To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Reporting and Analyzing Merchandising Operations QUESTIONS Additional accounts of a merchandising company likely include Merchandise Inventory, Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances (and possibly Delivery Expense) Merchandising companies report Merchandise Inventory on the balance sheet, service companies not Also, merchandising companies report both Sales (of goods) and Cost of Goods Sold on the income statement, while service companies not A company can have a net loss if its expenses (absent cost of goods sold) are greater than its gross profit from sales of merchandise A cash discount can be offered to encourage customers to promptly pay This provides cash more quickly to the seller and avoids the costs of additional collection activities—of course, the seller must perform a costs vs benefits analysis on the merits and terms of any cash discount offered to customers For a perpetual inventory system, inventory shrinkage is determined by taking a physical count of the inventory available at the end of a period and comparing that amount with the amount recorded in the Merchandise Inventory account Cash discounts are granted in return for early payment and reduce the amount paid below the negotiated price Cash discounts are recorded in the accounting records (as a reduction of Merchandise Inventory) Trade discounts are deducted from the list or catalog price to determine the purchase (negotiated) price Trade discounts are not recorded in the accounting records Sales discount is a term used by a seller to describe a cash discount granted to a customer Purchase discount is a term used by a purchaser to describe a cash discount received from a seller (It is a matter of perspective: seller versus buyer.) A manager is concerned about the quantity of its purchase returns because the company incurs costs in receiving, inspecting, identifying, and returning the merchandise More returns create more expenses By knowing more about returns, the manager can decide if they are a problem and how they can be minimized The sender (maker) of a debit memorandum records a debit in an account of the recipient; and the recipient records a credit in an account maintained for the sender ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 225 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10 The single-step income statement format presents cost of goods sold and expenses in one list, totals the list, and subtracts the total from net sales in one step The multiple-step format presents intermediate totals, including gross profit (the difference between net sales and cost of goods sold) and sub-categories of expenses (often by key activities) 11 Best Buy calls its inventory account ―Merchandise Inventories.‖ calculation of cost of goods sold is not presented for Best Buy A detailed 12 Circuit City calls its cost of goods sold account ―Cost of sales, buying, and warehousing.‖ 13 Apple reports a separate gross margin figure on its consolidated statement of income Its 2004 gross profit is $2,259,000,000 14 A buyer should attempt to negotiate the shipping terms FOB destination In this case, title will pass after the goods are safely delivered to the buyer’s business and transportation charges will be the responsibility of the supplier (seller) QUICK STUDIES Quick Study 4-1 (10 minutes) Mar Merchandise Inventory Accounts Payable 4,800 4,800 To record credit purchase [(600 x $10) x 80%] Mar Accounts Payable Merchandise Inventory 200 200 Returned defective units [(25/600) x $4,800] Mar 15 Accounts Payable Cash Merchandise Inventory* 4,600 4,508 92 Paid for purchase less cash discount *[(4,800 - $200) x 2%] ©McGraw-Hill Companies, 2008 226 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 4-2 (10 minutes) Apr Accounts Receivable Sales 3,000 3,000 To record credit sale Cost of Goods Sold Merchandise Inventory 1,800 1,800 To record cost of credit sale Sales Returns and Allowances Accounts Receivable 600 600 To record sales return Merchandise Inventory Cost of Goods Sold 360 360 Restore cost of returned goods to inventory 11 Cash Sales Discounts* Accounts Receivable 2,352 48 2,400 Received payment less cash discount *[($3,000 - $600) x 2%] Quick Study 4-3 (10 minutes) (a) Sales $150,000 Sales discounts (5,200) Sales returns and allowances (20,000) Net sales 124,800 Cost of goods sold (79,600) Gross profit $ 45,200 Gross margin ratio: (Gross profit / Net sales) 36.2% (b) $550,000 (17,500) (6,000) 526,500 (329,700) $196,800 37.4% (c) (d) $38,700 $255,700 (600) (4,200) (5,300) (900) 32,800 250,600 (24,300) (126,900) $ 8,500 $123,700 25.9% 49.4% Interpretation of gross margin ratio for case a: The ratio of 36.2% implies that for each