Merchandising Operations and the Multiple-Step Income Statement

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Sample Chapter 5 Merchandising Operations and the Multiple-Step Income Statement
Questions
1. (a) “The steps in the accounting cycle for a merchandising company differ from the steps in the accounting cycle for a service company.” Do you agree or disagree?
(b) Is the measurement of net income in a merchandising company conceptually the same as in a service company? Explain.
2. How do the components of revenues and expenses differ between a merchandising company and a service company?
3. Rachel Harpole, CEO of Bargain Den Stores, is considering a recommendation made by both the company’s purchasing manager and director of
finance that the company should invest in a sophisticated new perpetual inventory system to replace its periodic system. Explain the primary difference between the two systems, and discuss the potential benefits of a perpetual inventory system.
4. (a) Explain the income measurement process in a merchandising company.
(b) How does income measurement differ between a merchandising company and a service company?
5. Markoff Co. has sales revenue of $100,000, cost of goods sold of $70,000, and operating expenses of $18,000. What is its gross profit?
6. Peggy Wilder believes revenues from credit sales may be earned before they are collected in cash. Do you agree? Explain.
7.
(a) What is the primary source document for recording (1) cash sales and (2) credit sales?
(b) Using XXs for amounts, give the journal entry for each of the transactions in part (a), assuming perpetual inventory.
8. A credit sale is made on July 10 for $900, terms 1/15, n/30. On July 12, the purchaser returns $100 of goods for credit. Give the journal entry on July 19 to record the receipt of the balance due within the discount period.
9. As the end of Agnew Company’s fiscal yearend approached, it became clear that the company had considerable excess inventory. Belden Glass, the head of marketing and sales, ordered salespeople to “add 20% more units to each order that you ship. The customers can always ship the extra back next period if they decide they don’t want it. We’ve got to do it to meet this year’s sales goal.” Discuss the accounting implications of Belden’s action.
10. To encourage bookstores to buy a broader range of book titles, and to discourage price discounting, the publishing industry allows bookstores to return unsold books to the publisher. This results in very significant returns each year. To ensure proper recognition of revenues, how should publishing companies account for these returns?
11. Goods costing $1,900 are purchased on account on July 15 with credit terms of 2/10, n/30. On July 18, the purchaser receives a $300 credit from the supplier for damaged goods. Give the journal entry on July 24 to record payment of the balance due within the discount period.
12. Frattura Company reports net sales of $800,000, gross profit of $560,000, and net income of $230,000. What are its operating expenses?
13. Rai Company has always provided its customers with payment terms of 1/10, n/30. Members of its sale force have commented that competitors are offering customers 2/10, n/45. Explain what these terms mean, and discuss the implications to Rai of switching its payment terms to those of its competitors.
14. In its year-end earnings announcement press release, Longwell Corp. announced that its earnings increased by $15 million relative to the previous year. This represented a 20% increase. Inspection of its income statement reveals that the company reported a $20 million gain under “Other revenues and gains” from the sale of one of its factories. Discuss the implications of this gain from the perspective of a potential investor.
15. Identify the distinguishing features of an income statement for a merchandising company.
16. Why is the normal operating cycle for a merchandising company likely to be longer than for a service company?
17. What title does Tootsie Roll use for gross profit? How did it present gross profit? By how much did its total gross profit change, and in what direction, in 2009?
18. What merchandising account(s) will appear in the post-closing trial balance?
19. What types of businesses are most likely to use a perpetual inventory system?
20. Identify the accounts that are added to or deducted from purchases to determine the cost of goods purchased under a periodic system. For each account, indicate
(a) whether it is added or deducted, and
(b) its normal balance.
21. In the following cases, use a periodic inventory system to identify the item(s) designated by the letters X and Y.
(a) Purchases _X _ Y _ Net purchases.
(b) Cost of goods purchased _ Net purchases _ X.
(c) Beginning inventory _ X _ Cost of goods available for sale.
(d) Cost of goods available for sale _ Cost of goods sold _ X.
22. What two ratios measure factors that affect profitability?
23. What factors affect a company’s gross profit rate—that is, what can cause the gross profit rate to increase and what can cause it to decrease?
24. Corliss Ford, director of marketing, wants to reduce the selling price of his company’s products by 15% to increase market share. He says, “I know this will reduce our gross profit rate, but the increased number of units sold will make up for the lost margin.” Before this action is taken, what other factors does the company need to consider?
25. Howard Paulson is considering investing in Stevenson Pet Food Company. Stevenson’s net income increased considerably during the most recent year, even though many other companies in the same industry reported disappointing earnings. Howard wants to know whether the company’s earnings provide a reasonable depiction of its results. What initial step can Howard take to help determine whether he needs to investigate further?
*26. On July 15, a company purchases on account goods costing $1,900, with credit terms of 2/10, n/30. On July 18, the company receives a $400 credit memo from the supplier for damaged goods. Give the journal entry on July 24 to record payment of the balance due within the discount period assuming a periodic inventory system.
Brief Exercises
BE5-1 Presented here are the components in Korinek Company’s income statement. Determine the missing amounts. Sales Cost of Gross Operating Net Revenue Goods Sold Profit Expenses Income $ 71,200
(b) $ 30,000
(d) $12,100 $108,000 $70,000
(c) (e) $29,500
(a) $71,900 $109,600 $46,200 (f )
BE5-2 Pocras Company buys merchandise on account from Wedell Company. The selling price of the goods is $900 and the cost of the goods sold is $590. Both companies use perpetual inventory systems. Journalize the transactions on the books of both companies.
BE5-3 Prepare the journal entries to record the following transactions on Graff Company’s books using a perpetual inventory system.
(a) On March 2, Graff Company sold $800,000 of merchandise to Rodriguez Company, terms 2/10, n/30. The cost of the merchandise sold was $540,000.
(b) On March 6, Rodriguez Company returned $140,000 of the merchandise purchased on March 2. The cost of the merchandise returned was $94,000.
(c) On March 12, Graff Company received the balance due from Rodriguez Company.
BE5-4 From the information in
BE5-3, prepare the journal entries to record these transactions on Rodriguez Company’s books under a perpetual inventory system.
BE5-5 Bangura Company provides this information for the month ended October 31, 2012: sales on credit $300,000; cash sales $150,000; sales discounts $5,000; and sales returns and allowances $19,000. Prepare the sales revenues section of the income statement based on this information.
BE5-6 Explain where each of these items would appear on a multiple-step income statement: gain on disposal of plant assets; cost of goods sold; depreciation expense; and sales returns and allowances.
BE5-7 Berry Company sold goods with a total selling price of $800,000 during the year. It purchased goods for $380,000 and had beginning inventory of $67,000. A count of its ending inventory determined that goods on hand was $50,000. What was its cost of goods sold?
BE5-8 Assume that Logan Company uses a periodic inventory system and has these account balances: Purchases $404,000; Purchase Returns and Allowances $13,000; Purchase Discounts $9,000; and Freight-in $16,000. Determine net purchases and cost of goods purchased.
BE5-9 Assume the same information as in
BE5-8 and also that Logan Company has beginning inventory of $60,000, ending inventory of $90,000, and net sales of $612,000. Determine the amounts to be reported for cost of goods sold and gross profit.
BE5-10 Modder Corporation reported net sales of $250,000, cost of goods sold of $150,000, operating expenses of $50,000, net income of $32,500, beginning total assets of $520,000, and ending total assets of $600,000. Calculate each of the following values and explain what they mean:
(a) profit margin ratio and
(b) gross profit rate.
BE5-11 Delzer Corporation reported net sales $800,000; cost of goods sold $520,000; operating expenses $210,000; and net income $68,000. Calculate the following values and explain what they mean:
(a) profit margin ratio and
(b) gross profit rate.
BE5-12 Wasley Corporation reported net income of $346,000, cash of $67,800, and net cash provided by operating activities of $221,200. What does this suggest about the quality of the company’s earnings? What further steps should be taken? *
BE5-13 Prepare the journal entries to record these transactions on Koeller Company’s books using a periodic inventory system.
