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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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Chapter 05 - Accounting for Merchandising Operations

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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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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


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%].


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%)].


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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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)


1. a

2. b

3. a

4. a


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.


(a) (b) (c) (d)

Sales ............................................ $150,000 $550,000 $38,700 $255,700 Sales discounts .......................... (5,000) (17,500) (600) (4,800) Sales returns and allowances ....... (20,000) (6,000) (5,100) (900) Net sales ...................................... 125,000 526,500 33,000 250,000

Cost of goods sold ..................... (79,750) (329,589) (24,453) (126,500)

Gross profit ................................. $ 45,250 $196,911 $ 8,547 $123,500 Gross margin ratio: (Gross profit / Net sales) ........ 36.2% 37.4% 25.9% 49.4%

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.

(a) (b) (c) (d) (e)

Sales ............................ $62,000 $43,500 $46,000 $79,000 $25,600

Cost of goods sold Merch. inv. (beg.) ....... 8,000 17,050 7,500 8,000 4,560 Total cost of merch. purchases ................. 38,000 1,950 43,750 32,000 6,600

Merch. inv. (end.) ....... (11,950) (3,000) (9,000) (6,600) (4,160)

Cost of goods sold .... 34,050 16,000 42,250 33,400 7,000

Gross profit ................. 27,950 27,500 3,750 45,600 18,600

Expenses ..................... 10,000 10,650 12,150 3,600 6,000

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.


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Exercise 5-4 (30 minutes)

Apr. 2 Merchandise Inventory ..................................... 4,600 Accounts Payable—Lyon .......................... 4,600 Purchased merchandise on credit.

3 Merchandise Inventory ..................................... 300 Cash ............................................................ 300 Paid shipping charges on purchased

merchandise.

4 Accounts Payable—Lyon ................................. 600 Merchandise Inventory .............................. 600 Returned unacceptable merchandise.

17 Accounts Payable—Lyon ................................. 4,000 Merchandise Inventory* ............................ 80 Cash ............................................................ 3,920 *[($4,600 - $600) x 2%] Paid balance (less 2%) within discount period.

18 Merchandise Inventory .................................... 8,500 Accounts Payable—Frist .......................... 8,500 Purchased merchandise on credit.

21 Accounts Payable—Frist .................................. 1,100 Merchandise Inventory ............................. 1,100 Received an allowance on purchase.

28 Accounts Payable—Frist .................................. 7,400 Merchandise Inventory* ............................ 148 Cash ............................................................ 7,252 *[($8,500 - $1,100) x 2%] Paid balance (less 2%) within discount period.

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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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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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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.

b) Cash Collection Cash ................................................................... 23,280 Sales Discounts ................................................ 720 Accounts Receivable ................................ 24,000 Collected account receivable.

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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1. Entries for Sydney Company (BUYER):

May 11 Merchandise Inventory .................................. 40,000 Accounts Payable .................................... 40,000 Purchased merchandise on credit.

11 Merchandise Inventory .................................. 345 Cash .......................................................... 345 Paid shipping charges on purchased

merchandise.

12 Accounts Payable ........................................... 1,400 Merchandise Inventory ........................... 1,400 Returned unacceptable merchandise.

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.

21 Cash .................................................................. 37,442 Sales Discounts ............................................... 1,158 Accounts Receivable ............................... 38,600

Collected account receivable.

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Merchandise Inventory

Balance, Dec. 31, 2014.............. 25,000 Purchase discounts received ................................................................................ 1,700

Invoice cost of purchases ........ 192,500 Purchase returns and allow. .................................................................................. 4,000

Returns by customers .............. 2,100 Cost of sales transactions ..................................................................................... 196,000

Transportation-in ...................... 2,900 Shrinkage ................................................................................................................ 800

Balance, Dec. 31, 2015 20,000

Cost of Goods Sold

Cost of sales transactions .......

Inventory shrinkage recorded in December 31, 2015, adjusting entry ..............

196,000

800

Returns by customers and restored to inventory ..........................................................................................

2,100

Balance, Dec. 31, 2015 194,700


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Exercise 5-10 (20 minutes) Perpetual 1) Nov. 1 Merchandise Inventory ..................................... 1,500 Accounts Payable ...................................... 1,500

To record merchandise purchases on credit.

2) Nov. 5 Accounts Payable ............................................. 1,500 Merchandise Inventory .............................. 30

Cash ............................................................ 1,470

To record cash payment in discount period.

