,658 $43,658 $38,542 $38,542 Ratio ........................................ 1.68 1.23 1.50 1.04
Interpretation: The current ratio increased from 1.50 in 2012 to 1.68 in 2013. The acid-test ratio increased from 1.04 in 2012 to 1.23 in 2013. The year-to-year comparison shows that Apple’s liquidity position has improved slightly when considering the current ratio and the acid-test ratio. In both years its current ratio is at or above the industry average of 1.5 but below the rule-of-thumb ratio of 2.0. A similar interpretation applies to its acid-test ratio, which is below the industry average of 1.25 but is above the rule-of-thumb ratio of 1.0.
3. Solution depends on the financial statement data obtained.
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Comparative Analysis — BTN 5-2 1.
Apple Google ($ millions) Current Prior Current Prior
Net sales .................. $170,910 $156,508 $59,825 $50,175
Cost of sales ............ 106,606 87,846 25,858 20,634
2. In both years, Google’s gross margin ratio was higher than that for Apple. For both years, Apple’s gross margin ratio was below the industry average of 45.0%, whereas in both years Google’s gross margin exceeded the industry average.
3. Apple’s gross margin ratio declined from 43.9% to 37.6% and Google’s
gross margin ratio declined from 58.9% to 56.8%.
Ethics Challenge — BTN 5-3 1. A few students sometimes feel that Amy has devised a clever way to
beat the system. She appears to be succeeding in getting something for free. However, most students fortunately feel that Amy is abusing the system and that her ethical conduct needs an overhaul. The instructor may wish to point out that customer abuses such as Amy’s usually result in stores adopting stringent return policies that impact all customers who have legitimate needs to return unused products. At some point, Amy will probably suffer discomfort when questioned about items that are returned in less than new condition. Also, if store managers suspect Amy is abusing the system, they may no longer allow her to shop at their store. If Amy is banned from the store, she will likely suffer humiliation for herself, her family, and her friends.
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Ethics Challenge, BTN 5-3 — (Concluded) 2. The merchandising company accounts for sales returns using a contra
revenue account called Sales Returns and Allowances. A dress returned with a sales bill of $200 would be accounted for as follows:
Sales Returns and Allowances 200
Accounts Receivable ..................... 200
Also, if the item is returned to inventory (and it had cost $160), the following entry is made:
Merchandise Inventory 160
Cost of Goods sold ........................ 160
Communicating in Practice — BTN 5-4
Note: While responses will vary, the essence of its content follows: TO: Mr. V. Velakturi FROM: DATE: SUBJECT: Reply to inventory shrinkage question You are correct in noting that Music Plus has lost inventory as a result of shoplifting and other forms of shrinkage. However, you will be pleased to know your investment in security has paid off. Let me explain. We maintain a perpetual inventory system, which continuously updates inventory account balances as goods are purchased, sold, and returned. At the end of each accounting period, we take an actual physical inventory and compare this amount to our inventory records. These accounting procedures for verifying inventory available have disclosed that the amount of inventory loss is not abnormally large. Accounting procedures allow this immaterial shrinkage to be directly charged to cost of goods sold. This is why you do not see a specific deduction for shrinkage on the income statement. Instead, the deduction has been taken in the form of increased cost of goods sold. I hope this addresses your concern and that you are now confident that net income is not overstated. If you have any additional questions or require more specific information regarding inventory shrinkage, please let me know. The supporting information is available in the accounting records.
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Taking It to the Net — BTN 5-5
Fiscal Year ($ thousands) 2012 2013 2014
Net sales ........................................... $1,721,750 $2,227,717 $2,428,257
Cost of goods sold .......................... 1,042,197 1,240,989 1,422,143
Gross margin ratio .......................... 39.5% 44.3% 41.4%
Analysis: J. Crew’s gross margin ratio improved from 39.5% in 2012 to 44.3% in 2013, but declined to 41.4% in 2014. Its net sales increased in 2014, albeit with a lower gross margin percentage.