(a) On March 2, Koeller Company purchased $800,000 of merchandise from Reeves Company, terms 2/10, n/30.
(b) On March 6, Koeller Company returned $95,000 of the merchandise purchased on March 2.
(c) On March 12, Koeller Company paid the balance due to Reeves Company. Compute missing amounts in determining net income. (SO 1, 4), AP Journalize perpetual inventory entries. (SO 2, 3), AP Journalize sales transactions. (SO 3), AP Journalize purchase transactions. (SO 2), AP Prepare sales revenue section of income statement. (SO 4), AP Identify placement of items on a multiple-step income statement. (SO 4), AP Determine cost of goods sold using basic periodic formula. (SO 5), AP Compute net purchases and cost of goods purchased. (SO 5), AP Compute cost of goods sold and gross profit. (SO 5), C Calculate profitability ratios. (SO 6), AP Calculate profitability ratios. (SO 6), AP Evaluate quality of earnings. (SO 7), C Journalize purchase transactions. (SO 8), AP


5-1 On October 5, Longhini Company buys merchandise on account from Okern Company. The selling price of the goods is $5,000, and the cost to Okern Company is $3,000. On October 8, Longhini returns defective goods with a selling price of $640 and a scrap value of $240. Record the transactions of Longhini Company, assuming a perpetual approach.
5-2 Assume information similar to that in 5-1. That is: On October 5, Longhini Company buys merchandise on account from Okern Company. The selling price of the goods is $5,000, and the cost to Okern Company is $3,000. On October 8, Longhini returns defective goods with a selling price of $640 and a scrap value of $240. Record the transactions on the books of Okern Company, assuming a perpetual approach.
5-3 The following information is available for Jain Corp. for the year ended December 31, 2012: Other revenues and gains $ 12,700 Net sales $552,000 Other expenses and losses 13,300 Operating expenses 186,000 Cost of goods sold 156,000 Prepare a multiple-step income statement for Jain Corp. The company has a tax rate of 30%.
5-4 Crystal Lake Corporation’s accounting records show the following at yearend December 31, 2012: Purchase Discounts $ 5,900 Beginning Inventory $31,720 Freight-in 8,400 Ending Inventory 27,950 Freight-out 11,100 Purchase Returns 3,600 Purchases 162,500 Assuming that Crystal Lake Corporation uses the periodic system, compute
(a) cost of goods purchased and
(b) cost of goods sold. Do it! Do it! Do it! Do it! Do it! Record transactions of purchasing company. (SO 2), AP Record transactions of selling company. (SO 3), AP Prepare multiple-step income statement. (SO 4 ), AP Determine cost of goods sold using periodic system. (SO 5), AP

Exercises
E5-1 This information relates to Percy Co. 1. On April 5, purchased merchandise from Lyman Company for $28,000, terms 2/10, n/30. 2. On April 6, paid freight costs of $700 on merchandise purchased from Lyman. 3. On April 7, purchased equipment on account for $30,000. 4. On April 8, returned some of April 5 merchandise to Lyman Company, which cost $3,600. 5. On April 15, paid the amount due to Lyman Company in full. Instructions
(a) Prepare the journal entries to record the transactions listed above on the books of Percy Co. Percy Co. uses a perpetual inventory system.
(b) Assume that Percy Co. paid the balance due to Lyman Company on May 4 instead of April 15. Prepare the journal entry to record this payment.
E5-2 Assume that on September 1, Office Depot had an inventory that included a variety of calculators. The company uses a perpetual inventory system. During September, these transactions occurred. Sept. 6 Purchased calculators from Abacus Co. at a total cost of $1,650, terms n/30. 9 Paid freight of $50 on calculators purchased from Abacus Co. 10 Returned calculators to Abacus Co. for $66 credit because they did not meet specifications. 12 Sold calculators costing $520 for $690 to Union Book Store, terms n/30. 14 Granted credit of $45 to Union Book Store for the return of one calculator that was not ordered. The calculator cost $34. 20 Sold calculators costing $570 for $760 to Commons Card Shop, terms n/30. Journalize perpetual inventory entries. (SO 2, 3), AP Do it! Review Journalize purchase transactions. (SO 2), AP 260 chapter 5 Merchandising Operations and the Multiple-Step Income Statement Instructions Journalize the September transactions.
E5-3 The following transactions are for Masland Company.
1. On December 3, Masland Company sold $500,000 of merchandise to Parker Co., terms 1/10, n/30. The cost of the merchandise sold was $330,000.
2. On December 8, Parker Co. was granted an allowance of $25,000 for merchandise purchased on December 3.
3. On December 13, Masland Company received the balance due from Parker Co. Instructions
(a) Prepare the journal entries to record these transactions on the books of Masland Company. Masland uses a perpetual inventory system.
(b) Assume that Masland Company received the balance due from Parker Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2.
E5-4 On June 10, Harris Company purchased $9,000 of merchandise from Goetz Company, terms 3/10, n/30. Harris pays the freight costs of $400 on June 11. Goods totaling $600 are returned to Goetz for credit on June 12. On June 19, Harris Company pays Goetz Company in full, less the purchase discount. Both companies use a perpetual inventory system. Instructions

(a) Prepare separate entries for each transaction on the books of Harris Company.

(b) Prepare separate entries for each transaction for Goetz Company. The merchandise purchased by Harris on June 10 cost Goetz $5,000, and the goods returned cost Goetz $310.
E5-5 The adjusted trial balance of Dredge Company shows these data pertaining to sales at the end of its fiscal year, October 31, 2012: Sales Revenue $900,000; Freight-out $14,000; Sales Returns and Allowances $22,000; and Sales Discounts $13,500. Instructions Prepare the sales revenues section of the income statement.
E5-6 Presented below is information for Yu Co. for the month of January 2012. Cost of goods sold $212,000 Rent expense $32,000 Freight-out 7,000 Sales discounts 8,000 Insurance expense 12,000 Sales returns and allowances 20,000 Salaries and wages expense 60,000 Sales revenue 370,000 Instructions
(a) Prepare an income statement using the format presented on page 243. Assume a 25% tax rate.
(b) Calculate the profit margin ratio and the gross profit rate.
E5-7 Financial information is presented here for two companies. Indig Perez Company Company Sales revenue $90,000 ? Sales returns ? $ 5,000 Net sales 84,000 100,000 Cost of goods sold 58,000 ? Gross profit ? 40,000 Operating expenses 14,380 ? Net income ? 17,000 Instructions
(a) Fill in the missing amounts. Show all computations.
(b) Calculate the profit margin ratio and the gross profit rate for each company.
(c) Discuss your findings in part (b).
E5-8 In its income statement for the year ended December 31, 2012, Misra Company reported the following condensed data. Prepare sales revenues section of income statement. (SO 4), AP Prepare an income statement and calculate profitability ratios. (SO 4, 6), AP Compute missing amounts and calculate profitability ratios. (SO 4, 6), AP Prepare multiple-step income statement and calculate profitability ratios. (SO 4, 6), AP Journalize perpetual inventory entries. (SO 2, 3), AP Journalize sales transactions. (SO 3), AP Exercises 261 Administrative expenses $465,000 Loss on disposal of Cost of goods sold 987,000 plant assets $ 83,500 Interest expense 71,000 Net sales 2,050,000 Interest revenue 65,000 Income tax expense 25,000 Selling expenses 420,000 Instructions
(a) Prepare a multiple-step income statement.
(b) Calculate the profit margin ratio and gross profit rate.
(c) In 2011, Misra had a profit margin ratio of 5%. Is the decline in 2012 a cause for concern? (Ignore income tax effects.)
E5-9 In its income statement for the year ended June 30, 2009, The Clorox Company reported the following condensed data (dollars in millions). Selling and Research and administrative expenses $ 715 development expense $ 114 Net sales 5,450 Income tax expense 274 Interest expense 161 Other expense 46 Advertising expense 499 Cost of goods sold 3,104 Instructions
(a) Prepare a multiple-step income statement.