3) Nov. 7 Cash .................................................................... 196 Merchandise Inventory .............................. 196

To record check received for return of purchases previously paid for with discount already taken.

4) Nov. 10 Merchandise Inventory ..................................... 90 Cash ............................................................ 90

To record payment of freight charges. 5) Nov. 13 Accounts Receivable ........................................ 1,600 Sales ............................................................ 1,600

To record sale of merchandise on credit. ..........

Cost of Goods Sold ........................................... 800 Merchandise Inventory .............................. 800

To record cost of merchandise sold.

6) Nov. 16 Sales Returns and Allowances ........................ 300 Accounts Receivable ................................. 300

To record return of merchandise sold on credit.

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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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

Acid-test ratio computation

Cash ......................................... $2,000 $ 110 $1,000 Short-term investments ......... 50 0 580 Current receivables ................ 350 470 700 Quick assets ........................... $2,400 $ 580 $2,280 Current liabilities .................... $2,000 $1,000 $3,800

Acid-test ratio ......................... 1.20 0.58 0.60

Interpretation:

Case X has the highest acid-test ratio and a healthy current ratio. Since Case

X has enough current assets to cover its current liabilities by more than two

times and enough liquid assets to cover its current liabilities by more than one

time, Case X appears to be in the best position to meet its short-term

obligations.

More specifically, Case Y exhibits superior ability to meet current year

obligations using the current ratio and Case X has the superior ability to meet

near-term obligations using the acid-test ratio. The three companies’ current

ratios range from marginally adequate (such as Case Z’s 1.95) to strong (such

as Case Y’s 3.50). Further, Case X is the only company whose acid-test ratio

exceeds the common benchmark (rule-of-thumb) of 1.0. Although Case Y has

a higher current ratio than Case X, Case X would appear to be in a better

position to meet its current obligations since it has a higher percentage of its

most liquid assets, demonstrated by a higher acid-test ratio.

In summary, Case Z looks the worst for its ability to pay its immediate and

current year obligations. Case X looks the strongest. Case Y is in between

with a strong current ratio and the lowest acid-test ratio.


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Exercise 5-16A (30 minutes)

Apr. 2 Purchases .......................................................... 4,600 Accounts Payable—Lyon .......................... 4,600 Purchased merchandise on credit.

3 Transportation-In ............................................... 300 Cash ............................................................ 300 Paid shipping charges on purchased

merchandise.

4 Accounts Payable—Lyon ................................. 600 Purchases Returns & Allowances ............ 600 Returned unacceptable merchandise.

17 Accounts Payable—Lyon ................................. 4,000 Purchases Discounts ................................ 80 Cash ............................................................ 3,920 Paid balance (less 2%) within discount period.

18 Purchases .......................................................... 8,500 Accounts Payable—Frist .......................... 8,500 Purchased merchandise on credit

21 Accounts Payable—Frist .................................. 1,100 Purchases Returns & Allowances ............ 1,100 Received an allowance on purchase.

28 Accounts Payable—Frist .................................. 7,400 Purchases Discounts ................................ 148 Cash ............................................................ 7,252 Paid balance (less 2%) within discount period.

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1. BUYER – Santa Fe Company

Credit Purchase Purchases ......................................................... 24,000 Accounts Payable ..................................... 24,000 Purchased merchandise on credit.

Cash Payment Accounts Payable ............................................ 24,000 Purchases Discounts ............................... 720 Cash ........................................................... 23,280 Paid account payable within 3% discount period.

2. SELLER – Mesa Company

Credit Sale Accounts Receivable ....................................... 24,000 Sales ........................................................... 24,000 Sold merchandise on account.

Cash Collection Cash ................................................................... 23,280 Sales Discounts ................................................ 720 Accounts Receivable ................................ 24,000 Collected account receivable.


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1. Entries for Sydney Company (BUYER):

May 11 Purchases ........................................................ 40,000 Accounts Payable .................................... 40,000 Purchased merchandise on credit.

11 Transportation-In ............................................. 345 Cash .......................................................... 345 Paid shipping charges on purchased

merchandise.

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.

21 Cash .................................................................. 37,442 Sales Discounts ............................................... 1,158 Accounts Receivable ............................... 38,600

Collected account receivable.

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Periodic Inventory System

1) Nov. 1 Purchases .......................................................... 1,500 Accounts Payable ...................................... 1,500

To record purchases on credit.

2) Nov. 5 Accounts Payable ............................................. 1,500 Purchases Discount* ................................. 30

Cash ............................................................ 1,470

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.