dollar in net sales the company earns 36.2 cents in gross profit The company must still deduct other expenses that it incurs in running the business when computing net income ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 227 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 4-4 (10 minutes) July 31 Cost of Goods Sold Merchandise Inventory 1,900 1,900 To adjust for shrinkage based on physical count [$37,800 - $35,900] Quick Study 4-5 (10 minutes) July 31 Sales Income Summary 160,200 160,200 To close temporary accounts with credit balances July 31 Income Summary Sales Discounts Sales Returns and Allowances Cost of Goods Sold* Depreciation Expense Salaries Expense Miscellaneous Expenses 165,900 4,700 6,500 106,900 10,300 32,500 5,000 To close temporary accounts with debit balances (*$105,000 + $1,900 —from QS 4-4) Quick Study 4-6 (10 minutes) Acid-test ratio = ($1,500 + $2,800) / ($5,750 + $850) = 0.65 Explanation of acid-test ratio: The acid-test ratio is used to evaluate (reflect on) the liquidity of a company It helps in determining whether a company will be able to meet its current obligations as they come due with its most liquid assets In this case, the company only has 65 cents available in quick assets to pay $1.00 in current liabilities as they come due An acid-test ratio less than one usually suggests some concern and encourages further analysis of liquidity Quick Study 4-7 (10 minutes) Similarities: Both the acid-test ratio and current ratio are used to assess liquidity Both ratios are computed with current liabilities as the denominator Differences: The current ratio includes current assets in the numerator The acidtest ratio includes current assets less inventories and prepaids in its numerator (leaving cash & equivalents, current receivables, and short-term investments) Comparison and Description: Compared with the current ratio, the acid-test ratio is a more stringent test of a company’s ability to meet its current obligations The acid-test ratio is more stringent as it does not assume a company relies on prepaids and inventory to pay current liabilities This is because prepaids and inventory assets are not generally available to satisfy current obligations ©McGraw-Hill Companies, 2008 228 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 4-8A (5 minutes) a b c d e Perpetual inventory system Perpetual inventory system Periodic inventory system Perpetual inventory system Perpetual inventory system Quick Study 4-9A (10 minutes) Mar Purchases Accounts Payable 4,800 4,800 To record credit purchase [(600 x $10) x 80%] Accounts Payable Purchases Returns & Allowances 200 200 Returned defective units [(25/600) x $4,800] 15 Accounts Payable Cash Purchases Discounts* 4,600 4,508 92 Paid for purchase less cash discount * [($4,800 - $200) x 2%)] Quick Study 4-10A (10 minutes) Apr Accounts Receivable Sales 3,000 3,000 To record credit sale Sales Returns and Allowances Accounts Receivable 600 600 To record sales return 11 Cash Sales Discounts* Accounts Receivable 2,352 48 2,400 Received payment less cash discount *($3,000 - $600) x 2% ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 229 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES Exercise 4-1 (30 minutes) Apr Merchandise Inventory Accounts Payable—Lyon 4,600 4,600 Purchased merchandise on credit Merchandise Inventory Cash 300 300 Paid shipping charges on purchased merchandise Accounts Payable—Lyon Merchandise Inventory 600 600 Returned unacceptable merchandise 17 Accounts Payable—Lyon Merchandise Inventory* Cash 4,000 80 3,920 *[($4,600 - $600) x 2%] Paid balance (less 2%) within discount period 18 Merchandise Inventory Accounts Payable—Frist 8,500 8,500 Purchased merchandise on credit 21 Accounts Payable—Frist Merchandise Inventory 1,100 1,100 Received an allowance on purchase 28 Accounts Payable—Frist Merchandise Inventory* Cash 7,400 148 7,252 *[($8,500 - $1,100) x 2%] Paid balance (less 2%) within discount period ©McGraw-Hill Companies, 2008 230 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 4-2 (30 minutes) BUYER- Santa Fe Company Credit Purchase Merchandise Inventory Accounts Payable 24,000 24,000 Purchased merchandise on credit Cash Payment Accounts Payable Merchandise Inventory* Cash 24,000 720 23,280 *[24,000 x 3%] Paid account payable within 3% discount period SELLER – Mesa Company Credit Sale Accounts Receivable Sales 24,000 24,000 Sold merchandise on account Cost of Goods Sold Merchandise Inventory 16,000 16,000 To record cost of sale Cash Collection Cash Sales Discounts Accounts Receivable 23,280 720 24,000 Collected account receivable Amount borrowed to pay with discount Annual rate of interest Interest per year $ 23,280 x 8% $1,862.40 Interest per day ($1,862.40 / 365 days) $ Savings from discount taken ($24,000 - $23,280) Interest paid on 50-day loan (50 days x $5.10) Net savings from borrowing to pay in discount period $ 720.00 (255.00) $ 465.00 5.10 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 231 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 4-3 (10 minutes) J A B F E 10 D G H I C Exercise 4-4 (30 minutes) May Accounts Receivable Sales 21,000 21,000 Sold merchandise on credit (1,500 x $14) Cost of Goods Sold Merchandise Inventory 15,000 15,000 To record cost of sale (1,500 x $10) a May Sales Returns and Allowances Accounts Receivable 2,800 2,800 Accepted a return from a customer (200 x $14) Merchandise Inventory Cost of Goods Sold 2,000 2,000 Returned merchandise to inventory (200 x $10) b May Sales Returns and Allowances Accounts Receivable 600 600 Granted allowance for damaged merchandise c May 15 Sales Returns and Allowances Accounts Receivable 680 680 Granted allowance for mis-colored merchandise and accepted a return from a customer for the mis-colored merchandise [$120 + (40 x $14)] 15 Merchandise Inventory Cost of Goods Sold 400 400 Returned merchandise to inventory (40 x $10) ©McGraw-Hill Companies, 2008 232 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 4-5 (15 minutes) May Merchandise Inventory Accounts Payable 21,000 21,000 Purchased merchandise on credit (1,500 x $14) a May Accounts Payable Merchandise Inventory 2,800 2,800 Returned unwanted merchandise (200 x $14) b May Accounts Payable Merchandise Inventory 600 600 To record allowance for damaged merchandise c May 15 Accounts Payable Merchandise Inventory 680 680 To record allowance for mis-colored goods and return of mis-colored merchandise $120 + (40 x $14) Exercise 4-6 (25 minutes) Entries for Sydney Company (BUYER): May 11 Merchandise Inventory Accounts Payable 40,000 40,000 Purchased merchandise on credit 11 Merchandise Inventory Cash 345 345 Paid shipping charges on purchased merchandise 12 Accounts Payable Merchandise Inventory 1,400 1,400 Returned unacceptable merchandise 20 Accounts Payable Merchandise Inventory* Cash 38,600 1,158 37,442 Paid balance within the 3% discount period *($38,600 x 03) ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 233 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 4-6 — continued Entries for Troy Corporation (SELLER): May 11 Accounts Receivable Sales 40,000 40,000 Sold merchandise on account 11 Cost of Goods Sold Merchandise Inventory 30,000 30,000 To record cost of sale 13 Sales Returns and Allowances Accounts Receivable 1,400 1,400 Accepted a return from a customer 13 Merchandise Inventory Cost of Goods Sold 800 800 Returned goods to inventory 21 Cash Sales Discounts Accounts Receivable 37,442 1,158 38,600 Collected account receivable Exercise 4-7 (20 minutes) In today’s competitive world, organizations must concentrate on meeting their customers’ needs and avoiding dissatisfaction If these needs are not met and dissatisfaction grows, the customers will deal with other companies or entities One measure of dissatisfaction of customers is the amount of sold goods that are later returned Customer dissatisfaction needs to be understood and then dealt with promptly to encourage them to remain loyal The reasons for the return also need to be determined to allow the problem to be avoided in the future For example, the returns might arise from product defects, shipping damage, misleading information provided at the time of sale, or fickle customers An important early step in controlling returns is to have information about their dollar amount In addition, managers can set goals for reducing the dollar amount of sales returns Both objectives can be helped by having the company’s accounting system record the sales value of returned goods in a separate contra account instead of the Sales account This approach captures the information at the time of the return and allows it to be easily reported While a company’s sales return record is important for managers, it is also valuable information for external decision makers This information can help external users identify organizations focusing on customer satisfaction and product quality Although management might choose to report the amount of sales returns as evidence of sales satisfaction, their amount is rarely reported in financial statements provided to investors, creditors, and other external users ©McGraw-Hill Companies, 2008 234 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) Common Stock Date Explanation PR Dec 31 Balance Jan 120,000 Retained Earnings Date Explanation PR Dec 31 Balance Dividends Date Feb 15 Date Jan 11 16 Mar 16 24 31,850 Explanation PR Debit Debit Computer Services Revenue Explanation PR Debit Date Jan 20 Explanation PR Acct No 318 Credit