(b) Calculate the gross profit rate and the profit margin ratio and explain what each means.
(c) Assume the marketing department has presented a plan to increase advertising expenses by $340 million. It expects this plan to result in an increase in both net sales and cost of goods sold of 25%. Redo parts
(a) and
(b) and discuss whether this plan has merit. (Assume a tax rate of 34%, and round all amounts to whole dollars.)
E5-10 The trial balance of Pollard Company at the end of its fiscal year, August 31, 2012, includes these accounts: Beginning Inventory $18,700; Purchases $154,000; Sales Revenue $190,000; Freight-in $8,000; Sales Returns and Allowances $3,000; Freight-out $1,000; and Purchase Returns and Allowances $5,000. The ending merchandise inventory is $21,000. Instructions Prepare a cost of goods sold section (periodic system) for the year ending August 31.
E5-11 Below is a series of cost of goods sold sections for companies A, F, L, and V. A F L V Beginning inventory $ 250 $ 120 $ 700 $ ( j) Purchases 1,500 1,080 (g) 43,590 Purchase returns and allowances 80
(d) 290 (k) Net purchases
(a) 1,040 7,410 42,290 Freight-in 130 (e) (h) 2,240 Cost of goods purchased
(b) 1,230 8,050 (l) Cost of goods available for sale 1,800 1,350 (i) 49,530 Ending inventory 310 (f ) 1,150 6,230 Cost of goods sold
(c) 1,230 7,600 43,300 Instructions Fill in the lettered blanks to complete the cost of goods sold sections.
E5-12 Pardow Corporation reported sales revenue of $257,000, net income of $45,300, cash of $9,300, and net cash provided by operating activities of $23,200. Accounts receivable have increased at three times the rate of sales during the last 3 years. Instructions
(a) Explain what is meant by high quality of earnings.
(b) Evaluate the quality of the company’s earnings. Discuss your findings.
(c) What factors might have contributed to the company’s quality of earnings? *
E5-13 This information relates to Edyburn Co. 1. On April 5, purchased merchandise from Hansen Company for $27,000, terms 2/10, n/30. 2. On April 6, paid freight costs of $1,200 on merchandise purchased from Hansen Company. Prepare multiple-step income statement and calculate profitability ratios. (SO 4, 6), C Prepare cost of goods sold section using periodic system. (SO 5), AP Prepare cost of goods sold section using periodic system. (SO 5), AP Evaluate quality of earnings. (SO 7), C Journalize purchase transactions. (SO 8), AP 262 chapter 5 Merchandising Operations and the Multiple-Step Income Statement 3. On April 7, purchased equipment on account for $30,000. 4. On April 8, returned some of the April 5 merchandise to Hansen Company, which cost $3,600. 5. On April 15, paid the amount due to Hansen Company in full. Instructions
(a) Prepare the journal entries to record these transactions on the books of Edyburn Co. using a periodic inventory system.
(b) Assume that Edyburn Co. paid the balance due to Hansen Company on May 4 instead of April 15. Prepare the journal entry to record this payment. Exercises: Set B and Challenge Exercises Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.

Problems: Set A
P5-1A Janssen Hardware Store completed the following merchandising transactions in the month of May. At the beginning of May, Janssen’s ledger showed Cash of $8,000 and Common Stock of $8,000. May 1 Purchased merchandise on account from Vanco Wholesale Supply for $8,000, terms 1/10, n/30. 2 Sold merchandise on account for $4,400, terms 2/10, n/30. The cost of the merchandise sold was $3,300. 5 Received credit from Vanco Wholesale Supply for merchandise returned $200. 9 Received collections in full, less discounts, from customers billed on May 2. 10 Paid Vanco Wholesale Supply in full, less discount. 11 Purchased supplies for cash $900. 12 Purchased merchandise for cash $3,100. 15 Received $230 refund for return of poor-quality merchandise from supplier on cash purchase. 17 Purchased merchandise from Strickler Distributors for $2,500, terms 2/10, n/30. 19 Paid freight on May 17 purchase $250. 24 Sold merchandise for cash $5,500. The cost of the merchandise sold was $4,100. 25 Purchased merchandise from Fasteners Inc. for $800, terms 3/10, n/30. 27 Paid Strickler Distributors in full, less discount. 29 Made refunds to cash customers for returned merchandise $124. The returned merchandise had cost $90. 31 Sold merchandise on account for $1,280, terms n/30. The cost of the merchandise sold was $830. Janssen Hardware’s chart of accounts includes Cash, Accounts Receivable, Inventory, Supplies, Accounts Payable, Common Stock, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold. Instructions
(a) Journalize the transactions using a perpetual inventory system.
(b) Post the transactions to T accounts. Be sure to enter the beginning cash and common stock balances.
(c) Prepare an income statement through gross profit for the month of May 2012.
(d) Calculate the profit margin ratio and the gross profit rate. (Assume operating expenses were $1,400.)
P5-2A Hayes Warehouse distributes hardback books to retail stores and extends credit terms of 2/10, n/30 to all of its customers. During the month of June, the following merchandising transactions occurred. Journalize, post, prepare partial income statement, and calculate ratios. (SO 2, 3, 4, 6), AP
(c) Gross profit $2,828 Journalize purchase and sale transactions under a perpetual system. (SO 2, 3), AP Problems: Set A 263 June 1 Purchased books on account for $1,040 (including freight) from Brooks Publishers, terms 2/10, n/30. 3 Sold books on account to the Mission Viejo bookstore for $1,200. The cost of the merchandise sold was $720. 6 Received $40 credit for books returned to Brooks Publishers. 9 Paid Brooks Publishers in full. 15 Received payment in full from the Mission Viejo bookstore. 17 Sold books on account to Book Nook for $1,200. The cost of the merchandise sold was $730. 20 Purchased books on account for $720 from Cook Book Publishers, terms 1/15, n/30. 24 Received payment in full from Book Nook. 26 Paid Cook Book Publishers in full. 28 Sold books on account to NewTown Bookstore for $1,300. The cost of the merchandise sold was $780. 30 Granted NewTown Bookstore $130 credit for books returned costing $80. Instructions Journalize the transactions for the month of June for Hayes Warehouse, using a perpetual inventory system.
P5-3A At the beginning of the current season on April 1, the ledger of Thousand Oaks Pro Shop showed Cash $2,500; Inventory $3,500; and Common Stock $6,000. The following transactions were completed during April 2012. Apr. 5 Purchased golf bags, clubs, and balls on account from Ryder Co. $1,500, terms 3/10, n/60. 7 Paid freight on Ryder purchase $80. 9 Received credit from Ryder Co. for merchandise returned $200. 10 Sold merchandise on account to members $1,340, terms n/30. The merchandise sold had a cost of $820. 12 Purchased golf shoes, sweaters, and other accessories on account from Birdie Sportswear $830, terms 1/10, n/30. 14 Paid Ryder Co. in full. 17 Received credit from Birdie Sportswear for merchandise returned $30. 20 Made sales on account to members $810, terms n/30. The cost of the merchandise sold was $550. 21 Paid Birdie Sportswear in full. 27 Granted an allowance to members for clothing that did not fit properly $80. 30 Received payments on account from members $1,220. The chart of accounts for the pro shop includes Cash, Accounts Receivable, Inventory, Accounts Payable, Common Stock, Sales Revenue, Sales Returns and Allowances, and Cost of Goods Sold. Instructions
(a) Journalize the April transactions using a perpetual inventory system.
(b) Using T accounts, enter the beginning balances in the ledger accounts and post the April transactions.
(c) Prepare a trial balance on April 30, 2012.
(d) Prepare an income statement through gross profit.