* [$200 – ($200 x 2%)] 4) Nov. 10 Transportation-In ............................................... 90 Cash ............................................................ 90

To record payment of freight charges. 5) Nov. 13 Accounts Receivable ........................................ 1,600 Sales ............................................................ 1,600

To record sale of merchandise on credit. ..........

6) Nov. 16 Sales Returns and Allowances ........................ 300 Accounts Receivable ................................. 300

To record return of merchandise sold on credit.


5-318


L´Oréal

Income Statement (€ millions) For Year Ended December 31, 2013

Net sales ................................................................................... €22,976.6

Cost of sales ............................................................................. 6,601.8

Gross profit.......................................................................... 16,374.8

Research and development expense .................................... (857.0)

Advertising and promotion expense...................................... (6,886.2)

Selling, general and administrative expense ........................ (4,756.8)

Finance costs ........................................................................... (29.1)

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

5-319

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.

3 Merchandise Inventory ..................................... 125 Cash ............................................................ 125 Paid freight on incoming goods.

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.

9 Merchandise Inventory ..................................... 2,200 Accounts Payable—Leight ....................... 2,200 Purchased goods on credit, terms 2/15, n/60.

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.


5-320

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).

30 Cash .................................................................... 980 Sales Discounts (2%)* ....................................... 20 Accounts Receivable—Art ........................ 1,000 Collected receivable within discount period. *([$1,200 - $200] x .02)

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.

5-321

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.

8 Merchandise Inventory ..................................... 5,540 Accounts Payable—Waters ...................... 5,540 Purchased goods on credit, terms 1/10, n/45.

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

purchase.

14 Accounts Payable—Arotek .............................. 200 Cash ............................................................ 200 Paid freight for Arotek.


5-322


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.

22 Sales Returns and Allowances ........................ 500 Accounts Receivable—Tux ....................... 500 Issued credit memorandum.

29 Cash .................................................................... 4,257 Sales Discounts* ............................................... 43 Accounts Receivable—Tux ....................... 4,300 Collected receivable within discount period. *[($4,800 - $500) x 1%]

30 Accounts Payable—Arotek .............................. 7,300 Cash ............................................................ 7,300 Paid payable ($7,500 - $200). (Discount period has lapsed.)

5-323

Problem 5-3A (40 minutes)

1. Net sales

Sales ................................................................................ $225,600

Less: Sales discounts.................................................. (2,250)

Sales returns and allowances .......................... (12,000)

Net sales ......................................................................... $211,350

2. Cost of Merchandise purchased

Invoice cost of merchandise purchased ..................... $ 92,000

Purchase discounts received ....................................... (2,000)

Purchase returns and allowances ................................ (4,500)

Costs of transportation-in ............................................. 4,600

Total cost of merchandise purchased ......................... $ 90,100


5-324

Problem 5-3A (Continued)

3. Multiple-step income statement

VALLEY COMPANY Income Statement

For Year Ended August 31, 2015 Sales .................................................................... $225,600 Less: Sales discounts ....................................... $ 2,250 Sales returns and allowances ............... 12,000 14,250 Net sales ............................................................. 211,350

Cost of goods sold * .......................................... 74,500

Gross profit ........................................................ 136,850

Expenses

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

5-325

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

Selling expenses .................................................. 54,500

General and administrative expenses ................ 32,500

Total expenses ..................................................... 161,500

Net income ............................................................... $ 49,850


5-326

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.

5-327

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.


5-328

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).

5-329

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

Gross profit .............................................................. 67,750

Expenses Selling expenses Depreciation expense—Store equipment ........... 1,525 Sales salaries expense** ...................................... 17,500 Rent expense—Selling space**............................ 7,500 Store supplies expense ........................................ 4,050 Advertising expense ............................................ 9,800 Total selling expenses .......................................... 40,375

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.