Balance 7,435 Acct No 319 Debit Credit Balance 5,200 5,200 Sales Date Jan 13 26 Feb 23 Mar 25 30 20,900 Acct No 307 Credit Balance 110,000 10,000 Debit Sales Returns and Allowances Explanation PR Debit 500 Acct No 403 Credit Balance 9,000 9,000 5,600 14,600 6,250 20,850 11,000 Acct No 413 Credit Balance 6,000 6,000 4,700 10,700 3,800 14,500 3,900 18,400 2,500 Acct No 414 Credit Balance 500 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 275 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) Date Jan 22 Date Jan 13 26 Feb 23 Mar 25 30 Date Sales Discounts Explanation PR Cost of Goods Sold Explanation PR Debit 55 Acct No 415 Credit Balance 55 Acct No 502 Debit Credit Balance 4,080 4,080 3,196 7,276 2,584 9,860 2,652 12,512 1,700 14,212 Depreciation Expense—Office Equipment Acct No 612 Explanation PR Debit Credit Balance Depreciation Expense—Computer Equipment Date Date Jan 31 Feb 26 Explanation PR Wages Expense Explanation PR Date Insurance Expense Explanation PR Date Rent Expense Explanation PR Debit Acct No 613 Credit Balance Acct No 623 Debit Credit Balance 150 150 1,500 1,650 1,200 2,850 Debit Acct No 637 Credit Balance Debit Acct No 640 Credit Balance ©McGraw-Hill Companies, 2008 276 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) Date Computer Supplies Expense Explanation PR Debit Acct No 652 Credit Balance Date Feb Advertising Expense Explanation PR Debit 800 Acct No 655 Credit Balance 800 Mileage Expense Explanation PR Acct No 676 Credit Balance 320 512 Date Feb 27 Mar 31 Date Date Mar 11 Debit 320 192 Miscellaneous Expenses Explanation PR Debit Acct No 677 Credit Balance Repairs Expense—Computer Acct No 684 Explanation PR Debit Credit Balance 1,200 1,200 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 277 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) Acct No 101 106.1 106.2 106.3 106.4 106.5 106.6 106.7 106.8 106.9 119 126 128 131 163 164 167 168 201 210 236 307 318 319 403 413 414 415 502 612 613 623 637 640 652 655 676 677 684 Part SUCCESS SYSTEMS Partial Work Sheet March 31, 2008 Unadjusted Trial Balance Adjustments Account Title Cash 87,266 Alex’s Engineering Co Wildcat Services 3,900 Easy Leasing 11,000 Clark Co 4,800 Chang Corporation Gomez Co Delta Co KC, Inc 4,700 Dream, Inc Merchandise inventory .740 Computer supplies 4,025 Prepaid insurance 1,800 Prepaid rent 3,500 Office equipment 10,000 Accumulated depreciation– Office equipment Computer equipment 25,000 Accumulated depreciation– Computer equip Accounts payable Wages payable Unearned computer services revenue Common stock Retained earnings Dividends 5,200 Computer services revenue Sales Sales returns and allow .500 Sales discounts 55 Cost of goods sold 14,212 Depreciation expense– Office equipment Depreciation expense– Computer equipment Wages expense 2,850 Insurance expense Rent expense Computer supplies expense Advertising expense 800 Mileage expense 512 Miscellaneous expenses Repairs expense–Computer 1,200 Totals 182,060 Adjusted Trial Balance (g) 60 (a) 2,075 (b) 600 (d) 2,625 (f) 625 87,266 3,900 11,000 4,800 0 4,700 680 1,950 1,200 875 10,000 625 1,250 25,000 1,250 (e) 1,250 2,500 0 (c) 1,050 1,050 120,000 7,435 120,000 7,435 5,200 31,850 20,900 182,060 31,850 20,900 (g) (f) 60 625 500 55 14,272 625 (e) 1,250 1,250 (c) (b) (d) (a) 1,050 600 2,625 2,075 3,900 600 2,625 2,075 800 512 1,200 184,985 8,285 8,285 184,985 ©McGraw-Hill Companies, 2008 278 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Continued) Part SUCCESS SYSTEMS Income Statement For Three Months Ended March 31, 2008 Revenues Computer services revenue Net sales* Total revenues Expenses Cost of goods sold $31,850 20,345 52,195 $14,272 Depreciation expense—Office equipment Depreciation expense—Computer equipment Wages expense Insurance expense Rent expense Computer supplies expense Advertising expense Mileage expense Repairs expense—Computer Total expenses 625 1,250 3,900 600 2,625 2,075 800 512 1,200 27,859 Net income $24,336 * Net sales = $20,900 - $500 - $55 = $20,345 Part SUCCESS SYSTEMS Statement of Retained Earnings For Three Months Ended March 31, 2008 Retained earnings, Dec 31, 2007 Plus: Net income Less: Dividends Retained earnings, March 31, 2008 $ 7,435 24,336 31,771 5,200 $26,571 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 279 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP (Concluded) Part SUCCESS SYSTEMS Balance Sheet March 31, 2008 Assets Current assets Cash Accounts receivable* Merchandise inventory Computer supplies Prepaid insurance Prepaid rent Total current assets Plant assets Office equipment Accumulated depreciation—Office equipment $ 87,266 24,400 680 1,950 1,200 875 116,371 $10,000 (1,250) 8,750 25,000 (2,500) 22,500 Computer equipment Accumulated depreciation—Computer