Chapter 4 Solutions

Chapter 4: Accounting for a Merchandising Business

Discussion Questions: Key Points

1. Inventory, Cost of Goods Sold, Sales, Sales Discounts, Sales Returns and Allowances. Students might identify gross profit, but this is not an account, it is a subtotal.

2. A perpetual system allows the company to know more about the inventory items that are selling well and not selling well. It allows companies to monitor inventory more closely to avoid stock-outs or excessive holding costs. It can also help companies to more effectively prevent and detect theft of inventory through closer monitoring.

3. Subsidiary ledgers are used to keep track of detailed information that would be too cumbersome for a general ledger. For example, individual accounts receivable and payable would be noted in a subsidiary ledger.

4. The terms 2/10, n/30 mean that the purchasing company gets a two percent discount if it pays within 10 days, otherwise the full amount is due within 30 days. You should advise them to take advantage of all early payment discounts because by delaying payment by 20 days it is costing two percent. Given that there are approximately 18 twenty-day periods in a year, that translates into a 36 percent interest rate.

5. Four accounts are involved. A/R is debited and Sales is credited while Cost of Goods Sold is debited while Inventory is credited.

6. Sales returns and allowances is a contra-revenue account. It would appear on the income statement along with sales (subtracting from it) in order to arrive at a net sales subtotal.

7. Debit memos are most commonly used to decrease accounts payable. Credit memos are most commonly used to decrease accounts receivable. Both documents would be used with the return of defective merchandise. The purchaser would use a debit memorandum to reduce accounts payable (with a debit) on items that were returned so that they would not pay for the returned items. The seller of merchandise would use a credit memorandum to reduce receivables (with a credit) so that they would not bill the customer for items that were returned.

8. Free on board or “f.o.b.” terms describe where the goods change hands and who is responsible for the shipping charges. It is important to understand f.o.b. terms because shipping charges can significantly affect the total price paid to acquire items. If a merchandiser does not take shipping charges on merchandise received into account when setting prices, suitable profit might not be earned. Also, if goods are damaged in transit, it is important to know which party is responsible for making the situation right.

9. A single step income statement arrives at net income in a single-step of subtracting expenses from revenues. A multi-step income statement arrives at several subtotals along the way to calculating net income. A multi-step income statement is appropriate for a merchandising or a manufacturing company.

10. Several factors could account for the shrinking difference between what a company sells its goods for and what it costs to acquire.. It could be that competitors have entered the market, lowering the prices that could be charged. It could be that recessionary forces have made consumers of the product more price-conscious. Later periods of a product’s life cycle are generally associated with lower prices. All of the above assumed a single product being sold. If a company sells multiple products, moving from high mark-up items to lower mark-up items would have a similar effect.

Waybright Kemp Financial Accounting 1e 231

Short Exercises

(5-10 min.) S 4-1

a. A physical count of goods on hand at year end is required.

c. Both periodic and perpetual inventory

b. Inventory records are continuously updated. b. Perpetual inventoryc. Purchases of inventory are recorded in an asset account at the time of purchase.

b. Perpetual inventory

d. Bar code scanners are often utilized when using this inventory system.

b. Perpetual inventory

e. It is necessary to calculate the cost of goods sold at the end of the year with this inventory system.

a. Periodic inventory

(5-10 min.) S 4-2

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Dec 31 Cost of Goods Sold 1,700

Inventory 1,700

Adjust inventory to physical count

232 Solutions Manual

(5-10 min.) S 4-3

Req 1

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Mar 1 Inventory 40,000

Accounts Payable – Pacific Trail 40,000

Purchase inventory on account

Mar 8 Accounts Payable – Pacific Trail 40,000

Cash ($40,000 × .98) 39,200

Inventory ($40,000 × .02) 800

Record payment of inventory

purchases within the discount period.

Req 2

Final cost of Inventory = Inventory $40,000 – discount taken $800 = $39,200.

(5-10 min.) S 4-4

Req 1

a. $8,000 - $1,100 = $6,900

($8,000 - $1,100) x .98 = $6,762


(5-10 min.) S 4-5

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

a. Inventory 8,000

Accounts Payable – Pool Warehouse 8,000

b. Accounts Payable – Pool Warehouse 1,100

Inventory 1,100

c. Accounts Payable – Pool Warehouse 6,900

Cash ($6,900 × .98) 6,762

Inventory ($6,900 × .02) 800


(5-10 min.) S 4-6

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

a. Inventory 8,700

Accounts Payable 8,700

Purchase inventory on account

b. Inventory 175

Cash 175

Paid freight charges to have inventory delivered

c. Accounts Payable 8,700

Cash ($8,700 × .98) 8,526

Inventory ($8,700 × .02) 174

Record payment of inventory purchases

less returns within the discount period.


(5-10 min.) S 4-7

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

a. Accounts Receivable – Sonny’s Spas 55,000

Sales Revenue 55,000

Cost of Goods Sold 30,250

Inventory 30,250

b. Cash ($55,000 × .98) 53,900

Sales Discount ($55,000 × .02) 1,100

Accounts Receivable – Sonny’s Spas 55,000


(5-10 min.) S 4-8

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

May 17 Accounts Receivable 750.00

Sales Revenue 750.00

Cost of Goods Sold 460.00

Inventory 460.00

Record sale of inventory on account.

21 Sales Returns and Allowances 225.00

Accounts Receivable 225.00

Inventory 140.00


Record receipt of returned goods.

26 Cash [($750 – 225) × .98] 514.50

Sales Discount [($750 – 225) × .02] 10.50

Accounts Receivable ($750 - $225) 525.00

Record payment received within the

discount period.


(5-10 min.) S 4-9

Req 1 Net Sales Revenue:Sales Revenue……………………………..…. $

750.00Less: Sales Returns and Allowances ………. (225

Sales Discounts [($750 − $225) ×.02]... (10.50)

Net Sales Revenue……………………………. $ 514

Req 2 Net Sales Revenue: $ 514Less: Cost of Goods Sold…………………………… (320 Gross profit……………………………………………. $ 194

(5-10 min.) S 4-10

Req 1

a. Cash $ 5,200

Accounts Receivable 6,000

Inventory 37,000

Supplies 3,400

Prepaid Rent 6,200

Total Current Assets $ 57,800

b. Accounts Payable $ 19,500

Wages Payable 1,500

Unearned Revenue 2,000

Total Current Liabilities $ 23,000

c. Equipment $ 33,000

Less: Accumulated Depreciation, Equipment (4,500) $28,500


Building $ 87,000

Less: Accumulated Depreciation, Building (24,000) 63,000

Book Value of Plant Assets $ 91,500

d. Total Long-Term Liabilities (Note Payable, Long Term) $28,000


(10-15 min.) S 4-11

Req. 1

ADR, Inc.Income Statement

Year Ended August 31, 2010

Net sales revenue $28,000

Less: Cost of goods sold 19,500

Gross profit 8,500

Less: Operating expense 3,700

Net income $ 4,800


(10-15 min.) S 4-12

ADR, Inc.Balance Sheet

August 31, 2010Assets

Current assets:Cash $ 3,500Accounts Receivable 2,900Inventory 1,700Prepaid Rent 800 Total current assets 8,900