5-330


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

*$2,400 - $1,400 = $1,000

Quick assets (Cash) ....................................................... $ 1,000

Current liabilities ............................................................ $ 10,000

Acid-test ratio ($1,000 / $10,000) ....................................... 0.10

Net Sales ......................................................................... $107,750 Cost of Goods Sold ........................................................ 40,000

Gross margin .................................................................. $ 67,750

Gross margin ratio ($67,750 / $107,750) ............................ 0.63

5-331

Problem 5-6AB (50 minutes)

NELSON COMPANY Work Sheet

For Year Ended January 31, 2015 Unadjusted

Trial Balance

Adjustments Adjusted

Trial Balance Income

Statement

Balance Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Cash .......................................... 1,000 1,000 1,000

Merchandise inventory ........... 12,500 (d) 1,600 10,900 10,900

Store supplies.......................... 5,800 (a) 4,050 1,750 1,750

Prepaid insurance ................... 2,400 (b) 1,400 1,000 1,000

Store equipment ...................... 42,900 42,900 42,900

Accum. depreciation—Store eq .... 15,250 (c) 1,525 16,775 16,775

Accounts payable ................... 10,000 10,000 10,000

J. Nelson, Capital ................... 32,000 32,000 32,000

J. Nelson, Withdrawals ........... 2,200 2,200 2,200

Sales ......................................... 111,950 111,950 111,950

Sales discounts ....................... 2,000 2,000 2,000

Sales returns and allowances ...............................

2,200 2,200 2,200

Cost of goods sold .................. 38,400 (d) 1,600 40,000 40,000

Depreciation expense—Store eq .. 0 (c) 1,525 1,525 1,525

Salaries expense ..................... 35,000 35,000 35,000

Insurance expense .................. 0 (b) 1,400 1,400 1,400

Rent expense ........................... 15,000 15,000 15,000

Store supplies expense .......... 0 (a) 4,050 4,050 4,050

Advertising expense ............... 9,800 ______ ____ ____ 9,800 ______ 9,800 ______ ______ ______

Totals ........................................ 169,200 169,200 8,575 8,575 170,725 170,725 110,975 111,950 59,750 58,775

Net income ............................... 975 ______ ______ 975

Totals ........................................ 111,950 111,950 59,750 59,750


5-332 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill

Education.

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.

5 Merchandise Inventory ..................................... 250 Cash ............................................................ 250 Paid freight on incoming goods.

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.

10 Merchandise Inventory ..................................... 3,650 Accounts Payable—Duke ......................... 3,650 Purchased goods on credit, terms 2/15, n/60.

12 Accounts Payable—Duke ................................. 400 Merchandise Inventory .............................. 400 Received credit memo from returning

goods to supplier.

14 Cash .................................................................... 10,780 Sales Discounts* ............................................... 220 Accounts Receivable—Heather ................ 11,000 Collected receivable within discount period. *$11,000 x 2%


Education.

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

goods sold to customers.

25 Accounts Payable—Duke ................................ 3,250 Merchandise Inventory * ........................... 65 Cash ............................................................ 3,185 Paid payable in discount period [($3,650 - $400)x 2%].

30 Cash ................................................................... 2,352 Sales Discounts (2%) ....................................... 48 Accounts Receivable—Tameron .............. 2,400 Collected receivable within discount period. ([$2,800 - $400] x 2%)

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.



Education.

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.

10 Merchandise Inventory .................................... 14,700 Accounts Payable—Rupert ...................... 14,700 Purchased goods on credit, terms 1/10, n/45.

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

10 purchase.

15 Accounts Payable—OLB ................................. 150 Cash ........................................................... 150 Paid freight for OLB Corp.


Education.

Problem 5-2B (Concluded)

July 17 Cash ................................................................... 9,457 Sales Discounts* .............................................. 193 Accounts Receivable—Brill ..................... 9,650 Collected receivable within discount period. *($11,500 - $1,850) x 2%

20 Accounts Payable—Rupert* ............................ 12,700 Merchandise Inventory** .......................... 122 Cash ........................................................... 12,578 Paid payable within discount period. *$14,200 + $500 - $2,000 = $12,700 **($14,200 - $2,000) x 1% = $122

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.

24 Sales Returns and Allowances ....................... 1,300 Accounts Receivable—Brown ................. 1,300 Issued credit memo.

30 Cash ................................................................... 9,603 Sales Discounts* .............................................. 97 Accounts Receivable—Brown ................. 9,700 Collected receivable within discount period. *($11,000 - $1,300) x 1%

31 Accounts Payable—OLB ................................. 14,850 Cash ........................................................... 14,850 Paid $15,000 invoice less $150 freight paid

by Mason on request of OLB.



Education.

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


Education.