P5-4A Chapman Department Store is located in midtown Metropolis. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company’s fiscal year on November 30, 2012, these accounts appeared in its adjusted trial balance. Accounts Payable $ 26,800 Accounts Receivable 17,200 Accumulated Depreciation—Equipment 68,000 Cash 8,000 Common Stock 35,000 Cost of Goods Sold 614,300 Freight-out 6,200 Journalize, post, and prepare trial balance and partial income statement. (SO 2, 3, 4), AP Prepare financial statements and calculate profitability ratios. (SO 4, 6), AP(c) Tot. trial balance $8,150(d) Gross profit $ 700  Equipment $157,000 Depreciation Expense 13,500 Dividends 12,000 Gain on Disposal of Plant Assets 2,000 Income Tax Expense 10,000 Insurance Expense 9,000 Interest Expense 5,000 Inventory 26,200 Notes Payable 43,500 Prepaid Insurance 6,000 Advertising Expense 33,500 Rent Expense 34,000 Retained Earnings 14,200 Salaries and Wages Expense 117,000 Sales Revenue 904,000 Salaries and Wages Payable 6,000 Sales Returns and Allowances 20,000 Utilities Expense 10,600 Additional data: Notes payable are due in 2016. Instructions
(a) Prepare a multiple-step income statement, a retained earnings statement, and a classified balance sheet.
(b) Calculate the profit margin ratio and the gross profit rate.
(c) The vice president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis. Given the increased incentive, they expect net sales to increase by 15%. As a result, they estimate that gross profit will increase by $40,443 and expenses by $58,600. Compute the expected new net income. (Hint: You do not need to prepare an income statement.) Then, compute the revised profit margin ratio and gross profit rate. Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal. (Ignore income tax effects.)
P5-5A An inexperienced accountant prepared this condensed income statement for McDowell Company, a retail firm that has been in business for a number of years. MCDOWELL COMPANY Income Statement For the Year Ended December 31, 2012 Revenues Net sales $850,000 Other revenues 22,000 872,000 Cost of goods sold 555,000 Gross profit 317,000 Operating expenses Selling expenses 109,000 Administrative expenses 103,000 212,000 Net earnings $105,000 As an experienced, knowledgeable accountant, you review the statement and determine the following facts. 1. Net sales consist of sales $911,000, less freight-out expense on merchandise sold $33,000, and sales returns and allowances $28,000. 2. Other revenues consist of sales discounts $18,000 and rent revenue $8,000. 3. Selling expenses consist of salespersons’ salaries $80,000; depreciation on equipment $10,000; advertising $15,000; and sales commissions $6,000. The commissions represent commissions paid. At December 31, $3,000 of commissions have been earned by salespersons but have not been paid. All compensation should be recorded as Salaries and Wages Expense. Prepare a correct multiplestep income statement. (SO 4), AP
(a) Net income $ 32,900 Tot. assets $146,400 Problems: Set A 265 4. Administrative expenses consist of office salaries $47,000; dividends $18,000; utilities $12,000; interest expense $2,000; and rent expense $24,000, which includes prepayments totaling $6,000 for the first quarter of 2013. Instructions Prepare a correct detailed multiple-step income statement. Assume a 25% tax rate.
P5-6A The trial balance of Dealer’s Choice Wholesale Company contained the accounts shown at December 31, the end of the company’s fiscal year. DEALER’S CHOICE WHOLESALE COMPANY Trial Balance December 31, 2012 Debit Credit Cash $ 31,400 Accounts Receivable 37,600 Inventory 70,000 Land 92,000 Buildings 200,000 Accumulated Depreciation—Buildings $ 60,000 Equipment 83,500 Accumulated Depreciation—Equipment 40,500 Notes Payable 54,700 Accounts Payable 17,500 Common Stock 160,000 Retained Earnings 67,200 Dividends 10,000 Sales Revenue 922,100 Sales Discounts 6,000 Cost of Goods Sold 709,900 Salaries and Wages Expense 51,300 Utilities Expense 11,400 Maintenance and Repairs Expense 8,900 Advertising Expense 5,200 Insurance Expense 4,800 $1,322,000 $1,322,000 Adjustment data: 1. Depreciation is $8,000 on buildings and $7,000 on equipment. (Both are operating expenses.) 2. Interest of $4,500 is due and unpaid on notes payable at December 31. 3. Income tax due and unpaid at December 31 is $24,000. Other data: $15,000 of the notes payable are payable next year. Instructions
(a) Journalize the adjusting entries.
(b) Create T accounts for all accounts used in part (a). Enter the trial balance amounts into the T accounts and post the adjusting entries.
(c) Prepare an adjusted trial balance.
(d) Prepare a multiple-step income statement and a retained earnings statement for the year, and a classified balance sheet at December 31, 2012.
P5-7A At the end of Snyder Department Store’s fiscal year on November 30, 2012, these accounts appeared in its adjusted trial balance. Freight-in $ 5,060 Inventory (beginning) 41,300 Purchases 613,000 Purchase Discounts 7,000 Purchase Returns and Allowances 6,760 Sales Revenue 902,000 Sales Returns and Allowances 20,000 Journalize, post, and prepare adjusted trial balance and financial statements. (SO 4), AP Determine cost of goods sold and gross profit under a periodic system. (SO 4, 5), AP Net income $69,500
(c) Tot. trial balance $1,365,500
(d) Net income $81,100 Tot. assets $399,000 266 chapter 5 Merchandising Operations and the Multiple-Step Income Statement Additional facts: 1. Merchandise inventory on November 30, 2012, is $36,200. 2. Note that Snyder Department Store uses a periodic system. Instructions Prepare an income statement through gross profit for the year ended November 30, 2012.
P5-8A Reza Inc. operates a retail operation that purchases and sells snowmobiles, amongst other outdoor products. The company purchases all merchandise inventory on credit and uses a periodic inventory system. The Accounts Payable account is used for recording inventory purchases only; all other current liabilities are accrued in separate accounts. You are provided with the following selected information for the fiscal years 2010 through 2013, inclusive. 2010 2011 2012 2013 Income Statement Data Sales revenue $96,890 $ (e) $82,220 Cost of goods sold
(a) 28,060 26,490 Gross profit 67,800 59,620 (i) Operating expenses 63,640 (f ) 52,870 Net income $
(b) $ 3,510 $ ( j) Balance Sheet Data Inventory $13,000 $
(c) $14,700 $ (k) Accounts payable 5,800 6,500 4,600 (l) Additional Information Purchases of merchandise inventory on account $25,890 $ (g) $24,050 Cash payments to suppliers
(d) (h) 24,650 Instructions
(a) Calculate the missing amounts.
(b) The vice presidents of sales, marketing, production, and finance are discussing the company’s results with the CEO. They note that sales declined over the 3-year fiscal period, 2011–2013. Does that mean that profitability necessarily also declined? Explain, computing the gross profit rate and the profit margin ratio for each fiscal year to help support your answer. *
P5-9A At the beginning of the current season on April 1, the ledger of Thousand Oaks Pro Shop showed Cash $2,500; Inventory $3,500; and Common Stock $6,000. These transactions occurred during April 2012. Apr. 5 Purchased golf bags, clubs, and balls on account from Ryder Co. $1,500, terms 3/10, n/60. 7 Paid freight on Ryder Co. purchases $80. 9 Received credit from Ryder Co. for merchandise returned $200. 10 Sold merchandise on account to members $1,340, terms n/30. 12 Purchased golf shoes, sweaters, and other accessories on account from Birdie Sportswear $830, terms 1/10, n/30. 14 Paid Ryder Co. in full. 17 Received credit from Birdie Sportswear for merchandise returned $30. 20 Made sales on account to members $810, terms n/30. 21 Paid Birdie Sportswear in full. 27 Granted credit to members for clothing that did not fit properly $80. 30 Received payments on account from members $1,220. The chart of accounts for the pro shop includes Cash, Accounts Receivable, Inventory, Accounts Payable, Common Stock, Sales Revenue, Sales Returns and Allowances, Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-in. Instructions
(a) Journalize the April transactions using a periodic inventory system.
(b) Using T accounts, enter the beginning balances in the ledger accounts and post the April transactions.