Fixed assets: Equipment, net 6,100Total assets $15,000

LiabilitiesCurrent liabilities:

Accounts Payable $ 4,500Wages Payable 1,100Accrued Liabilities 1,900 Total current liabilities 7,500

Long-term liabilities:Long-Term Notes Payable 2,300

Total liabilities 9,800

Stockholder’s equityTotal stockholder’s equity 5,200

Total liabilities and stockholder’s equity $15,000


(10-15 min.) S 4-13

Gross Profit Percentage

=Gross Profit

=($28,000 - $19,500)

= 0.304 or 30.4%Net Sales Revenue $28,000

Current Ratio

=

Current Assets

=($3,500 + $2,900 + $1,700 + $800)

= 1.19Current

Liabilities$4,500 + $1,100 + $1,900)


Exercises

(5-10 min.) E 4-14A

Req 1

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.


Inventory 1,800


Req 2The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged.


(10-15 min.) E 4-15A

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Jun 15 Inventory 4,300


18 Inventory 350

Cash 350

20 Accounts payable 900

Inventory 900

28 Accounts Payable ($4,300 - $900) 3,400

Cash ($3,400 × .97) 3,298

Inventory ($3,400 × .03) 102


(10-15 min.) E 4-16A

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Mar 3 Inventory 4,850


Purchased Inventory on account.


Inventory 600

Returned damaged inventory to supplier.


Cash ($4,250 - $80) 4,170

Inventory [($4,600-600) x .02] 80

Paid invoice in full.


(10-15 min.) E 4-17A

Req 1

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Sep 14 Accounts Receivable 2,300

Sales Revenue 2,300


Inventory 1,350

16 Delivery Expense 75

Cash 75

20 Sales Returns and Allowances 900

Accounts Receivable 900

Inventory 540

Cost of Goods Sold 540

23 Cash ($1,400 × .99) 1,386

Sales Discount ($1,400 × .01) 14

Accounts Receivable ($2,300 - $900) 1,400


(10-15 min.) E 4-18A

Journal

DATEACCOUNTS

POST

REF. Dr. Cr.

Nov 3 Accounts Receivable 1,600.00

Sales Revenue 1,600.00

Cost of Goods Sold 1,040.00

Inventory 1,040.00


3 Accounts Receivable 85.00

Cash 85.00

Record prepayment of shipping charges.



Inventory 162.50


Record return of goods from customer.

16 Cash ($1,600 +$85 - $250 - $27) 1,408.00

Sales Discounts [($1,600 – $250) × .02] 27.00

Accounts Receivable ($1,600 + $85 - $250) 1,435.00

Record receipt of payment from customer.


(15-20 min.) E 4-19A

Journal

DATEACCOUNTS

POST

REF. Dr. Cr.

Apr 3 Inventory 3,500Accounts Payable 3,500

6 Accounts Payable 400Inventory 400

8 Inventory 110Cash 110

11 Accounts Receivable 4,300Sales Revenue 4,300

Cost of Goods Sold 2,100Inventory 2,100

12 Accounts Payable ($3,500 - $400) 3,100Cash ($3,100 × .98) 3,038Inventory ($3,100 × .02) 62

18 Sales Returns and Allowances 300Accounts Receivable 300

25 Cash ($4,000 × .97) 3,880Sales Discounts ($4,000 × .03) 120



(10-15 min.) E 4-20A

a. Sales * = Net Sales + Sales Discounts = $100,400 + $2,500

= $102,900

b. Net Sales = Gross Profit + Cost of Goods Sold = $32,100 + $68,300

= $100,400

c. Net Sales = Sales – Sales Discounts = $64,000 − $1,700

= $62,300

d. Gross Profit = Net Sales − Cost of Goods Sold = $62,300 − $44,600

= $17,700

e. Sales Discounts = Sales – Net Sales = $102,000 - 93,500

= $8,500

f. Cost of Goods Sold = Net Sales – Gross Profit = $93,500 − 28,600

= $64,900

g Sales = Net Sales + Sales Discounts = $86,300 + 2,100

= $88,400

h. Gross Profit = Net Sales – Cost of Goods Sold = $86,300 - $57,700

= $28,600

* You must find (b) before you find (a).


(10-15 min.) E 4-21A

Req 1

Atlantis Aquatics, Inc.Income Statement

Year Ended December 31, 2010Revenues: Net Sales Revenue $ 236,500

Expenses: Cost of Goods Sold $136,400 Selling Expenses 26,800 General and Administrative Expenses 18,200 Total Expenses 181,400Net Income $ 55,100

Computations: Net Sales Revenue: $243,500 - $4,800 - $2,200 = $236,500

Req 2

The single-step income statement is not recommended for Atlantis Aquatics because they are a Merchandiser. A Merchandiser should use a Multi-step income to provide more detailed information to the financial statement users.


(15-20 min.) E 4-22A

Req 1

Atlantis Aquatics, Inc.Income Statement

Year Ended December 31, 2010Sales Revenue $243,500

Less: Sales Returns and Allowances $4,800 Sales Discounts 2,200 7,000Net Sales Revenue $ 236,500

Cost of Goods Sold 136,400Gross Profit 100,100Operating Expenses:

Selling Expenses 26,800General and Administrative Expenses 18,200 45,000

Net Income $ 55,100

Note: There are no Other Revenue or Expense items so Operating Income is Net Income

Req 2


=Gross Profit

=$100,100

= .423 or 42.3%Net Sales Revenue $236,500

Req 3

Atlantis Aquatics’ Gross Profit rate of 42.3% in 2010 is an improvement over the gross profit rate of 38.7% in 2009. Atlantis Aquatics has retained a higher percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009.


(15-20 min.) E 4-23A

Req 1Atlantis Aquatics, Inc.