Problem 5-3B (Continued)

3. Multiple-step income statement

BARKLEY COMPANY Income Statement

For Year Ended March 31, 2015 Sales .................................................................... $332,650

Less: Sales discounts ...................................... $ 5,875

Sales returns and allowances ............... 20,000 25,875

Net sales ............................................................. 306,775

Cost of goods sold * .......................................... 115,600

Gross profit ........................................................ 191,175 Expenses

Selling expenses

Sales salaries expense .................................. 44,500

Rent expense—Selling space ....................... 16,000

Store supplies expense ................................. 3,850

Advertising expense ...................................... 26,000

Total selling expenses .................................. 90,350

General and administrative expenses

Office salaries expense ................................. 40,750

Rent expense—Office space ........................ 3,800

Office supplies expense ................................ 1,100

Total general and administrative expenses 45,650

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



Education.


4. Single-step income statement

BARKLEY COMPANY Income Statement

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.


Education.


Part 2

The first step is to determine the amount of purchases that were subject to a discount during the year:

Invoice cost of merchandise purchases ........................... $138,500

Purchase returns and allowances ..................................... (6,700)

Total cost of merchandise purchases payable ................ $131,800

This amount is used to determine the maximum discount, which is then compared to the actual discount:

Maximum discount available (3% x $131,800) .................. $ 3,954

Purchase discounts received .............................................. (2,950)

Purchase discounts missed ................................................ $ 1,004

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 ..................................................................................... $332,650

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.



Education.

Problem 5-5B (60 Minutes) Part 1

Adjustment (a)

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).


Education.

Problem 5-5B (Continued)

Part 2 Multiple-step income statement

FOSTER PRODUCTS COMPANY Income Statement

For Year Ended October 31, 2015

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



Education.


Part 4

Current assets Cash ........................................................................... $ 7,400 Merchandise inventory ............................................ 21,300 Store supplies ........................................................... 3,700 Prepaid insurance .................................................... 3,800* Total current assets .................................................. $ 36,200

Current liabilities ......................................................... $ 18,000

Current ratio ($36,200 / $18,000) ..................................... 2.01

*$6,600 - $2,800 = $3,800

Quick assets (Cash in this case) ............................... $ 7,400

Current liabilities ......................................................... $ 18,000

Acid-test ratio ($7,400 / $18,000) .................................... 0.41 Net Sales ...................................................................... $221,100 Cost of goods sold ...................................................... 78,500 Gross margin ............................................................... $142,600

Gross margin ratio ($142,600 / $221,100) ....................... 0.64

5-343 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Problem 5-6BB (50 minutes)

FOSTER PRODUCTS COMPANY Work Sheet

For Year Ended October 31, 2015 Unadjusted

Trial Balance

Adjustments Adjusted

Trial Balance Income

Statement

Balance Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Cash ........................................... 7,400 7,400 7,400

Merchandise inventory ............ 24,000 (d) 2,700 21,300 21,300

Store supplies ........................... 9,700 (a) 6,000 3,700 3,700

Prepaid insurance .................... 6,600 (b) 2,800 3,800 3,800

Store equipment ....................... 81,800 81,800 81,800

Accum. depreciation—Store eq ..... 32,000 (c) 3,000 35,000 35,000

Accounts payable .................... 18,000 18,000 18,000

D. Foster, Capital ...................... 43,000 43,000 43,000

D. Foster, Withdrawals ............ 2,000 2,000 2,000

Sales .......................................... 227,100 227,100 227,100

Sales discounts ........................ 1,000 1,000 1,000

Sales returns and allowances . 5,000 5,000 5,000

Cost of goods sold ................... 75,800 (d) 2,700 78,500 78,500

Depreciation expense—Store eq ... 0 (c) 3,000 3,000 3,000

Salaries expense ...................... 63,000 63,000 63,000

Insurance expense ................... 0 (b) 2,800 2,800 2,800

Rent expense ............................ 26,000 26,000 26,000

Store supplies expense ........... 0 (a) 6,000 6,000 6,000

Advertising expense ................ 17,800 ______ _____ _____ 17,800 ______ 17,800 ______ ______ ______

Totals ......................................... 320,100 320,100 14,500 14,500 323,100 323,100 203,100 227,100 120,000 96,000

Net income ................................ 24,000 ______ ______ 24,000

Totals ......................................... 227,100 227,100 120,000 120,000


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SERIAL PROBLEM — SP 5 Serial Problem — SP 5, Business Solutions (150 minutes) Part 1 Journal entries

Jan. 4 Wages Expense ..............................................623 125 Wages Payable ...............................................210 500 Cash .........................................................101 625 Paid employee.

5 Cash .................................................................101 25,000 S. Rey, Capital ..........................................301 25,000 Additional investment by owner.