(c) Prepare a trial balance on April 30, 2012. Calculate missing amounts and assess profitability. (SO 4, 5, 6), AN Journalize, post, and prepare trial balance and partial income statement under a periodic system. (SO 5, 8), AP Gross profit $272,600
(c) Tot. trial balance $8,427 Gross profit $700 Problems: Set B 267
(d) Prepare an income statement through gross profit, assuming merchandise inventory on hand at April 30 is $4,263. Problems: Set B
P5-1B Curtain Distributing Company completed these merchandising transactions in the month of April. At the beginning of April, the ledger of Curtain showed Cash of $9,000 and Common Stock of $9,000. Apr. 2 Purchased merchandise on account from Luebke Supply Co. $8,700, terms 2/10, n/30. 4 Sold merchandise on account $6,000, terms 2/10, n/30. The cost of the merchandise sold was $3,700. 5 Paid $200 freight on April 4 sale. 6 Received credit from Luebke Supply Co. for merchandise returned $400. 11 Paid Luebke Supply Co. in full, less discount. 13 Received collections in full, less discounts, from customers billed on April 4. 14 Purchased merchandise for cash $4,700. 16 Received refund from supplier for returned merchandise on cash purchase of April 14, $500. 18 Purchased merchandise from Cascade Distributors $5,500, terms 2/10, n/30. 20 Paid freight on April 18 purchase $180. 23 Sold merchandise for cash $8,300. The cost of the merchandise sold was $5,580. 26 Purchased merchandise for cash $2,300. 27 Paid Cascade Distributors in full, less discount. 29 Made refunds to cash customers for returned merchandise $180. The returned merchandise had a cost of $120. 30 Sold merchandise on account $3,980, terms n/30. The cost of the merchandise sold was $2,500. Curtain Distributing Company’s chart of accounts includes Cash, Accounts Receivable, Inventory, Accounts Payable, Common Stock, Sales Revenue, Sales Returns and Allowances, Sales Discounts, Cost of Goods Sold, and Freight-out. Instructions
(a) Journalize the transactions.
(b) Post the transactions to T accounts. Be sure to enter the beginning cash and common stock balances.
(c) Prepare the income statement through gross profit for the month of April 2012.
(d) Calculate the profit margin ratio and the gross profit rate. (Assume operating expenses were $2,050.)
P5-2B Holiday Warehouse distributes suitcases to retail stores and extends credit terms of 1/10, n/30 to all of its customers. During the month of July, the following merchandising transactions occurred. July 1 Purchased suitcases on account for $2,700 from Satchel Manufacturers, terms 2/15, n/30. 3 Sold suitcases on account to Triptik for $2,900. The cost of the merchandise sold was $1,800. 9 Paid Satchel Manufacturers in full. 12 Received payment in full from Triptik. 17 Sold suitcases on account to PassPort for $2,000. The cost of the merchandise sold was $1,200. 18 Purchased suitcases on account for $2,200 (including freight) from Steamer Manufacturers, terms 1/10, n/30. 20 Received $300 credit for suitcases returned to Steamer Manufacturers. 21 Received payment in full from PassPort. 22 Sold suitcases on account to Carry On for $3,120. The cost of the merchandise sold was $1,800. 30 Paid Steamer Manufacturers in full. 31 Granted Carry On $310 credit for suitcases returned costing $170. Journalize, post, prepare partial income statement, and calculate ratios. (SO 2, 3, 4, 6), AP Journalize purchase and sale transactions under a perpetual system. (SO 2, 3), AP
(c) Gross profit $6,320 268 chapter 5 Merchandising Operations and the Multiple-Step Income Statement Instructions Journalize the transactions for the month of July for Holiday Warehouse, using a perpetual inventory system.
P5-3B At the beginning of the current season, the ledger of Highland Tennis Shop showed Cash $2,500; Inventory $1,700; and Common Stock $4,200. The following transactions were completed during April. Apr. 4 Purchased racquets and balls from Harris Co. $980, terms 2/10, n/30. 6 Paid freight on Harris Co. purchase $60. 8 Sold merchandise to members $750, terms n/30. The merchandise sold cost $480. 10 Received credit of $130 from Harris Co. for damaged racquets that were returned. 11 Purchased tennis shoes from Happy Feet for cash $300. 13 Paid Harris Co. in full. 14 Purchased tennis shirts and shorts from Rivera Sportswear $1,300, terms 3/10, n/60. 15 Received cash refund of $50 from Happy Feet for damaged merchandise that was returned. 17 Paid freight on Rivera Sportswear purchase $60. 18 Sold merchandise to members $660, terms n/30. The cost of the merchandise sold was $440. 20 Received $500 in cash from members in settlement of their accounts. 21 Paid Rivera Sportswear in full. 27 Granted an allowance of $30 to members for tennis clothing that did not fit properly. 30 Received cash payments on account from members $550. The chart of accounts for the tennis shop includes Cash, Accounts Receivable, Inventory, Accounts Payable, Common Stock, Sales Revenue, Sales Returns and Allowances, and Cost of Goods Sold. Instructions
(a) Journalize the April transactions using a perpetual inventory system.
(b) Using T accounts, enter the beginning balances in the ledger accounts and post the April transactions.
(c) Prepare a trial balance on April 30, 2012.
(d) Prepare an income statement through gross profit.
P5-4B Parkland Department Store is located near the Lyndale Shopping Mall. At the end of the company’s fiscal year on December 31, 2012, the following accounts appeared in its adjusted trial balance. Accounts Payable $ 73,300 Accounts Receivable 45,500 Accumulated Depreciation—Buildings 52,500 Accumulated Depreciation—Equipment 42,600 Buildings 190,000 Cash 28,000 Common Stock 140,000 Cost of Goods Sold 412,000 Depreciation Expense 23,400 Dividends 15,000 Equipment 100,000 Gain on Disposal of Plant Assets 4,300 Income Tax Expense 15,000 Insurance Expense 8,400 Interest Expense 7,000 Interest Payable 2,000 Inventory 43,000 Mortgage Payable 62,500 Prepaid Insurance 2,400 Journalize, post, and prepare trial balance and partial income statement. (SO 2, 3, 4), AP Prepare financial statements and calculate profitability ratios. (SO 4, 6), AP
(c) Tot. trial balance $5,610
(d) Gross profit $460 Problems: Set B 269 Maintenance and Repairs Expense $ 6,200 Retained Earnings 19,200 Salaries and Wages Expense 111,000 Sales Revenue 626,000 Salaries and Wages Payable 3,500 Sales Returns and Allowances 8,000 Utilities Expense 11,000 Additional data: $20,000 of the mortgage payable is due for payment next year. Instructions
(a) Prepare a multiple-step income statement, a retained earnings statement, and a classified balance sheet.
(b) Calculate the profit margin ratio and the gross profit rate.
(c) The vice president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis. Given the increased incentive, they expect net sales to increase by 25%. As a result, they estimate that gross profit will increase by $50,500 and expenses by $27,800. Compute the expected new net income. (Hint: You do not need to prepare an income statement.) Then, compute the revised profit margin ratio and gross profit rate. Comment on the effect that this plan would have on net income and the ratios, and evaluate the merit of this proposal.
P5-5B A part-time bookkeeper prepared this income statement for Kritek Company for the year ending December 31, 2012. KRITEK COMPANY Income Statement December 31, 2012 Revenues Sales revenue $720,000 Less: Freight-out $14,000 Sales discounts 11,300 25,300 Net sales 694,700 Other revenues (net) 1,300 Total revenues 696,000 Expenses Cost of goods sold 460,000 Selling expenses 103,000 Administrative expenses 54,000 Dividends 12,000 Total expenses 629,000 Net income $ 67,000 As an experienced, knowledgeable accountant, you review the statement and determine the following facts. 1. Sales include $12,000 of deposits from customers for future sales orders. 2. Other revenues contain two items: interest expense $4,000 and interest revenue $5,300. 3. Selling expenses consist of sales salaries and wages $82,500, advertising $13,000, and depreciation on store equipment $7,500. 4. Administrative expenses consist of office salaries $23,000; utilities expense $9,500; rent expense $14,500; and insurance expense $7,000. Insurance expense includes $1,200 of insurance applicable to 2013. Instructions Prepare a correct detailed multiple-step income statement. Assume a tax rate of 25%.