Balance SheetDecember 31, 2010

Assets LiabilitiesCurrent assets: Current Liabilities: Cash $ 3,700 Accounts Payable $ 4,500 Accounts Receivable 3,200 Wages Payable 1,100 Inventory 1,700 Unearned Revenues 1,900 Prepaid Rent 800 Total Current Liabilities $ 7,500 Supplies 900 Long-term liabilities: Total current assets $ 10,300 Long-Term Notes Payable 10,000Fixed assets: Mortgage Payable 37,000 47,000 Equipment 13,700 Total liabilities 54,500 Less Accumulated Depreciation, Equip 6,100 7,600 Stockholder’s Equity Common Stock 35,000 Building 125,000 Retained Earnings* 34,900 Less Accumulated Total Stockholder’s Equity 69,900 Depreciation, Bldg 18,500 106,500

Total Liabilities andTotal assets $ 124,400Stockholder’s Equity $ 124,400

*Retained Earnings = ($13,800 Beginning Balance + $55,100 Net Income - $34,000 Dividends) = $34,900

Req 2

Current Ratio

=

Current Assets

=$10,300

= 1.37Current

Liabilities$7,500

Req 3

Atlantis Aquatics’ Current Ratio of 1.37 in 2010 is an improvement over the Current Ratio of 1.25 in 2009. Atlantis Aquatics has a higher percentage of current assets compared to current liabilities than it did in 2009.


(10-15 min.) E 4-24A


=Gross Profit **

=$20,500,000

= .461 or 46.1%Net Sales Revenue * $44,500,000

* Net Sales Revenue = (Sales Revenue – Sales Returns and Allowances – Sales Discounts) = ($47,000,000 - $2,000,000 - $500,000) = ($44,500,000)

** Gross Profit = (Net Sales Revenue – Cost of Goods Sold) = ($44,500,000 - $24,000,000) = $20,500,000

Current Ratio

=

Current Assets

=$15,000,000

= 1.67Current

Liabilities$9,000,000

(5-10 min.) E 4-25B

Req 1

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.


Inventory 1,500


Req 2The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged.


(10-15 min.) E 4-26B

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Nov 15 Inventory 5,100


18 Inventory 175

Cash 175


Inventory 600


Cash ($4,500 × .97) 4,365

Inventory ($4,500 × .03) 135


(10-15 min.) E 4-27B

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Jan 3 Inventory 5,925


Purchased inventory on account.


Inventory 500

Returned damaged inventory to supplier.


Cash ($5,425 - $52) 5,373

Inventory [($5,700-500) x .01] 52

Paid invoice in full.


(10-15 min.) E4-28B

Req 1

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Nov 14 Accounts Receivable 3,100

Sales Revenue 3,100


Inventory 1,330

16 Delivery Expense 65

Cash 65

20 Sales Returns and Allowances 800

Accounts Receivable 800

Inventory 420


23 Cash ($2,300 × .97) 2,231

Sales Discount ($2,300 × .03) 69



(10-15 min.) E 4-29B

Journal

DATEACCOUNTS

POST

REF. Dr. Cr.

Apr 3 Accounts Receivable 2,100.00

Sales Revenue 2,100.00

Cost of Goods Sold 1,470.00

Inventory 1,470.00


3 Accounts Receivable 50.00

Cash 50.00

Record prepayment of shipping charges.



Inventory 157.50


Record return of goods from customer.

16 Cash ($2,100.00 + $50.00 - $225.00 - $18.75) 1,906.25

Sales Discounts [($2,100.00 – $225.00) × .01] 18.75

Accounts Receivable ($2,100 + $50 - $225) 1,925.00

Record receipt of payment from customer.


(15-20 min.) E 4-30B

Journal

DATE ACCOUNTSPOSTREF. Dr. Cr.

Apr 3 Inventory 3,400Accounts Payable 3,400

6 Accounts Payable 500Inventory 500

8 Inventory 130Cash 130

11 Accounts Receivable 2,800Sales Revenue 2,800


12 Accounts Payable ($3,400 - $500) 2,900Cash ($2,900 × .99) 2,2,871Inventory ($2,900 × .01) 29

18 Sales Returns and Allowances 225Accounts Receivable 225

25 Cash ($2,575 × .97) 2,497.75Sales Discounts ($2,575 × .03) 77.25

Accounts Receivable ($2,800 - $225) 2,575.00


(10-15 min.) E 4-31B

a. Sales * = Net Sales + Sales Discounts = $105,200 + $1,700

= $106,900

b. Net Sales = Gross Profit + Cost of Goods Sold = $37,700 + $67,500

= $105,200

c. Net Sales = Sales – Sales Discounts = $89,600 − $2,900

= $86,700

d. Gross Profit = Net Sales − Cost of Goods Sold = $86,700 − $55,700

= $31,000

e. Sales Discounts = Sales – Net Sales = $103,000 – 94,300

= $8,700

f. Cost of Goods Sold = Net Sales – Gross Profit = $94,300 – 31,500

= $62,800

g Sales = Net Sales + Sales Discounts = $88,000 + 1,400

= $89,400

h. Gross Profit = Net Sales – Cost of Goods Sold = $88,000 - $51,900

= $36,100

* You must find (b) before you find (a).


(10-15 min.) E 4-32B

Req 1

Great Gadget, Inc.Income Statement

Year Ended December 31, 2010Revenues: Net Sales Revenue $ 252,600

Expenses: Cost of Goods Sold $135,000 Selling Expenses 43,500 General and Administrative Expenses 18,200 Total Expenses 196,700Net Income $ 55,900

Computations: Net Sales Revenue: $257,000 - $2,900 - $1,500 = $252,600

Req 2

The single-step income statement is not recommended for Great Gadget because they are a Merchandiser. A Merchandiser should use a Multi-step income to provide more detailed information to the financial statement users.


(15-20 min.) E 4-33B

Req 1

Great Gadget, Inc.Income Statement





Net Income $ 55,900


Req 2


=Gross Profit

=$117,600


Req 3

Great Gadget’s Gross Profit rate of 46.6% in 2010 has deteriorated from the gross profit rate of 52.3%% in 2009. Great Gadget has retained a lower percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009.


(15-20 min.) E 4-34B

Req 1Great Gadget, Inc.

Balance SheetDecember 31, 2010

Assets LiabilitiesCurrent assets: Current Liabilities: Cash $ 9,300 Accounts Payable $ 6,300 Accounts Receivable 4,500 Wages Payable 1,300 Inventory 3,700 Unearned Revenues 1,900 Prepaid Rent 2,600 Total Current Liabilities $ 9,500 Supplies 3,300 Long-term liabilities: Total current assets $ 23,400 Long-Term Notes Payable 35,000Fixed assets: Mortgage Payable 43,500 78,500 Equipment 39,800 Total liabilities 88,000 Less Accumulated Depreciation, Equip 13,700 26,100 Stockholder’s Equity Common Stock 25,000 Building 130,000 Retained Earnings* 40,600 Less Accumulated Total Stockholder’s Equity 65,600 Depreciation, Bldg 25,900 104,100

Total Liabilities andTotal assets $ 153,600Stockholder’s Equity $ 153,600

*Retained Earnings = ($25,700 Beginning Balance + $55,900 Net Income - $41,000 Dividends) = $40,600.

Req 2

Current Ratio

=

Current Assets

=$23,400

= 2.46Current

Liabilities$9,500

Req 3

Great Gadget’s Current Ratio of 2.46 in 2010 has deteriorated from the Current Ratio of 3.62 in 2009. Great Gadget has a lower percentage of current assets compared to current liabilities than it did in 2009.