7 Merchandise Inventory ..................................119 5,800 Accounts Payable ...................................201 5,800 Purchased merchandise on credit.

9 Cash .................................................................101 2,668 Accounts Receivable—Gomez Co. .......106.6 2,668 Collected accounts receivable.

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.

15 Merchandise Inventory ..................................119 600 Cash ..........................................................101 600 Paid freight on incoming merchandise.

16 Cash .................................................................101 4,000 Computer Services Revenue .................403 4,000 Collected cash revenue from customer.

5-345

Serial Problem — SP 5 (Continued)

Jan. 17 Accounts Payable ..........................................201 5,800 Merchandise Inventory ...........................119 58 Cash .........................................................101 5,742 Paid account payable within discount period.

(Discount taken = $5,800 x .01 = $58)

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 Merchandise Inventory ..................................119 9,000 Accounts Payable ...................................201 9,000 Purchased merchandise for resale.

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.

31 Wages Expense ..............................................623 1,250 Cash .........................................................101 1,250 Paid employee wages.


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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.

11 Cash .................................................................101 5,500 Accounts Receivable—Alex’s Eng. Co. ......106.1 5,500 Collected accounts receivable.

15 S. Rey, Withdrawals ........................................302 4,800 Cash .........................................................101 4,800 Owner withdrew cash.

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.

26 Wages Expense ..............................................623 1,000 Cash .........................................................101 1,000 Paid employee.

27 Mileage Expense ............................................676 192 Cash .........................................................101 192 Reimbursed Rey for business mileage.

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Mar. 8 Computer Supplies ........................................126 2,730 Accounts Payable ...................................201 2,730 Purchased supplies on credit.

9 Cash .................................................................101 3,220 Accounts Rec.—Delta Co. ......................106.7 3,220 Collected accounts receivable.

11 Repairs Expense–Computer .........................684 960 Cash .........................................................101 960 Paid for computer repairs.

16 Cash .................................................................101 5,260 Computer Services Revenue .................403 5,260 Collected cash revenue from customer.

19 Accounts Payable ..........................................201 3,830 Cash .........................................................101 3,830 Paid accounts payable ($1,100 + $2,730).

24 Accounts Receivable—Easy Leasing ...........106.3 9,047 Computer Services Revenue .................403 9,047 Billed customer for services.

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.


5-348

Serial Problem — SP 5 (Continued) Part 2 Ledger accounts as of March 31 before posting of March 31 adjusting entries

Cash Acct. No. 101

Date Explanation PR Debit Credit Balance

Dec. 31 Balance 48,372 Jan. 4 625 47,747 5 25,000 72,747 9 2,668 75,415 15 600 74,815 16 4,000 78,815 17 5,742 73,073 22 4,653 77,726 31 1,250 76,476 Feb. 1 2,475 74,001 3 8,414 65,587 5 600 64,987 11 5,500 70,487 15 4,800 65,687 26 1,000 64,687 27 192 64,495 Mar. 9 3,220 67,715 11 960 66,755 16 5,260 72,015 19 3,830 68,185 31 128 68,057

Accounts Receivable—Alex’s Engineering Co. Acct. No. 106.1


Dec. 31 Balance 0 Jan. 11 5,500 5,500 Feb. 11 5,500 0

Accounts Receivable—Wildcat Services Acct. No. 106.2


Dec. 31 Balance 0 Mar. 25 2,800 2,800

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Accounts Receivable—Easy Leasing Acct. No. 106.3


Dec. 31 Balance 0 Mar. 24 9,047 9,047

Accounts Receivable—IFM Co. Acct. No. 106.4


Dec. 31 Balance 3,000 Mar. 30 2,220 5,220

Accounts Receivable—Liu Corporation Acct. No. 106.5


Dec. 31 Balance 0 Jan. 13 5,200 5,200 20 500 4,700 22 4,700 0

Accounts Receivable—Gomez Co. Acct. No. 106.6


Dec. 31 Balance 2,668 Jan. 9 2,668 0

Accounts Receivable—Delta Co. Acct. No. 106.7


Dec. 31 Balance 0 Feb. 23 3,220 3,220 Mar. 9 3,220 0

Accounts Receivable—KC, Inc. Acct. No. 106.8


Dec. 31 Balance 0 Jan. 26 5,800 5,800


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Accounts Receivable—Dream, Inc. Acct. No. 106.9