P5-6B The trial balance of Runway Fashion Center contained the accounts on the next page at November 30, the end of the company’s fiscal year. Prepare a correct multiplestep income statement. (SO 4), AP Journalize, post, and prepare adjusted trial balance and financial statements. (SO 4), AP
(a) Net income $28,300 Tot. assets $313,800 Operating expenses $169,800 Net income $51,150 270 chapter 5 Merchandising Operations and the Multiple-Step Income Statement RUNWAY FASHION CENTER Trial Balance November 30, 2012 Debit Credit Cash $ 37,700 Accounts Receivable 33,700 Inventory 43,000 Supplies 8,800 Equipment 143,000 Accumulated Depreciation—Equipment $ 41,000 Notes Payable 62,000 Accounts Payable 17,800 Common Stock 80,000 Retained Earnings 30,000 Dividends 12,000 Sales Revenue 757,200 Sales Returns and Allowances 6,200 Cost of Goods Sold 505,400 Salaries and Wages Expense 110,000 Advertising Expense 26,400 Utilities Expense 14,000 Maintenance and Repairs Expense 12,100 Freight-out 11,700 Rent Expense 24,000 $988,000 $988,000 Adjustment data: 1. Store supplies on hand total $3,100. 2. Depreciation is $14,000 on the store equipment and $6,000 on the delivery equipment. 3. Interest of $4,400 is accrued on notes payable at November 30. 4. Income tax due and unpaid at November 30 is $3,000. Other data: $24,000 of notes payable are due for payment next year. Instructions
(a) Journalize the adjusting entries.
(b) Prepare T accounts for all accounts used in part (a). Enter the trial balance amounts into the T accounts and post the adjusting entries.
(c) Prepare an adjusted trial balance.
(d) Prepare a multiple-step income statement and a retained earnings statement for the year, and a classified balance sheet at November 30, 2012.
P5-7B At the end of Ehlinger Department Store’s fiscal year on December 31, 2012, these accounts appeared in its adjusted trial balance. Freight-in $ 7,200 Inventory (beginning) 40,500 Purchases 456,000 Purchase Discounts 12,000 Purchase Returns and Allowances 6,400 Sales Revenue 702,000 Sales Returns and Allowances 8,000 Additional facts: 1. Merchandise inventory on December 31, 2012, is $58,300. 2. Note that Ehlinger Department Store uses a periodic system. Instructions Prepare an income statement through gross profit for the year ended December 31, 2012.
P5-8B Sandra McLellan operates a clothing retail operation. She purchases all merchandise inventory on credit and uses a periodic inventory system. The Accounts Payable account is used for recording inventory purchases only; all other current liabilities are accrued in separate accounts. You are provided with the following selected information for the fiscal years 2010, 2011, 2012, and 2013. Determine cost of goods sold and gross profit under a periodic system. (SO 4, 5), AP Calculate missing amounts and assess profitability. (SO 4, 5, 6), AN
(c) Tot. trial balance $1,015,400
(d) Net income $14,300 Tot. assets $199,500 Gross profit $267,000 Problems: Set C 271 2010 2011 2012 2013 Inventory (ending) $16,000 $ 11,300 $ 16,400 $ 12,200 Accounts payable (ending) 17,000 Sales revenue 229,700 227,600 222,000 Purchases of merchandise inventory on account 146,900 155,700 139,200 Cash payments to suppliers 135,900 159,000 127,000 Instructions
(a) Calculate cost of goods sold for each of the 2011, 2012, and 2013 fiscal years.
(b) Calculate the gross profit for each of the 2011, 2012, and 2013 fiscal years.
(c) Calculate the ending balance of accounts payable for each of the 2011, 2012, and 2013 fiscal years.
(d) The vice presidents of sales, marketing, production, and finance are discussing the company’s results with the CEO. They note that sales declined in fiscal 2013. They wonder whether that means that profitability, as measured by the gross profit rate, necessarily also declined. Explain, calculating the gross profit rate for each fiscal year to help support your answer. *
P5-9B At the beginning of the current season, the ledger of Highland Tennis Shop showed Cash $2,500; Inventory $1,700; and Common Stock $4,200. The following transactions were completed during April. Apr. 4 Purchased racquets and balls from Harris Co. $980, terms 2/10, n/30. 6 Paid freight on Harris Co. purchase $60. 8 Sold merchandise to members $750, terms n/30. 10 Received credit of $130 from Harris Co. for damaged racquets that were returned. 11 Purchased tennis shoes from Happy Feet for cash $300. 13 Paid Harris Co. in full. 14 Purchased tennis shirts and shorts from Rivera Sportswear $1,300, terms 3/10, n/60. 15 Received cash refund of $50 from Happy Feet for damaged merchandise that was returned. 17 Paid freight on Rivera Sportswear purchase $60. 18 Sold merchandise to members $660, terms n/30. 20 Received $500 in cash from members in settlement of their accounts. 21 Paid Rivera Sportswear in full. 27 Granted an allowance of $30 to members for tennis clothing that did not fit properly. 30 Received cash payments on account from members $550. The chart of accounts for the tennis shop includes Cash, Accounts Receivable, Inventory, Accounts Payable, Common Stock, Sales Revenue, Sales Returns and Allowances, Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-in. Instructions
(a) Journalize the April transactions using a periodic inventory system.
(b) Using T accounts, enter the beginning balances in the ledger accounts and post the April transactions.
(c) Prepare a trial balance on April 30, 2012.
(d) Prepare an income statement through Gross Profit, assuming merchandise inventory on hand at April 30 is $3,244. Journalize, post, and prepare trial balance and partial income statement under a periodic system. (SO 5, 8), AP
(a) 2012 $150,600
(c) 2012 $24,700
(c) Tot. trial balance $5,846
(d) Gross profit $460 Problems: Set C Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Problem Set C. 272 chapter 5 Merchandising Operations and the Multiple-Step Income Statement Comprehensive Problem CP5 On December 1, 2012, Shiras Distributing Company had the following account balances. Debits Credits Cash $ 7,200 Accumulated Depreciation— Accounts Receivable 4,600 Equipment $ 2,200 Inventory 12,000 Accounts Payable 4,500 Supplies 1,200 Salaries and Wages Payable 1,000 Equipment 22,000 Common Stock 15,000 $47,000 Retained Earnings 24,300 $47,000 During December, the company completed the following summary transactions. Dec. 6 Paid $1,600 for salaries due employees, of which $600 is for December and $1,000 is for November salaries payable. 8 Received $1,900 cash from customers in payment of account (no discount allowed). 10 Sold merchandise for cash $6,300. The cost of the merchandise sold was $4,100. 13 Purchased merchandise on account from Gong Co. $9,000, terms 2/10, n/30. 15 Purchased supplies for cash $2,000. 18 Sold merchandise on account $12,000, terms 3/10, n/30. The cost of the merchandise sold was $8,000. 20 Paid salaries $1,800. 23 Paid Gong Co. in full, less discount. 27 Received collections in full, less discounts, from customers billed on December 18. Adjustment data: 1. Accrued salaries payable $800. 2. Depreciation $200 per month. 3. Supplies on hand $1,500. 4. Income tax due and unpaid at December 31 is $200. Instructions
(a) Journalize the December transactions using a perpetual inventory system.
(b) Enter the December 1 balances in the ledger T accounts and post the December transactions. Use Cost of Goods Sold, Depreciation Expense, Salaries and Wages Expense, Sales Revenue, Sales Discounts, Supplies Expense, Income Tax Expense, and Income Taxes Payable.
(c) Journalize and post adjusting entries.
(d) Prepare an adjusted trial balance. (e) Prepare an income statement and a retained earnings statement for December and a classified balance sheet at December 31.