(10-15 min.) E 4-35B


=Gross Profit **

=$27,700,000

= .546 or 54.6%Net Sales Revenue * $50,700,000

* Net Sales Revenue = (Sales Revenue – Sales Returns and Allowances – Sales Discounts) = ($53,000,000 - $2,000,000 - $300,000) = ($50,700,000)

** Gross Profit = (Net Sales Revenue – Cost of Goods Sold) = ($50,700,000 - $23,000,000) = $27,700,000

Current Ratio

=

Current Assets

=$13,000,000

= 1.86Current

Liabilities$7,000,000


Problems

(15-20 min.) P 4-36A

Req. 1

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.Feb 3 Inventory 5,400

Cash 5,400

9 Supplies 650Accounts Payable – Supplies Unlimited 650

16 Inventory 6,800Accounts Payable – A to Z, Inc. 6,800

22 Accounts Payable – A to Z, Inc. 1,200Inventory 1,200

28 Accounts Payable – Supplies Unlimited 650Cash 650

28 Accounts Payable – A to Z, Inc. ($6,800 - $1,200) 5,600 Cash ($5,600 x .98) 5,488 Inventory ($5,600 x .02) 112


(10-15 min.) P4-37A

Req 1Journal


Jun 3 Accounts Receivable – J. Henderson 3,200Sales Revenue 3,200


4 Delivery Expense 250 Cash 250

10 Cash 1,800Sales Revenue 1,800


17 Cash ($3,200 x .98) 3,136Sales Discount ($3,200 x .02) 64 Accounts Receivable – J. Henderson 3,200

22 Accounts Receivable – M. Perez 4,700Sales Revenue 4,700


26 Sales Returns and Allowances 600Accounts Receivable – M. Perez 600

30 Cash ($4,100 × .97) 3,977Sales Discount ($4,100× .03) 123



(20-25 min.) P 4-38A

Req 1 M&L Furniture Warehouse

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

May 4 Inventory 5,800 Accounts Payable - M & L Furniture

Warehouse5,800

Record purchase of inventory onaccount.

7 Inventory 125 Cash 125Record payment of freight charges.

10 Accounts Payable – M & L Furniture Warehouse 1,400Inventory 1,400

Record inventory returned to supplier.

18 Accounts Payable – M & L Furniture Warehouse 2,000Cash ($2,000 x .98) 1,960Inventory ($2,000 × .02) 40

Record partial payment of invoice.

31 Accounts Payable – M & L Furniture Warehouse($5,800 – $1,400 - $2,000) 2,400 Cash 2,400Record payment of remainder of invoice in full.


Req 2 Kinzer Warehouse

May 4 Accounts Receivable - Kinzer Furniture 5,800 Sales Revenue 5,800



10 Sales Returns and Allowances 1,400Accounts Receivable - Kinzer Furniture 1,400

Inventory 800Cost of Goods Sold 800


18 Cash ($2,000 x .98) 1,960 Sales Discount ($2,000 x .02) 40

Accounts Receivable - Kinzer Furniture 2,000Record partial payment received.

31 Cash 2,400 Accounts Receivable - Kinzer Furniture

($5,800 - $1,400 - $2,000)2,400

Record payment on remainder of invoice received.


(20-25 min.) P 4-39A

Journal


Oct 4 Inventory ($5,900 + $300) 6,200 Accounts Payable – Firerock Tire 6,200Record purchase of inventory on account

7 Supplies 350 Accounts Payable – OfficeMaxx 350Record purchase of supplies on account

9 Accounts Receivable – L. Simpson 950 Sales Revenue 950Cost of Goods Sold 500 Inventory 500Record sale on account

11 Delivery Expense 75 Cash 75Record payment of freight charges

13 Accounts Payable – Firerock Tire 1,400 Inventory 1,400

Record return of merchandise to supplier

15 Cash 650 Sales Revenue 650Cost of Goods Sold 350 Inventory 350Record cash sales.

16 Accounts Payable - OfficeMaxx 350 Cash ($350 X .98) 343 Supplies ($350 X .02) 7 Record payment for supplies

18 Accounts Payable – Firerock Tire ($5,900 + $300 − $1,400) 4,800

Cash ($4,800 – $90) 4,710Inventory [($5,900 - $1,400) × .02] 90

20 Sales Returns and Allowances 175 Accounts Receivable – L. Simpson 175




22 Inventory 2,100

Cash 2,100

Record purchase of inventory for cash.

23 Cash ($775× .97) 751.75Sales Discounts ($775 × .03) 23.25

Accounts Receivable – L. Simpson ($950 - $175)

775.00

Record payment received on account

Req. 2

Sales Revenue ($950 + $650) $1,600.00Less: Sales Returns and Allowance $ 175.00

Sales Discounts 23 .25 198 .25 Net Sales Revenue 1,401.75Cost of Goods Sold ($500+ $350 -$100) 750 .00 Gross Profit $ 651 .75


(20-25 min.) P 4-40A

Req. 1

Sparky’s Electrical, Inc.Income Statement

Month Ended November 30, 2010Sales Revenue $193,200




Net Income $ 37,200


Req 2


=Gross Profit

=$78,500


Req 3

Sparky’s Electrical Inc.’s 43.2% gross profit percentage means that each dollar of net sales generates 43.2 cents of gross profit that is used to cover operating expenses and generate net income.


(25-30 min.) P 4-41A

Req. 1

Williams Industries, Inc.Income Statement




Selling Expenses: Commission Expense 22,300 Advertising Expense 12,600 Delivery Expense 1,300 36,200 General and Administrative Expenses Office Salaries Expense 52,000 Utilities Expense 10,300 Rent Expense 5,800 Insurance Expense 5,700 73,800 110,000Operating Income 45,500Other Revenues (Expenses) Interest Expense (1,700)Net Income $43,800

Req 2

Williams Industries, Inc.Statement of Retained EarningsYear Ended December 31, 2010

Retained earnings, January 1, 2010 $ 87,600Plus: Net Income 43,800Subtotal 131,400Less: Dividends 14,000Retained earnings, December 31, 2010 $ 117,400


Req 3

Williams Industries, Inc.Balance Sheet

December 31, 2010Assets

Current Assets:Cash $ 7,800Accounts Receivable 6,900Inventory 16,400

Supplies 600Prepaid Rent 1,200Total Current Assets 32,900

Fixed Assets:Equipment $104,000Less: Accumulated Depreciation, Equipment 26,400 77,600

Building 140,000

Less: Accumulated Depreciation, Building 40,500 99,500Total assets $210,000

LiabilitiesCurrent Liabilities:

Accounts Payable $ 16,500 Wages Payable 1,600

Unearned Sales Revenue 2,500Total Current Liabilities 20,600

Long-Term Liabilities:Mortgage Payable 37,000

Total Liabilities 57,600Stockholder’s Equity

Common Stock 35,000Retained Earnings 117,400Total Stockholder’s Equity 152,400

Total Liabilities and Stockholder’s Equity $210,000


(20-25 min.) P 4-42A

Req 1


=Gross Profit

=$155,500*

= .495 or 49.5%Net Sales Revenue $313,900*

* Numbers are taken from the solution to P4-41A above

Req 2

Williams Industries, Inc.’s Gross Profit rate of 49.5% in 2010 has deteriorated from the gross profit rate of 51.3%% in 2009. Williams Industries, Inc. has retained a lower percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009.