Dec. 31 Balance 0

Merchandise Inventory Acct. No. 119


Dec. 31 Balance 0 Jan. 7 5,800 5,800 13 3,560 2,240 15 600 2,840 17 58 2,782 24 496 2,286 26 9,000 11,286 26 4,640 6,646 Feb. 3 90 6,556 23 2,660 3,896 Mar. 25 2,002 1,894 30 1,048 846

Computer Supplies Acct. No. 126


Dec. 31 Balance 580 Mar. 8 2,730 3,310

Prepaid Insurance Acct. No. 128


Dec. 31 Balance 1,665

Prepaid Rent Acct. No. 131


Dec. 31 Balance 825 Feb. 1 2,475 3,300

Office Equipment Acct. No. 163



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Accumulated Depreciation—Office Equipment Acct. No. 164


Dec. 31 Balance 400

Computer Equipment Acct. No. 167



Accumulated Depreciation—Computer Equipment Acct. No. 168



Accounts Payable Acct. No. 201


Dec. 31 Balance 1,100 Jan. 7 5,800 6,900 17 5,800 1,100 24 496 604 26 9,000 9,604 Feb. 3 8,504 1,100 Mar. 8 2,730 3,830 19 3,830 0

Wages Payable Acct. No. 210


Dec. 31 Balance 500 Jan. 4 500 0

Unearned Computer Services Revenue Acct. No. 236


Dec. 31 Balance 1,500 Jan. 11 1,500 0


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S. Rey, Capital Acct. No. 301


Dec. 31 Balance 80,360 Jan. 5 25,000 105,360

S. Rey, Withdrawals Acct. No. 302


Feb. 15 4,800 4,800

Computer Services Revenue Acct. No. 403


Jan. 11 7,000 7,000 16 4,000 11,000 Mar. 16 5,260 16,260 24 9,047 25,307

Sales Acct. No. 413


Jan. 13 5,200 5,200 26 5,800 11,000 Feb. 23 3,220 14,220 Mar. 25 2,800 17,020 30 2,220 19,240

Sales Returns and Allowances Acct. No. 414


Jan. 20 500 500

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Sales Discounts Acct. No. 415


Jan. 22 47 47

Cost of Goods Sold Acct. No. 502


Jan. 13 3,560 3,560 26 4,640 8,200 Feb. 23 2,660 10,860 Mar. 25 2,002 12,862 30 1,048 13,910

Depreciation Expense—Office Equipment Acct. No. 612


Depreciation Expense—Computer Equipment Acct. No. 613


Wages Expense Acct. No. 623


Jan. 4 125 125 31 1,250 1,375 Feb. 26 1,000 2,375

Insurance Expense Acct. No. 637


Rent Expense Acct. No. 640



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Computer Supplies Expense Acct. No. 652


Advertising Expense Acct. No. 655


Feb. 5 600 600

Mileage Expense Acct. No. 676


Feb. 27 192 192 Mar. 31 128 320

Miscellaneous Expenses Acct. No. 677


Repairs Expense—Computer Acct. No. 684


Mar. 11 960 960

5-355

Serial Problem — SP 5 (Continued) Part 3

BUSINESS SOLUTIONS Partial Work Sheet

March 31, 2016 Acct. No.

Account Title

Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance

101 Cash ........................................ 68,057 68,057 106.1 Alex’s Engineering Co. ........... 0 0 106.2 Wildcat Services .................... 2,800 2,800 106.3 Easy Leasing .......................... 9,047 9,047 106.4 IMF Co. .................................... 5,220 5,220 106.5 Liu Corporation ...................... 0 0 106.6 Gomez Co. .............................. 0 0 106.7 Delta Co. ................................. 0 0 106.8 KC, Inc. ................................... 5,800 5,800 106.9 Dream, Inc. ............................. 0 0 119 Merchandise inventory ............ 846 (g) 142 704 126 Computer supplies ................ 3,310 (a) 1,305 2,005 128 Prepaid insurance .................. 1,665 (b) 555 1,110 131 Prepaid rent ............................ 3,300 (d) 2,475 825 163 Office equipment.................... 8,000 8,000 164 Accumulated depreciation–

Office equipment ................. 400 (f) 400 800

167 Computer equipment ............. 20,000 20,000 168 Accumulated depreciation–

Computer equip. ................. 1,250 (e) 1,250 2,500

201 Accounts payable .................. 0 0 210 Wages payable ....................... 0 (c) 875 875 236 Unearned computer

services revenue ................. 0 0

301 S. Rey, Capital ........................ 105,360 105,360 302 S. Rey, Withdrawals ............... 4,800 4,800 403 Computer services revenue .......... 25,307 25,307 413 Sales ....................................... 19,240 19,240 414 Sales returns and allow. ............ 500 500 415 Sales discounts ..................... 47 47 502 Cost of goods sold ................ 13,910 (g) 142 14,052 612 Depreciation expense–