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Teamwork in Action — BTN 5-6 1. a. Net sales computation Sales ............................................................................ $600,000 Less: Sales discounts ............................................. $ 13,000 Sales returns and allowances ...................... 20,000 33,000 Net sales ..................................................................... $567,000 b. Total cost of merchandise purchases computation
Invoice cost of merchandise purchases .................... $360,000 Less: Purchase discounts received ......................... (9,000) Purchase returns and allowances .................. (11,000) Add costs of transportation-in .................................... 22,000 Total cost of merchandise purchases ........................ $362,000
c. Cost of goods sold computation
Merchandise inventory, Beginning ............................. $ 98,000 Total cost of merchandise purchased (from b) ......... 362,000 Merchandise available for sale ................................... $460,000 Merchandise inventory, Ending .................................. (84,000) Cost of goods sold ....................................................... $376,000
d. Gross profit computation
Net sales (from a) ........................................................ $567,000 Less: Cost of goods sold (from c) ............................. 376,000 Gross profit ................................................................. $191,000
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Teamwork in Action (Concluded) e. Net income computation
Gross profit from sales (from d) ............................... $191,000 Operating expenses (given) ...................................... 50,000 Net income .................................................................. $141,000
2. Net income is $141,000. 3. The inventory account balance is $84,000. If actual (physical) inventory
is $76,000, an $8,000 loss from inventory shrinkage occurred. This would result in an adjustment necessitating a reduction (credit) to the inventory account and an increase (debit) to cost of goods sold. This $8,000 increase in cost of goods sold would result in a corresponding decrease in both gross profit and net income. This means that net income would decline to $133,000.
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Entrepreneurial Decision — BTN 5-7
1.
Sseko Designs Forecasted Income Statement
For Year Ended January 31, 2015
Net sales ($1,000,000 x 1.09) .............................................. $1,090,000 Cost of sales* ($1,090,000 x 61%) ...................................... 664,900 Expenses ($200,000 x 1.06) ................................................ 212,000 Net income ...................................................................... $ 213,100 *Gross profit ratio = ($1,000,000 - $610,000) / $1,000,000 = 39%; therefore the ratio of cost
of sales to sales = 100% - 39% = 61%
2. The proposal yields a forecasted net income of $213,100. This compares favorably to
the prior year’s net income of $190,000. Accordingly, based on these facts alone, the
company should implement the proposal.
3. There are many issues that should be considered. Among them are:
First, there is the issue of the prediction itself. That is, are estimates reasonable or could
reality be markedly different from these estimates?
Second, and related to the first, there is a need to consider “ranges” of possible scenarios
since the future is unpredictable. This would involve looking at alternative possibilities and
then assessing the range of outcomes.
Third, there is a concern with the impact of these changes on customer attitudes. For
example, one concern might be with the proposed change to an FOB shipping point policy
from FOB destination. We need to be certain that our customers will not object to this
change and look elsewhere for their merchandise.
In addition to issues of confidence in prediction, one should also consider that there may be
speeding up of cash collections. Customers currently have 15 days to earn a 1% discount.
By changing the terms, customers will have only 10 days to earn a 3% discount. That
additional discount may motivate some customers to pay sooner.
Currently, the company sends a signal to customers through terms of n/60 that it is willing
to wait 60 days for payment. By changing the terms to n/30, the company signals that it is
now only willing to wait 30 days before payments are overdue. This may motivate
customers to pay sooner.
In sum, we must consider alternative possibilities, both good and bad, with these
proposed policy changes.
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Hitting the Road — BTN 5-8 There is no formal solution for this field activity. As the discussion facilitator, the instructor should try to develop a sense of how willing retail managers are in granting sales allowances, the range of return policies employed, and strategies managers use to stem return abuses.
Global Decision — BTN 5-9 1.
(in millions) Samsung* Apple Google
Net sales ........................................... ₩228,692,667 $170,910 $59,825
Cost of sales ..................................... 137,696,309 106,606 25,858
Gross margin ratio ........................... 39.8% 37.6% 56.8%
*millions of Korean won
Gross Margin % Rank
Google ..................................... 56.8% 1
Samsung ................................. 39.8% 2
Apple ....................................... 37.6% 3
2. Samsung, Apple and Google each use the multiple-step format for their
income statements. Google’s income statement is a mix between multiple-step and single-step as it does not report a measure of gross profit separately however other items such as Income from operations are reported. Samsung’s income statement is somewhat different from what most U.S. companies use in that the term Profit for the year is used instead of net income or net earnings and they report in Korean won instead of dollars.
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