Req 3

Current Ratio

=

Current Assets

=$32,900

= 1.60Current

Liabilities$20,600

Req 4

Williams Industries, Inc.’s Current Ratio of 1.60 in 2010 has improved from the Current Ratio of 1.47 in 2009. Williams Industries, Inc. has a higher percentage of current assets compared to current liabilities than it did in 2009.


(15-20 min.) P 4-43B

Req. 1

Journal


Sep 3 Inventory 5,100Cash 5,100

9 Supplies 800Accounts Payable – Chandler Unlimited 800

16 Inventory 4,300Accounts Payable – Garden Supplies, Inc. 4,300

22 Accounts Payable – Garden Supplies, Inc. 1,100Inventory 1,100

28 Accounts Payable – Chandler Unlimited 800Cash 800

28Accounts Payable – Garden Supplies, Inc.

($4,300- $1,100)3,200

Cash ($3,200 x .97) 3,104 Inventory ($3,200 x .03) 96


(10-15 min.) P4-44B

Req 1

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Apr 3 Accounts Receivable – A. Klecans 3,600Sales Revenue 3,600


4 Delivery Expense 75 Cash 75

10 Cash 2,700Sales Revenue 2,700


17 Cash ($3,600 x .97) 3,492Sales Discount ($3,600 x .03) 108 Accounts Receivable – A. Klecans 3,600

22 Accounts Receivable – M. Perez 5,100Sales Revenue 5,100


26 Sales Returns and Allowances 200Accounts Receivable – M. Perez 200

30 Cash ($4,900 × .98) 4,802Sales Discount ($4,900× .02) 98



(20-25 min.) P 4-45B

Req 1 Retro Furniture

Journal

DATE ACCOUNTS POSTREF. Dr. Cr.

Oct 4 Inventory 8,000 Accounts Payable - E & S Furniture

Warehouse5,800

Record purchase of inventory onaccount.

7 Inventory 200 Cash 200Record payment of freight charges.

10 Accounts Payable – E & S Furniture Warehouse 1,000Inventory 1,000

Record inventory returned to supplier.

18 Accounts Payable – E & S Furniture Warehouse 2,000Cash ($2,000 x .99) 1,980Inventory ($2,000 × .01) 20

Record partial payment of invoice.

31 Accounts Payable – E & S Furniture Warehouse($8,000 – $1,000 - $2,000) 5,000 Cash 5,000Record payment of remainder of invoice in full.


Req 2 E & S Furniture Warehouse

Oct 4 Accounts Receivable - Retro Furniture 8,000

Sales Revenue 8,000


Inventory 2,900


10 Sales Returns and Allowances 1,000

Accounts Receivable - Retro Furniture 1,000

Inventory 450



18 Cash ($2,000 x .99) 1,980

Sales Discount ($2,000 x .01) 20

Accounts Receivable - Retro Furniture 2,000

Record partial payment received.

31 Cash 5,000

Accounts Receivable - Retro Furniture

($8,000 - $1,000 - $2,000)

5,000

Record payment on remainder of invoice received.


(20-25 min.) P 4-46B

Journal


May 4 Inventory ($5,400 + $125) 5,525 Accounts Payable – Bargain Tire 5,525Record purchase of inventory on account

7 Supplies 375 Accounts Payable – Office Maxx 375Record purchase of supplies on account

9 Accounts Receivable – W. Furmick 950 Sales Revenue 950Cost of Goods Sold 250 Inventory 250Record sale on account

11 Delivery Expense 25 Cash 25Record payment of freight charges

13 Accounts Payable – Bargain Tire 600 Inventory 600

Record return of merchandise to supplier

15 Cash 900 Sales Revenue 900Cost of Goods Sold 350 Inventory 350Record cash sales.

16 Accounts Payable – Office Maxx 375 Cash ($375 x .97) 363.75 Supplies (375 x .03) 11.25 Record payment for supplies

18 Accounts Payable – Bargain Tire ($5,400 + $125 − $600) 4,925

Cash ($4,925 – $144) 4,781Inventory [($5,400 - $600) × .03] 144

20 Sales Returns and Allowances 175 Accounts Receivable – W. Furmick 175




22 Inventory 3,900

Cash 3,900

Record purchase of inventory for cash.

23 Cash ($775× .97) 751.75Sales Discounts ($775 × .03) 23.25

Accounts Receivable – W. Furmick ($950 - $175)

775.00

Record payment received on account

Req. 2

Sales Revenue ($950 + $900) $1,850.00Less: Sales Returns and Allowance $ 175.00

Sales Discounts 23 .25 198 .25 Net Sales Revenue 1,651.75Cost of Goods Sold ($250+ $350 -$100) 500 .00 Gross Profit $ 1,151 .75


(20-25 min.) P 4-47B

Req. 1

CED Electric, Inc.Income Statement

Month Ended June 30, 2010Sales Revenue $197,500




Net Income $ 30,600


Req 2


=Gross Profit

=$88,200


Req 3

CED Electric Inc.’s 46.5% gross margin percentage means that each dollar of net sales generates 46.5 cents of gross profit that is used to cover operating expenses and generate net income.


