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Merchandising Operations
and the Multiple-Step Income Statement
ANSWERS TO QUESTIONS
1.
(a) Disagree. The steps in the accounting cycle are the same for both a merchandising company and a
service enterprise.
(b) The measurement of income is conceptually the same. In both types of companies, net
income (or loss) results from the matching of expenses with revenues.
2.
Sales
Cost of Goods Sold and Operating
Service
Fees, Rents, etc.
Operating (only)
3.
Under a periodic inventory system the company does not keep track of how many units are on hand.
Instead it takes a physical count at the end of the period to determine ending inventory and cost of goods
sold. Under a perpetual system the company adjusts its inventory account each time it purchases or sells
inventory. Thus it always has a record of its available inventory. Having knowledge of inventory balances
helps a company avoid lost sales due to stock-outs as well as carrying too much inventory on hand
(which results in additional storage and handling costs). The purchasing department can make better
decisions with the aid of perpetual inventory records.
4.
Less
Cost of
Goods
Sold
Equals
Gross
Profit
Less
Operating
Expenses
Net
Income
Equals
(b) Income measurement in a merchandising company differs from a service company as follows: (a)
sales are the primary source of revenue and (b) expenses are divided into two main categories:
cost of goods sold and operating expenses.
5.
6.
Agree. In accordance with the revenue recognition principle, sales revenues are generally considered
to be earned when the goods are transferred from the seller to the buyer; that is, when the exchange
transaction occurs. The earning of revenue is not dependent on the collection of credit sales.
7.
(a) The primary source documents are (1) cash salescash register tapes and (2) credit sales sales
invoice.
$100,000
65,000
$ 35,000
5-1
5-2
Cash ...................................................................
Sales ...........................................................
XX
XX
Credit
XX
XX
Credit sales
8.
July 19
XX
XX
XX
XX
784
16
800
9.
The practice of shipping more goods than were ordered in order to meet sales goals and get rid of extra
inventory is referred to as channel stuffing. Shipping unwanted goods to customers is generally
considered unethical behavior. In addition, if proper accounting is applied, in most cases it wont achieve
the desired result of increasing sales. If it is expected that the unwanted goods will be shipped back to
the seller, then they should not be treated as sales in the first place.
10.
In most industries returns are not significant, and they are therefore accounted for as they occur. When
returns are expected to be significant, the company should make an adjusting entry at the end of the
period to estimate the amount of returns that will result from the periods sales, so that revenues will
not be overstated during the period.
11.
July 24
1,700
34
1,666
12.
Gross profit.....................................................................................................
Less: Net income...........................................................................................
Operating expenses .......................................................................................
13.
Its current terms of 1/10, n/30 means that customers get a 1% discount if they pay within 10 days,
otherwise they have to pay the full amount within 30 days. If they switch to 2/10, n/45 customers would
get a 2% discount for paying within 10 days, otherwise they have to pay the full amount in 45 days. By
offering 2%, more of Allisons customers would likely pay within the 10 day period. Management would
have to determine whether it is worth the additional cost to be paid quicker. Also, by extending the full
payment period from 30 to 45 days, Allison would end up receiving its money even later from its slow
payers.
14.
The gain on the sale of the plant represents a one-time gain. That is, it wont be recurring next year.
If you eliminate the effect of this one-time gain, then the companys income actually declined by $5
million relative to the prior year. When predicting future earnings investors frequently place little weight
on non-recurring events such as this.
15.
There are three distinguishing features in the income statement of a merchandising company:
(1) a sales revenues section, (2) a cost of goods sold section, and (3) gross profit.
16.
The normal operating cycle for a merchandising company is likely to be longer than for a service
company because inventory must first be purchased and sold, and then the receivables must be
collected.
$560,000
260,000
$300,000
5-3
(a)
Added/Deducted
Deducted
Deducted
Added
(b)
Normal Balance
Credit
Credit
Debit
5-4
1,700
34
1,666
900
Wood Company
Accounts Receivable ........................................
Sales ...........................................................
900
900
900
630
630
800,000
540,000
110,000
75,000
676,200
13,800
800,000
540,000
110,000
75,000
690,000
5-5
800,000
110,000
690,000
800,000
110,000
13,800
676,200
$450,000
$22,000
5,000
27,000
$423,000
Section
5-6
$ 70,000
380,000
450,000
50,000
$400,000
$404,000
$11,000
7,000
18,000
$386,000
$386,000
16,000
$402,000
$620,000
$ 60,000
402,000
462,000
90,000
372,000
$248,000
5-7
5-8
800,000
110,000
690,000
800,000
110,000
13,800
676,200
DO IT! 5-1
Oct. 5
Oct. 8
5,000
700
5,000
700
5-9
DO IT! 5-2
Oct. 5
Oct. 8
5,000
3,000
700
250
5,000
3,000
700
250
DO IT! 5-3
JUNEAU CORP.
Income Statement
For the Year Ended December 31, 2010
Net sales .............................................................
Cost of goods sold ............................................
Gross profit ........................................................
Operating expenses...........................................
Income from operations ....................................
Other revenues and gains .................................
Other expenses and losses...............................
Income before income taxes .............................
Income tax expense ...........................................
Net income .........................................................
5-10
$552,000
156,000
396,000
186,000
210,000
$12,700
2,300
10,400
220,400
66,120
$154,280
DO IT! 5-4
(a) Cost of goods purchased:
Purchases Purchase returns Purchase discounts + Freight-in
$162,500 $3,200 $5,700 + $8,400 = $162,000
(b) Cost of goods sold:
Beginning inventory + Cost of goods purchased Ending inventory
$31,720 + $162,000 $27,950 = $165,770
5-11
SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a) (1) Dec. 3
500,000
320,000
28,000
467,280
472,000
(2) Dec. 8
(3) Dec. 13
500,000
320,000
28,000
4,720
472,000
472,000
EXERCISE 5-3
(a) (1) April 5
(2) April 6
(3) April 7
(4) April 8
(5) April 15
5-12
25,000
900
Equipment........................................