Office equipment ................. 0 (f) 400 400

613 Depreciation expense– Computer equipment ..........

0 (e) 1,250 1,250

623 Wages expense ...................... 2,375 (c) 875 3,250 637 Insurance expense ................. 0 (b) 555 555 640 Rent expense ......................... 0 (d) 2,475 2,475 652 Computer supplies expense ............ 0 (a) 1,305 1,305 655 Advertising expense .............. 600 600 676 Mileage expense .................... 320 320 677 Miscellaneous expenses .......... 0 0 684 Repairs expense–Computer ......... 960 ______ ____ ____ 960 ______ Totals ...................................... 151,557 151,557 7,002 7,002 154,082 154,082


5-356

Serial Problem — SP 5 (Continued) Part 4

BUSINESS SOLUTIONS Income Statement

For Three Months Ended March 31, 2016

Revenues

Computer services revenue ...................................... $25,307

Net sales* .................................................................... 18,693

Total revenues ............................................................ 44,000

Expenses Cost of goods sold ..................................................... $14,052

Depreciation expense—Office equipment ............... 400

Depreciation expense—Computer equipment ........... 1,250

Wages expense .......................................................... 3,250

Insurance expense ..................................................... 555

Rent expense .............................................................. 2,475

Computer supplies expense ..................................... 1,305

Advertising expense .................................................. 600

Mileage expense ......................................................... 320

Repairs expense—Computer .................................... 960

Total expenses ........................................................... 25,167

Net income .................................................................... $18,833

* Net sales = $19,240 - $500 - $47 = $18,693

Part 5

BUSINESS SOLUTIONS Statement of Owner’s Equity

For Three Months Ended March 31, 2016 S. Rey, Capital, Dec. 31, 2015 .................................... $ 80,360

Plus: Investments by owner ...................................... 25,000

Net income ........................................................ 18,833

124,193

Less: Withdrawals by owner ..................................... 4,800

S. Rey, Capital, March 31, 2016 ................................. $119,393

5-357

Serial Problem — SP 5 (Concluded) Part 6

BUSINESS SOLUTIONS Balance Sheet March 31, 2016

Assets

Current assets Cash ............................................................................. $ 68,057

Accounts receivable* .................................................. 22,867

Merchandise inventory ............................................... 704

Computer supplies ...................................................... 2,005

Prepaid insurance ....................................................... 1,110

Prepaid rent ................................................................. 825

Total current assets .................................................... 95,568

Plant assets

Office equipment ......................................................... $8,000 Accumulated depreciation—Office equipment ........ (800) 7,200

Computer equipment .................................................. 20,000 Accumulated depreciation—Computer equipment .... (2,500) 17,500

Total plant assets ........................................................ 24,700

Total assets ................................................................... $120,268

Liabilities Current liabilities Wages payable ............................................................ $ 875

Equity

S. Rey, Capital ............................................................... 119,393

Total liabilities and equity ............................................ $120,268

*Accounts receivable = $2,800 + $9,047 + $5,220 + $5,800 = $22,867


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Reporting in Action — BTN 5-1

1. Compute cost of sales for 2013 as follows ($ millions)

September 29, 2012 inventory.............................. $ 791

Plus cost of goods purchased ............................. ?

Less September 28, 2013 inventory .................... (1,764)

Cost of goods sold ................................................ $106,606

Then, solve for:

Cost of goods purchased * ................................... $107,579

*($106,606 - $791 + $1,764) 2.

2013 2012 ($ millions)

Current Ratio

Acid-Test Ratio

Current Ratio

Acid-Test Ratio

Current assets

Cash and equivalents .......... $14,259 $14,259 $10,746 $10,746

Short-term marketable sec ...... 26,287 26,287 18,383 18,383

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

Gross margin ........... $ 64,304 $ 68,662 $33,967 $29,541

Gross margin ratio .... 37.6% 43.9% 56.8% 58.9%

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.


5-360

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.

5-361

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 ................................... $ 679,553 $ 986,728 $1,006,114

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

5-363

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.


5-364

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 .................................... ₩ 90,996,358 $ 64,304 $33,967

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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