(25-30 min.) P 4-48B

Req. 1

Clark Industries, Inc.Income Statement

Year Ended March 31, 2010Sales Revenue $275,100



Selling Expenses: Commission Expense 31,700 Advertising Expense 11,500 Delivery Expense 1,200 44,400 General and Administrative Expenses Office Salaries Expense 54,000 Utilities Expense 14,000 Insurance Expense 10,200 Rent Expense 5,200 83,400 127,800Operating Income 20,900Other Revenues (Expenses) Interest Expense (700)Net Income $20,200

Req 2

Clark Industries, Inc.Statement of Retained Earnings

Year Ended March 31, 2010Retained earnings, April 1, 2009 $ 112,800Plus: Net Income 20,200Subtotal 133,000Less: Dividends 12,000Retained earnings, March 31, 2010 $ 121,000


Req 3

Clark Industries, Inc.Balance Sheet

March 31, 2010Assets

Current Assets:Cash $ 22,500Accounts Receivable 8,800Inventory 29,000

Supplies 1,200Prepaid Rent 5,000Total Current Assets 66,500

Fixed Assets:Equipment $27,000Less: Accumulated Depreciation, Equipment 13,000 14,000

Building 190,000

Less: Accumulated Depreciation, Building 52,500 137,500Total assets $218,000


Accounts Payable $ 16,500 Wages Payable 1,000

Unearned Sales Revenue 2,500Total Current Liabilities 20,000

Long-Term Liabilities:Mortgage Payable 42,000

Total Liabilities 62,000Stockholder’s Equity

Common Stock 35,000Retained Earnings 121,000Total Stockholder’s Equity 156,000

Total Liabilities and Stockholder’s Equity $218,000


(20-25 min.) P 4-49B

Req 1


=Gross Profit

=$148,700*

= .555 or 55.5%Net Sales Revenue $267,700*

* Numbers are taken from the solution to P4-48B above

Req 2

Clark Industries, Inc.’s Gross Profit rate of 55.5% in 2010 has improved from the gross profit rate of 39.1% in 2009. Clark Industries, Inc. has retained a higher percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009.

Req 3

Current Ratio

=

Current Assets

=$66,500

= 3.33Current

Liabilities$20,000

Req 4

Clark Industries, Inc.’s Current Ratio of 3.33 in 2010 has improved from the Current Ratio of 2.33 in 2009. Clark Industries, Inc. has a higher percentage of current assets compared to current liabilities than it did in 2009.


Continuing Exercise

Req. 1

Journal

DATE ACCOUNTS AND EXPLANATIONS DEBIT CREDIT

Sept. 2 Cash 500Service Revenue 500

5 Plant Inventory ($250 +$10) 260Accounts Payable 260

15 Accounts Receivable 400Sales Revenue 400

Cost of Goods Sold 104Plant Inventory 104

17 Accounts Receivable 150Service Revenue 150

20 Plant Inventory 300Accounts Payable 300

21 Accounts Payable 100Cash 100

25 Cash 700Sales Revenue 700

Cost of Goods Sold 276Plant Inventory 276

31 Salaries Expense 225 Salaries Payable 225

31 Depreciation Expense - Equipment 30Accumulated Depreciation – Equip. 30

31 Cost of Goods Sold 30Plant Inventory 30


Cash Accounts ReceivableBal. 1,480 July 21 100 Bal. 150July 2 500 July 15 400

25 700 17 150Bal. 700

Bal. 2,580

Lawn Supplies Plant InventoryBal. 20 Bal. 0 July 15 104

July 5 260 25 27620 300 31 30

Bal. 20 Bal. 150

Equipment Acc. Depreciation – Equip.Bal. 1,400 Bal. 30

July 31 30Bal. 60

Accounts Payable Salaries PayableJuly 21 100 Bal. 1,400 July 31 225

July 5 260 Bal. 22520 300

Bal. 1,860

Common Stock Retained EarningsBal. 1,000 Bal. 620

Service Revenue Sales RevenueJuly 2 500 July 15 400

17 150 25 700Bal. 650 Bal. 1,100

Cost of Goods Sold Fuel ExpenseJuly 15 104 Bal.

25 27631 30

Bal. 410


Supplies expense Depreciation Exp. – EquipBal. Bal. 0

July 31 30

Bal. 30Bal.

Salaries ExpenseJuly 31 225

Bal. 225

Req. 2

Graham’s Yard Care, Inc.Income Statement

Month Ended July 31, 2010Revenues: Service Revenue $ 650 Sales Revenue 1,100 Total Revenues $ 1,750Expenses:

Cost of Goods Sold 410Salaries Expense 225

Depreciation Expense - Equipment 30Total expenses 665

Net income $ 1,085


Continuing Problem

Req 1

8/2 Salary Payable 675 Cash 675

8/3 Inventory 20,600 Accounts Payable – Spa Superstore 20,600

8/5 Supplies 750 Cash 750

8/6 Inventory 475 Cash 475

8/8 Accounts Receivable – R. Tanaka 5,800 Sales 5,800Cost of Goods Sold 3,600 Inventory 3,600

8/10 Office Furniture 1,200 Cash 1,200

8/11 Advertising Expense 625 Cash 625

8/12 Accounts Payable – Spa Superstore 3,400 Inventory 3,400

8/13 Cash 6,750 Sales 6,750Cost of Goods Sold 3,360 Inventory 3,360

8/15 Sales Returns and Allowances 300 Accounts Receivable – R. Tanaka 300

8/16 Salary Expense 675 Cash 675

8/17 Accounts Payable – Spa Superstore 17,200


Cash 16,684 Inventory 516

8/19 Inventory 12,100 Accounts Payable – Pool Universe 12,100

8/21 Accounts Receivable – B. Wagoner 13,700 Sales 13,700Cost of Goods Sold 8,500 Inventory 8,500

8/22 Cash 5,390Sales Discounts 110Accounts Receivable – R. Tanaka 5,500

8/24 Delivery Expense 560 Cash 560

8/25 Equipment 2,600 Accounts Payable – Betterbuy, Inc. 2,600

8/27 Cash 13,426Sales Discounts 274 Accounts Receivable – B. Wagoner 13,700

8/28 Accounts Payable – Pool Universe 12,100 Cash 11,858 Inventory 242

8/30 Utilities Expense 850 Cash 850

8/31 Commission Expense 1,300 Cash 1,300


Req 2

CashPOST. BALANCE

DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 17,380

2 675 16,7055 750 15,9556 475 15,48010 1,200 14,28011 625 13,65513 6,750 20,40516 675 19,73017 16,684 3,04622 5,390 8,43624 560 7,87627 13,426 21,30228 11,858 9,44430 850 8,59431 1,300 7,294

Accounts ReceivablePOST. BALANCE


8 5,800 11,20015 300 10,90021 13,700 24,60022 5,500 19,10027 13,700 5,400


InventoryPOST. BALANCE

DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0

3 20,600 20,6006 475 21,0758 3,600 17,47512 3,400 14,07513 3,360 10,71517 516 10,19919 12,100 22,29921 8,500 13,79928 242 13,557

SuppliesPOST. BALANCE


5 750 1,100

Prepaid RentPOST. BALANCE


LandPOST. BALANCE



FurniturePOST. BALANCE


10 1,200 4,500

Accumulated Depreciation, FurniturePOST. BALANCE


EquipmentPOST. BALANCE


25 2,600 7,300

Accumulated Depreciation, EquipmentPOST. BALANCE


VehiclesPOST. BALANCE



Accumulated Depreciation, VehiclesPOST. BALANCE


Accounts PayablePOST. BALANCE


3 20,600 22,44012 3,400 19,04017 17,200 1,84019 12,100 13,94025 2,600 16,54028 12,100 4,440