Accounts Payable ....................
30,000
3,600
Accounts Payable
($25,000 $3,600) ........................
Merchandise Inventory
25,000
900
30,000
3,600
21,400
428
20,972
21,400
21,400
EXERCISE 5-6
(a)
YATES COMPANY
Income Statement
For the Month Ended January 31, 2010
Sales revenues
Sales ............................................................
Less: Sales returns and
allowances .......................................
Sales discounts ...............................
Net sales ......................................................
Cost of goods sold .............................................
Gross profit.........................................................
Operating expenses
Salary expense ...........................................
Rent expense ..............................................
Insurance expense .....................................
Freight-out...................................................
Total operating expenses ...................
Income before income taxes .............................
Income tax expense ...........................................
Net income ..........................................................
$370,000
$17,000
8,000
25,000
345,000
212,000
133,000
62,000
32,000
12,000
7,000
113,000
20,000
5,000
$ 15,000
$15,000 = 4.3%
$345,000
$133,000 = 38.6%
$345,000
EXERCISE 5-7
(a) Iwig Company
5-13
5-14
Sales .....................................................................................
*Sales returns ($90,000 $84,000) .......................................
Net sales ...............................................................................
$ 90,000)
(6,000)
$ 84,000)
$ 84,000)
(56,700)
$ 27,300)
$ 27,300)
(14,580)
$ 12,720)
Pratt Company
*Sales ($100,000 + $5,000) ....................................................
Sales returns ........................................................................
Net sales ...............................................................................
$105,000)
(5,000)
$100,000)
$100,000)
(60,000)
$ 40,000)
Gross profit...........................................................................
*Operating expenses ($40,000 $18,000) ............................
Net income ............................................................................
$ 40,000)
(22,000)
$ 18,000)
Iwig
Pratt
(c) Pratt has a higher profit margin ratio than Iwig. Each dollar of sales by Pratt
results in 18 cents of net income compared to only 15 cents for Iwig. Pratt
also has a higher gross profit rate. For each dollar of Pratts sales revenue,
60 cents is required to cover cost of goods sold leaving 40 cents to cover
other expenses and produce net income. Iwigs gross profit of .33 indicates
that only 33 cents of each sales dollar is available to cover other expenses
and produce net income.
5-15
EXERCISE 5-10
Inventory, September 1, 2009 ...................................
Purchases ..................................................................
Less: Purchase returns and allowances ................
Net purchases............................................................
Add: Freight-in .......................................................
Cost of goods purchased .........................................
Cost of goods available for sale ...............................
Inventory, August 31, 2010 .......................................
Cost of goods sold ............................................
$ 19,200
$154,000
5,000
149,000
8,000
157,000
176,200
22,000
$154,200
EXERCISE 5-11
(a) $1,440 ($1,500 $60)
(b) $1,570 (1,440 + $130)
(c) $1,510 ($1,820 $310)
(d) $40
(e) $190
(f) $120
(g) $7,700
(h) $640
(i) $9,050
($1,080 $1,040)
($1,230 $1,040)
($1,350 $1,230)
(j)
(k)
(I)
($290 + $7,410)
($8,050 $7,410)
($1,000 + $8,050)
SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
(a)
General Journal
Date
May 1
Account Titles
Merchandise
Inventory
Debit
8,000
Credit
8,000
Accounts
Payable
5-16
Accounts
Receivable
4,400
4,400
Sales
3,300
3,300
Cost of Goods
Sold
Merchandise
Inventory
5
Accounts
Payable
200
200
Merchandise
Inventory
9
Cash ($4,400
$132)
4,268
132
4,400
7,800
156
7,644
Merchandise Inventory
($7,800 X
2%)
Cash
11
Supplies
900
900
Cash
5-17
12
Merchandise
Inventory
2,700
2,700
Cash
15
Cash
230
230
Merchandise
Inventory
17
Merchandise
Inventory
2,500
2,500
Accounts
Payable
5-18
Account Titles
Merchandise
Inventory
Debit
250
Credit
250
Cash
24
Cash
5,400
5,400
Sales
4,020
4,020
Cost of Goods
Sold
Merchandise
Inventory
25
Merchandise
Inventory
800
800
Accounts
Payable
27
Accounts
Payable
2,500
50
2,450
Merchandise Inventory
($2,500 X
2%)
Cash
29
124
124
90
5-19
Cash
90
Merchandise
Inventory
Cost of Goods
Sold
31
Accounts
Receivable
Sales
1,280
1,280
830
830
Cost of Goods
Sold
Merchandise
Inventory
5-20
7,644
900
2,700
250
2,450
124
Accounts Receivable
5/2
4,400 5/9
4,400
5/31
1,280
5/31 Bal. 1,280
Merchandise Inventory
5/1
8,000 5/2
3,300
5/12
2,700 5/5
200
5/17
2,500 5/10
156
5/19
250 5/15
230
5/25
800 5/24
4,020
5/29
90 5/27
50
5/31
830
5/31 Bal. 5,554
5/11
5/31 Bal.
5/5
5/10
5/27
Common Stock
5/1 Bal. 8,000
5/31 Bal. 8,000
Sales
5/2
5/24
5/31
5/31 Bal.
4,400
5,400
1,280
11,080
90
Supplies
900
900
Accounts Payable
200 5/1
8,000
7,800 5/17
2,500
2,500 5/25
800
5/31 Bal.
800
5-21
$11,080
$124
132
256
10,824
8,060
$ 2,764
5-22
5-23