(d) Totals $65,500 (e) Net income $540 Continuing Cookie Chronicle (Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 4.) CCC5 Because Natalie has had such a successful first few months, she is considering other opportunities to develop her business. One opportunity is to become the exclusive distributor of a line of fine European mixers. Natalie comes to you for advice on how to account for these mixers. Go to the book’s companion website, at www.wiley.com/college/kimmel, to see the completion of this problem. Broadening Your Perspective 273 Financial Reporting and Analysis FINANCIAL REPORTING PROBLEM: Tootsie Roll Industries Inc.
BYP5-1 The financial statements for Tootsie Roll Industries appear in Appendix A at the end of this book. Instructions Answer these questions using the Consolidated Income Statement.
(a) What was the percentage change in total revenue and in net income from 2008 to 2009?
(b) What was the profit margin ratio in each of the 3 years? (Use “Total Revenue.”) Comment on the trend.
(c) What was Tootsie Roll’s gross profit rate in each of the 3 years? (Use “Product” amounts.) Comment on the trend. COMPARATIVE ANALYSIS PROBLEM: Tootsie Roll vs. Hershey
BYP5-2 The financial statements of The Hershey Company appear in Appendix B, following the financial statements for Tootsie Roll in Appendix A. Instructions
(a) Based on the information contained in these financial statements, determine the following values for each company. (1) Profit margin ratio for 2009. (For Tootsie Roll, use “Total Revenue.”) (2) Gross profit for 2009. (For Tootsie Roll, use “Product” amounts.) (3) Gross profit rate for 2009. (For Tootsie Roll, use “Product” amounts.) (4) Operating income for 2009. (5) Percentage change in operating income from 2009 to 2008.
(b) What conclusions concerning the relative profitability of the two companies can be drawn from these data? RESEARCH CASE
BYP5-3 The April 23, 2008, issue of the Wall Street Journal includes an article by Vanessa O’Connell entitled “Coach Profit Is Up but Margins Are Tightening.” Instructions Read the article and answer the following questions.
(a) Referring to the ratios that were presented in this chapter, interpret the first paragraph of the article.
(b) Explain why investors would be angry that the company has stopped reporting the amount of its sales from outlet malls separately from its sales at full-priced stores.
(c) The article says that the gross margin (gross profit rate) fell from 77.8% to 75%. According to the article, what were the two causes of this decline? INTERPRETING FINANCIAL STATEMENTS
BYP5-4 Recently, it was announced that two giant French retailers, Carrefour SA and Promodes SA, would merge. A headline in the Wall Street Journal blared, “French Retailers Create New Wal- Mart Rival.” While Wal-Mart’s total sales would still exceed those of the combined company, Wal- Mart’s international sales are far less than those of the combined company. This is a serious concern for Wal-Mart, since its primary opportunity for future growth lies outside of the United States. Below are basic financial data for the combined corporation (in euros) and Wal-Mart (in U.S. dollars). Even though their results are presented in different currencies, by employing ratios we can make some basic comparisons. Carrefour Wal-Mart (in millions) (in millions) Sales C= 70,486 $256,329 Cost of goods sold 54,630 198,747 Net income 1,738 9,054 Total assets 39,063 104,912 Current assets 14,521 34,421 Current liabilities 13,660 37,418 Total liabilities 29,434 61,289 broadening your perspective Instructions Compare the two companies by answering the following.
(a) Calculate the gross profit rate for each of the companies, and discuss their relative abilities to control cost of goods sold.
(b) Calculate the profit margin ratio, and discuss the companies’ relative profitability.
(c) Calculate the current ratio and debt to total assets ratios for the two companies, and discuss their relative liquidity and solvency.
(d) What concerns might you have in relying on this comparison? FINANCIAL ANALYSIS ON THE WEB
BYP5-5 Purpose: No financial decision maker should ever rely solely on the financial information reported in the annual report to make decisions. It is important to keep abreast of financial news. This activity demonstrates how to search for financial news on the Web. Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/kimmel Steps 1. Type in either Wal-Mart, Target Corp., or Kmart. 2. Choose News. 3. Select an article that sounds interesting to you and that would be relevant to an investor in these companies. Instructions
(a) What was the source of the article (e.g., Reuters, Businesswire, Prnewswire)?
(b) Assume that you are a personal financial planner and that one of your clients owns stock in the company. Write a brief memo to your client summarizing the article and explaining the implications of the article for their investment. Critical Thinking DECISION MAKING ACROSS THE ORGANIZATION
BYP5-6 Three years ago, Amy Blodgett and her brother-in-law Dennis Torres opened Megamart Department Store. For the first 2 years, business was good, but the following condensed income statement results for 2012 were disappointing. MEGAMART DEPARTMENT STORE Income Statement For the Year Ended December 31, 2012 Net sales $700,000 Cost of goods sold 560,000 Gross profit 140,000 Operating expenses Selling expenses $100,000 Administrative expenses 20,000 120,000 Net income $ 20,000 Amy believes the problem lies in the relatively low gross profit rate of 20%. Dennis believes the problem is that operating expenses are too high. Amy thinks the gross profit rate can be improved by making two changes: (1) Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%. (2) Buy merchandise in larger quantities and take all purchase discounts; these changes are expected to increase the gross profit rate from 20% to 25%. Amy does not anticipate that these changes will have any effect on operating expenses. Dennis thinks expenses can be cut by making these two changes: (1) Cut 2012 sales salaries of $60,000 in half and give sales personnel a commission of 2% of net sales. (2) Reduce store deliveries to one day per week rather than twice a week; this change will reduce 2012 delivery expenses of $40,000 by 40%. Dennis feels that these changes will not have any effect on net sales. Amy and Dennis come to you for help in deciding the best way to improve net income.  Instructions With the class divided into groups, answer the following.
(a) Prepare a condensed income statement for 2013 assuming (1) Amy’s changes are implemented and (2) Dennis’s ideas are adopted.
(b) What is your recommendation to Amy and Dennis?
(c) Prepare a condensed income statement for 2013 assuming both sets of proposed changes are made.
(d) Discuss the impact that other factors might have. For example, would increasing the quantity of inventory increase costs? Would a salary cut affect employee morale? Would decreased morale affect sales? Would decreased store deliveries decrease customer satisfaction? What other suggestions might be considered? COMMUNICATION ACTIVITY
BYP5-7 The following situation is presented in chronological order. 1. Finley decides to buy a surfboard. 2. He calls Surfing USA Co. to inquire about their surfboards. 3. Two days later he requests Surfing USA Co. to make him a surfboard. 4. Three days later Surfing USA Co. sends him a purchase order to fill out. 5. He sends back the purchase order. 6. Surfing USA Co. receives the completed purchase order. 7. Surfing USA Co. completes the surfboard. 8. Finley picks up the surfboard. 9. Surfing USA Co. bills Finley. 10. Surfing USA Co. receives payment from Finley. Instructions In a memo to the president of Surfing USA Co., answer the following questions.
(a) When should Surfing USA Co. record the sale?
(b) Suppose that with his purchase order, Finley is required to make a down payment. Would that change your answer to part (a)? ETHICS CASE
BYP5-8 Margie Anunson was just hired as the assistant treasurer of Northshore Stores, a specialty chain store company that has nine retail stores concentrated in one metropolitan area. Among other things, the payment of all invoices is centralized in one of the departments Margie will manage. Her primary responsibility is to maintain the company’s high credit rating by paying all bills when due and to take advantage of all cash discounts. Michael Hauer, the former assistant treasurer, who has been promoted to treasurer, is training Margie in her new duties. He instructs Margie that she is to continue the practice of preparing all checks “net of discount” and dating the checks the last day of the discount period. “But,” Michael continues, “we always hold the checks at least 4 days beyond the discount period before mailing them. That way we get another 4 days of interest on our money. Most of our creditors need our business and don’t complain. And, if they scream about our missing the discount period, we blame it on the mail room or the post office. We’ve only lost one discount out of every hundred we take that way. I think everybody does it. By the way, welcome to our team!” Instructions
(a) What are the ethical considerations in this case?