Salary PayablePOST. BALANCE


2 675 0

Unearned Service Revenue POST. BALANCE


Notes Payable POST. BALANCE



Common StockPOST. BALANCE


Retained EarningsPOST. BALANCE


SalesPOST. BALANCE


8 5,800 5,80013 6,750 12,55021 13,700 26,250

Sales DiscountsPOST. BALANCE


22 110 11027 274 384

Sales Returns and AllowancesPOST. BALANCE


15 300 300


Cost of Goods SoldPOST. BALANCE


8 3,600 3,60013 3,360 6,96021 8,500 15,460

Advertising ExpensePOST. BALANCE


11 625 625

Salary ExpensePOST. BALANCE


16 675 675

Delivery ExpensePOST. BALANCE


24 560 560


Utilities Expense POST. BALANCE


30 850 850

Commissions ExpensePOST. BALANCE


31 1,300 1,300


Req 3

Aqua Elite, Inc.Unadjusted Trial Balance

August 31, 2010ACCOUNT DEBIT CREDITCashAccounts ReceivableInventorySuppliesPrepaid RentLandFurnitureAccumulated Depreciation, FurnitureEquipmentAccumulated Depreciation, EquipmentVehiclesAccumulated Depreciation, VehiclesAccounts PayableUnearned Service RevenueNotes PayableCommon StockRetained EarningsSalesSales DiscountsSales Returns and AllowancesCost of Goods SoldCommision ExpenseUtilities ExpenseSalary ExpenseAdvertising ExpenseDelivery ExpenseTotal

$7,2945,400

13,5571,1003,600

15,0004,500

7,300

31,000

384300

15,4601,300

850675625

___560$108,905

$210

400

6504,4402,800

31,00038,5004,655

26,250

_ $108,905


Req. 4

8/31 Rent Expense 1,800 Prepaid Rent 1,800

8/31 Supplies Expense 655 Supplies 655

8/31 Depreciation Expense 1,605 Accumulated Depreciation, Equipment 575 Accumulated Depreciation, Furniture 380 Accumulated Depreciation, Vehicles 650

8/31 Cost of Goods Sold 170 Inventory 170

Rent ExpensePOST. BALANCE


31 1,800 1,800


Prepaid RentPOST. BALANCE


31 1,800 1,800

Supplies ExpensePOST. BALANCE


31 655 655

SuppliesPOST. BALANCE


5 750 1,10031 655 445

Depreciation ExpensePOST. BALANCE


31 1,605 1,605


Accumulated Depreciation, EquipmentPOST. BALANCE


31 575 975

Accumulated Depreciation, FurniturePOST. BALANCE


31 380 590

Accumulated Depreciation, VehiclesPOST. BALANCE


31 650 1,300



8 3,600 3,60013 3,360 6,96021 8,500 15,46031 170 15,630


InventoryPOST. BALANCE


3 20,600 20,6006 475 21,0758 3,600 17,47512 3,400 14,07513 3,360 10,71517 516 10,19919 12,100 22,29921 8,500 13,79928 242 13,55731 170 13,387


Req. 5

Aqua Elite, Inc.Adjusted Trial Balance

August 31, 2010ACCOUNT DEBIT CREDITCashAccounts ReceivableInventorySuppliesPrepaid RentLandFurnitureAccumulated Depreciation, FurnitureEquipmentAccumulated Depreciation, EquipmentVehiclesAccumulated Depreciation, VehiclesAccounts PayableUnearned Service RevenueNotes PayableCommon StockRetained EarningsSalesSales DiscountsSales Returns and AllowancesCost of Goods SoldRent ExpenseDepreciation ExpenseCommision ExpenseUtilities ExpenseSalary ExpenseSupplies ExpenseAdvertising ExpenseDelivery ExpenseTotal

$7,2945,400

13,387445

1,80015,0004,500

7,300

31,000

384300

15,6301,8001,6051,300

850675655625

___560$110,510

$590

975

1,3004,4402,800

31,00038,5004,655

26,250

_ $110,510


Req. 6

Aqua Elite, Inc.Income Statement

Month ended August 31, 2010Sales revenue $26,250

Less: Sales Discounts $384 Sales Returns and Allowances 300 684

Net Sales Revenue $25,566Cost of Goods Sold 15,630Gross Profit 9,936Operating Expenses:

Selling Expenses: Commissions Expense 1,300 Delivery Expense 560 1,860

General and Administrative Expenses: Rent Expense 1,800 Depreciation Expense 1,605 Utilities Expense 850 Salaries Expense 675 Supplies Expense 655 Advertising Expense 625 6,210 8,070Net income $ 1,866

Aqua Elite, Inc.Statement of Retained EarningsMonth Ended August 31, 2010

Retained Earnings, August 1, 2010Add: Net IncomeRetained Earnings, August 31, 2010

$4,6551,866

$6,521


Aqua Elite, Inc.Balance Sheet

August 31, 2010Assets

Current Assets:Cash $ 7,294Accounts Receivable 5,400Inventory 13,387Supplies 445

Prepaid Rent 1,800Total Current Assets 28,326

Fixed assets: Land 15,000 Furniture $ 4,500

Less: Accumulated Depreciation, Furniture 590 3,910

Equipment 7,300Less: Accumulated Depreciation, Equipment 975 6,325

Vehicles 31,000Less: Accumulated Depreciation, Vehicles 1,300 29,700

Total Assets $83,261


Accounts Payable $ 4,440 Unearned Service Revenue 2,800 Total Current Liabilities 7,240Long-Term Liabilities:

Notes Payable 31,000Total Liabilities 38,240

Stockholders’ Equity Common Stock 38,500 Retained Earnings 6,521Total Stockholders’ Equity 45,021Total Liabilities and Stockholders’ Equity $83,261


Req. 7

8/31 Sales 26,250 Retained Earnings 26,250

8/31 Retained Earnings 24,384 Sales Discounts 384 Sales Returns and Allowances 300 Cost of Goods Sold 15,630 Rent Expense 1,800 Depreciation Expense 1,605 Commission Expense 1,300 Utilities Expense 850 Salary Expense 675 Supplies Expense 655 Advertising Expense 625 Delivery Expense 560

8/31 Note – there were no dividends during August so no closing entry is required to close dividends