equipment Total plant assets Total assets 31,250 $147,621 Liabilities Current liabilities Wages payable $ 1,050 Equity Common stock Retained earnings 120,000 26,571 Total liabilities and equity $147,621 *Accounts receivable = $3,900 + $11,000 + $4,800 + $4,700 = $24,400 ©McGraw-Hill Companies, 2008 280 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 4-1 Compute cost of sales as follows February 28, 2004 inventory Plus cost of goods purchased Less February 26, 2005 inventory Cost of sales $ 2,607,000,000 ? (2,851,000,000) $20,938,000,000 Then, solve for: Cost of goods purchased * $21,182,000,000 *($20,938,000,000 + $2,851,000,000 - $2,607,000,000) ($ millions) Fiscal 2005 Current Acid-Test Ratio Ratio Current assets Cash and equivalents Short-term investments Receivables Merchandise inventories Other current assets Total current assets $ 470 2,878 375 2,851 329 $6,903 $ 470 2,878 375 Total current liabilities Ratio Fiscal 2004 Current Acid-Test Ratio Ratio $ 245 2,355 343 _ $3,723 $ 245 2,355 343 2,607 174 $5,724 $4,959 $4,959 $4,501 $4,501 1.39 0.75 1.27 0.65 _ $2,943 Interpretation: The current ratio increased from 1.27 in 2004 to 1.39 in 2005 The acid-test ratio increased from 0.65 in 2004 to 0.75 in 2005 The two-year comparison on both ratios shows that Best Buy has improved its liquidity position However, in both years the current ratio is below both the industry average of 1.6 and the rule-of-thumb ratio of 2.0 The fiscal 2005 acid-test ratio is above the industry average of 0.7, but is below the rule-of-thumb ratio of 1.0 Solution depends on the financial statement data obtained ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 281 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis — BTN 4-2 Key Figures ($ millions) Best Buy Current Prior Circuit City Current Prior Net sales $27,433 $24,548 $10,472 $ 9,857 Cost of sales 20,938 18,677 7,904 7,573 Gross margin $ 6,495 $ 5,871 $ 2,568 $ 2,284 Gross margin ratio 23.7% 23.9% 24.5% 23.2% In the current year, Circuit City’s gross margin ratio was higher than Best Buy’s In the prior year, Best Buy’s gross margin ratio was slightly higher than Circuit City’s For both years, each company’s gross margin ratio is lower than the industry average of 29% Best Buy’s gross margin ratio decreased slightly from 23.9% to 23.7% This is a slightly negative development for Best Buy Circuit City’s gross margin ratio increased from 23.2% to 24.5% This is a positive development for Circuit City ©McGraw-Hill Companies, 2008 282 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN 4-3 A few students sometimes feel that Amy has devised a clever way to beat the system She appears to be succeeding in getting something for free However, most students fortunately feel that Amy is abusing the system and that her ethical conduct needs an overhaul The instructor may wish to point out that customer abuses such as Amy’s usually result in stores adopting stringent return policies that impact all customers who have legitimate needs to return unused products At some point, Amy will probably suffer discomfort when questioned about items that are returned in less than new condition Also, if store managers suspect Amy is abusing the system, they may no longer allow her to shop at their store If Amy is banned from the store, she will likely suffer humiliation for herself, her family, and her friends The merchandising company accounts for sales returns using a contra revenue account called Sales Returns and Allowances A dress returned with a sales bill of $200 would be accounted for as follows: Sales Returns and Allowances Accounts Receivable 200 200 Also, if the item is returned to inventory (and it had cost $160), the following entry is made: Merchandise Inventory Cost of Goods sold 160 160 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 283 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Communicating in Practice — BTN 4-4 Note: While responses will vary, the essence of its content follows: TO: Mr Velakturi FROM: DATE: SUBJECT: Reply to inventory shrinkage question You are correct in noting that Music Plus has lost inventory as a result of shoplifting and other forms of shrinkage However, you will be pleased to know your investment in security has paid off Let me explain We maintain a perpetual inventory system, which continuously updates inventory account balances as goods are purchased, sold, and returned At the end of each accounting period, we take an actual physical inventory and compare this amount to our inventory records These accounting procedures for verifying inventory available have disclosed that the amount of inventory loss is not abnormally large Accounting procedures allow this immaterial shrinkage to be directly charged to