(b) What stakeholders are harmed or benefited?
(c) Should Margie continue the practice started by Michael? Does she have any choice? “ALL ABOUT YOU” ACTIVITY
BYP5-9 There are many situations in business where it is difficult to determine the proper period in which to record revenue. Suppose that after graduation with a degree in finance, you take a job as a manager at a consumer electronics store called Pacifica Electronics. The company has expanded rapidly in order to compete with Best Buy. Pacifica has also begun selling gift cards. The cards are available in any dollar amount and allow the holder of the card to purchase an item for up to 2 years from the time the card is purchased. If the card is not used during that 2 years, it expires. Broadening Your Perspective 275 Instructions Answer the following questions. At what point should the revenue from the gift cards be recognized? Should the revenue be recognized at the time the card is sold, or should it be recorded when the card is redeemed? Explain the reasoning to support your answers. FASB CODIFICATION ACTIVITY
BYP5-10 Access the FASB Codification at http://asc.fasb.org to prepare responses to the following
(a) Access the glossary (“Master Glossary”) to answer the following. (1) What is the definition provided for inventory? (2) What is a customer?
(b) What guidance does the Codification provide concerning reporting inventories above cost? Answers to Insight and Accounting Across the Organization Questions p. 231 Morrow Snowboards Improves Its Stock Appeal Q: If a perpetual system keeps track of inventory on a daily basis, why do companies ever need to do a physical count? A: A perpetual system keeps track of all sales and purchases on a continuous basis. This provides a constant record of the number of units in the inventory. However, if employees make errors in recording sales or purchases, or if there is theft, the inventory value will not be correct. As a consequence, all companies do a physical count of inventory at least once a year. p. 238 Should Costco Change Its Return Policy? Q: If a company expects significant returns, what are the implications for revenue recognition? A: If a company expects significant returns, it should make an adjusting entry at the end of the year reducing sales by the estimated amount of sales returns. This is necessary so as not to overstate the amount of revenue recognized in the period. p. 242 Disclosing More Details Q: Why have investors and analysts demanded more accuracy in isolating “Other gains and losses” from operating items? A: Greater accuracy in the classification of operating versus nonoperating (“Other gains and losses”) items permits investors and analysts to judge the real operating margin, the results of continuing operations, and management’s ability to control operating expenses. p. 248 Strategic Errors Can Be Costly Q: Explain how Wal-Mart’s profitability gave it a strategic advantage over Kmart. A: If two competitors get into a “price war,” the company with the lower costs can reduce prices further (thus eroding its gross profit rate), but still operate at a profit. Thus, Wal-Mart’s success at minimizing its operating costs has enabled it to drive many competitors out of business. Answers to Self-Test Questions 1. a 2. c 3. c 4. b (($750 _ $50) _ .98) 5. c 6. c 7. b ($400,000 _ $310,000) 8. d 9. a ($60,000 _ $380,000 _ $50,000) 10. b ($17,200 _ ($60,400 _ $3,000 _ $1,100 _ $600)) 11. c 12. c 13. d ($92,400 _ $267,000) 14. b *15. b 276 chapter 5 Merchandising Operations and the Multiple-Step Income Statement IFRS A Look at IFRS The basic accounting entries for merchandising are the same under both GAAP and IFRS. The income statement is a required statement under both sets of standards. The basic format is similar although some differences do exist. KEY POINTS • Under both GAAP and IFRS, a company can choose to use either a perpetual or a periodic system. • Inventories are defined by IFRS as held-for-sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the providing of services. • Under GAAP, companies generally classify income statement items by function. Classification by function leads to descriptions like administration, distribution, and manufacturing. Under IFRS, companies must classify expenses by either nature or function. Classification by nature leads to descriptions such as the following: salaries, depreciation expense, and utilities expense. If a company uses the functional-expense method on the income statement, disclosure by nature is required in the notes to the financial statements. • Presentation of the income statement under GAAP follows either a single-step or multiple-step format. IFRS does not mention a single-step or multiple-step approach. • Under IFRS, revaluation of land, buildings, and intangible assets is permitted. The initial gains and losses resulting from this revaluation are reported as adjustments to equity, often referred to as other comprehensive income. The effect of this difference is that the use of IFRS results in more transactions affecting equity (other comprehensive income) but not net income. • IAS 1, “Presentation of Financial Statements,” provides general guidelines for the reporting of income statement information. Subsequently, a number of international standards have been issued that provide additional guidance to issues related to income statement presentation. • Similar to GAAP, comprehensive income under IFRS includes unrealized gains and losses (such as those on so-called “available-for-sale securities”) that are not included in the calculation of net income. • IFRS requires that two years of income statement information be presented, whereas GAAP requires three years. LOOKING TO THE FUTURE The IASB and FASB are working on a project that would rework the structure of financial statements. Specifically, this project will address the issue of how to classify various items in the income statement. A main goal of this new approach is to provide information that better represents how businesses are run. In addition, this approach draws attention away from just one number—net income. It will adopt major groupings similar to those currently used by the statement of cash flows (operating, investing, and financing), so that numbers can be more readily traced across statements. For example, the amount of income that is generated by operations would be traceable to the assets and liabilities used to generate the income. Finally, this approach would also provide detail, beyond that currently seen in most statements (either GAAP or IFRS), by requiring that line items be presented both by function and by nature. The new financial statement format was heavily influenced by suggestions from financial statement analysts. IFRS Self-Test Questions 1. Which of the following would not be included in the definition of inventory under IFRS?
(a) Photocopy paper held for sale by an office-supply store.
(b) Stereo equipment held for sale by an electronics store.
(c) Used office equipment held for sale by the human relations department of a plastics company.
(d) All of the above would meet the definition. 2. Which of the following would not be a line item of a company reporting costs by nature?
(a) Depreciation expense.
(b) Salaries expense.
(c) Interest expense.
(d) Manufacturing expense. 3. Which of the following would not be a line item of a company reporting costs by function?
(a) Administration.
(b) Manufacturing.
(c) Utilities expense.
(d) Distribution. 4. Which of the following statements is false?
(a) IFRS specifically requires use of a multiple-step income statement.
(b) Under IFRS, companies can use either a perpetual or periodic system.
(c) The proposed new format for financial statements was heavily influenced by the suggestions of financial statement analysts.
(d) The new income statement format will try to de-emphasize the focus on the “net income” line item. A Look at IFRS 277 5. Under the new format for financial statements being proposed under a joint IASB/FASB project:
(a) all financial statements would adopt headings similar to the current format of the balance sheet.
(b) financial statements would be presented consistent with the way management usually run companies.
(c) companies would be required to report income statement line items by function only.
(d) the amount of detail shown in the income statement would decrease compared to current presentations. IFRS Concepts and Application
IFRS5–1 Explain the difference between the “nature-of-expense” and “function-of-expense” classifications.
IFRS5–2 For each of the following income statement line items, state whether the item is a “by nature” expense item or a “by function” expense item. ________ Cost of goods sold ________ Depreciation expense ________ Wages and salaries expense ________ Selling expenses ________ Utilities expense ________ Delivery expense ________ General and administrative expenses
IFRS5–3 Gribble Company reported the following amounts in 2012: Net income, C=150,000; Unrealized gain related to revaluation of buildings, C=10,000; and Unrealized loss on available-forsale securities, C= (35,000). Determine Gribble’s total comprehensive income for 2012. INTERNATIONAL FINANCIAL REPORTING PROBLEM: Zetar plc
IFRS5–4 The financial statements of Zetar plc are presented in Appendix C. The company’s complete annual report, including the notes to its financial statements, is available at www.zetarplc.com. Instructions
(a) Is Zetar using a multiple-step or a single-step income statement format? Explain how you made your determination.
(b) Instead of “interest expense,” what label does Zetar use for interest costs that it incurs?
(c) What is the approximate tax rate of Zetar’s “Tax on profit from continuing activities”?
(d) Using the notes to the company’s financial statements, explain what each of the following are: (1) Adjusted results. (2) One-off