Retained EarningsPOST. BALANCE


31 26,250 30,90531 24,384 6,521

SalesPOST. BALANCE


8 5,800 5,80013 6,750 12,55021 13,700 26,25031 26,250 0

Sales DiscountsPOST. BALANCE


22 110 11027 274 38431 384 0


Sales Returns and AllowancesPOST. BALANCE


15 300 30031 300 0



8 3,600 3,60013 3,360 6,96021 8,500 15,46031 170 15,63031 15,630 0

Rent ExpensePOST. BALANCE


31 1,800 1,80031 1,800 0


Depreciation ExpensePOST. BALANCE


31 1,605 1,60531 1,605 0

Commissions ExpensePOST. BALANCE


31 1,300 1,30031 1,300 0

Utilities Expense POST. BALANCE


30 850 85031 850 0

Salary ExpensePOST. BALANCE


16 675 67531 675 0

Supplies Expense


POST. BALANCEDATE ITEM REF. DEBIT CREDIT DEBIT CREDIT

Aug. 1 Bal. 031 655 65531 655 0

Advertising ExpensePOST. BALANCE


11 625 62531 625 0

Delivery ExpensePOST. BALANCE


24 560 56031 560 0


Req. 8

Aqua Elite, Inc.Post-closing Trial Balance

August 31, 2010ACCOUNT DEBIT CREDITCashAccounts receivableInventorySuppliesPrepaid rentLandFurnitureAccumulated depreciation, furnitureEquipmentAccumulated depreciation, equipmentVehiclesAccumulated depreciation, vehiclesAccounts payableUnearned service revenueNotes payableCommon stockRetained earningsTotal

$7,2945,400

13,387445

1,80015,0004,500

7,300

31,000

$86,126

$590

975

1,3004,4402,800

31,00038,5006,521

$86,126


Ethics in Action

Case 1

It is unethical for Tim to encourage the customer to make this purchase. While it is a

salesman’s job to convince customers to make purchases, intentionally soliciting a

purchase with the full knowledge that the merchandise will likely be returned just to earn

the sales commission is wrong.

Conway can deter this behavior by basing sales commissions on net sales rather than

on gross sales.

Case 2

Normally there is nothing wrong with Tina asking her parents to loan Cottage Café

money. However, if Tina’s request is soley for the pupose of making the Cottage Café’s

current ratio look better in order to receive credit from UMT, then Tina’s request could

be viewed as unethical behavior. This is especially true if Tina intends on repaying the

loan before the due date.

Creditors like to see a current ration of 1.5 or higher because they know that some of a

company’s assets such as prepaid expenses and supplies will not be available to pay off

liabilities as they come due. They also realize that inventory and accounts receivable can

not be used to pay liabilities as they come due. They must first be converted to cash.


Financial Analysis

Req 1

Columbia Sportswear uses a multi-step income statement format. You can tell because line items

for gross profit, and operating expenses can be seen.

Req 2

2006 2007 2008

$541,055= 42.0%

$579,751= 42.8%

$567,811=43.1 %

$1,287,672 $1,356,039 $1,317,835

Columbia Sportswear’s gross profit rate has been improving each year.

Req 3

Columbia Sportswear uses a classified balance sheet format. In addition to current assets and

current liabilities, other categories such as property and equipment can be seen.

Req 4

2007 2008

$885,6645.32

$872,5195.04

$166,531 $173,189

Columbia Sportswear’s current ratio has deteriorated slightly from 2007 to 2008. However, at

5.04 it is still a very high current ratio.


Industry Analysis

Both the Consolidated Balance Sheets and the Consolidated Statements of Income (or Operations) give you clues to the fact that these companies are merchandising businesses. On the balance sheet, merchandising businesses will have an account called Inventories or Merchandise Inventory. This represents the merchandise the company has already bought but hasn’t sold yet.

On the income statement, there may be several clues. The first one may be the name of the revenue account. Most merchandising businesses call this account Sales or Net Sales, as Columbia Sportswear does. However, Under Armour uses the term Net Revenues.

The next clue on the income statement is the account located right under the revenue account. That account is usually called Cost of Goods Sold. Columbia Sportswear uses the term Cost of Sales, but it means the same thing. This account represents the cost to the company for the items that they sold during that particular accounting period. When they sell merchandise, the cost of that merchandise is moved from the Inventory account on the balance sheet to the Cost of Goods Sold account on the income statement.

Small Business Analysis

The only thing that’s certain is that this transaction will not save your client any tax dollars. The purchase of inventory is not an expense that appears on the income statement. Inventory is an asset until it is sold. Then it will be moved from the asset account on the balance sheet to the income statement as cost of merchandise sold. So, your client’s main objective for making this large purchase will not be achieved.

As far as paying cash for this transaction, that depends on a lot of different factors. If your client had ample cash prior to this purchase and the discount was sufficient to cover the cost of tying up his money until the inventory can be sold (one of the carrying costs of inventory), then it was probably not a bad idea. However, if this cash purchase created a cash shortage, even to the point of having to borrow money on the company’s line of credit, then the transaction was probably not a good idea.

Your client’s last statement about making more profit when he sells this inventory is also contingent upon some of the other items mentioned above. It would seem like that would be the case, but if this vendor normally offers a discount for early payment anyway, then maybe the per-unit cost of this product isn’t as good as he may think.


Written Communication

Regardless of whether or not you choose to have the customer return the youth footballs or just give them an allowance (reduce the invoice amount) for the error, the accounting is the same. You will be debiting an account called Sales Returns and Allowances and crediting accounts receivable for the amount that you will be reducing the invoice. Sales Returns and Allowances is an account known as a contra-revenue account which only means that the normal balance of the account is contrary (opposite) to what a revenue account would normally be. So by debiting the Sales Returns and Allowance account, you are increasing it.

The accounting form that you will issue to the customer for this transaction is called a credit memorandum, or a credit memo. The form gets its name from the fact that you will be crediting (decreasing) their accounts receivable account because the customer now owes you less.

Concerning the freight costs, the customer is correct. If the terms for the sale were in fact FOB Destination, then the customer is not responsible for paying the freight, or shipping costs. Had the terms been FOB Shipping point, then the customer would be responsible for those costs. These terms derive their name from the point at which title passes for the merchandise. So whoever owns the goods while they’re in route ultimately is responsible for paying to get them there.

So your letter might read like this:

Dear Customer:

Thank you for the letter concerning your recent purchase from us. I apologize for the mix-up in the product. As football season approaches, it tends to get a little hectic around here, but that is no reason for us to not get your order correct. So here’s what we can do to correct it now.

I’ll give you the option to either send the footballs back to us (freight will be paid by us), or if you like, you can keep the youth footballs and we will reduce the price 50% from the normal cost of a youth football. Either way, we will reduce the amount of your invoice and issue you a credit memorandum for the amount of the reduction. Please let us know what you prefer to do.

Concerning the shipping terms on the invoice, you are correct that you do not normally pay for shipping. So the shipping terms on your invoice were correct, but there should be no freight charged to you. FOB (Free on Board) Destination only means that you didn’t officially own the product until it reached its destination, that being your store. So since we still officially owned the product, we were responsible for paying the freight. We will deduct the freight from your invoice and include it as part of the credit memo we will be issuing to you.

Thank you for your business, and, again, we apologize for the mix-up. Hopefully, this will clear everything up.


Chapter 4 Solutions

Documents

Transcript of Chapter 4 Solutions