cost of goods sold This is why you not see a specific deduction for shrinkage on the income statement Instead, the deduction has been taken in the form of increased cost of goods sold I hope this addresses your concern and that you are now confident that net income is not overstated If you have any additional questions or require more specific information regarding inventory shrinkage, please let me know The supporting information is available in the accounting records ©McGraw-Hill Companies, 2008 284 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Taking It to the Net Fiscal Year ($ thousands) 2004 — BTN 4-5 2003 2002 Net sales $778,295 Cost of goods sold 478,829 Gross margin $299,466 $660,628 440,276 $220,352 $732,279 472,262 $260,017 Gross margin ratio 38.5% 33.4% 35.5% Analysis: J.Crew’s gross margin ratio declined in 2003, but has recovered in 2004 In 2003, sales declined from 2002 before recovering in 2004 It may be that 2003 found J Crew having to reduce selling prices, while the cost of clothing did not go down proportionally Teamwork in Action — BTN 4-6 a Net sales computation Sales Less: Sales discounts Sales returns and allowances Net sales b Total cost of merchandise purchases computation Invoice cost of merchandise purchases Less: Purchase discounts received Purchase returns and allowances Add costs of transportation-in Total cost of merchandise purchases c Cost of goods sold computation Merchandise inventory, Beginning Total cost of merchandise purchased (from b) Merchandise available for sale Merchandise inventory, Ending Cost of goods sold d Gross profit computation Net sales (from a) Less: Cost of goods sold (from c) Gross profit $600,000 $ 13,000 20,000 33,000 $567,000 $360,000 (9,000) (11,000) 22,000 $362,000 $ 98,000 362,000 $460,000 (84,000) $376,000 $567,000 376,000 $191,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 285 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action (Concluded) e Net income computation Gross profit from sales (from d) Operating expenses (given) Net income $191,000 50,000 $141,000 Net income is $141,000 The inventory account balance is $84,000 If actual (physical) inventory is $76,000, an $8,000 loss from inventory shrinkage occurred This would result in an adjustment necessitating a reduction (credit) to the inventory account and an increase (debit) to cost of goods sold This $8,000 increase in cost of goods sold would result in a corresponding decrease in both gross profit and net income This means that net income would decline to $133,000 BusinessWeek Activity — BTN 4-7 Gift cards require that the customer pay cash to acquire them Loyalty programs, however, require that customers make purchases of merchandise Based on those purchases, the customers get discounts or ―loyalty dollars‖ that they can spend on additional merchandise with no further cash outlay (a) (b) Cash Unearned revenue 50 Unearned revenue Revenue 50 50 50 To record the $125,000 in sales Cash Revenue 125,000 To record the Reward Zone dollars Revenue Unearned revenue 5,000 125,000 5,000 ©McGraw-Hill Companies, 2008 286 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Business Week Activity (Concluded) No, not all retailers record these programs by reducing revenue and recording a liability for the future redemption of these ―dollars.‖ Other methods that the article mentions are: a Circuit City uses those redemption ―dollars‖ that have expired as a reduction of expenses b Talbots, Inc accounts for the program as part of selling expenses c Men’s Wearhouse accounts for the program as part of cost of goods sold The FASB currently has no rules as to how these programs should be accounted for, but is expected to address the issue as part of a major review it is conducting The different methods affect revenues, cost of goods sold, gross margin, selling expenses, and liabilities These items affect the gross margin ratio, the profit margin, and the current ratio Since investors and others use these measures to analyze company performance, any change in these numbers can have an impact on the analysts’ interpretations In addition, lack of consistency in methods from one company to another will reduce the analysts’ ability to compare one company to another ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 287 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision — BTN 4-8 Big Bad Toy Store Forecasted Income Statement For Year Ended January 31, 2008 Net sales ($10,000,000 x 1.09) Cost of sales** ($10,900,000 x 61%) Expenses ($2,000,000 x 1.06) Net income $10,900* 6,649 2,120 $ 2,131 * In thousands **Gross profit ratio = ($10,000,000 - $6,100,000) / $10,000,000 = 39%; therefore the ratio of cost of sales to sales = 100% - 39% = 61% The proposal yields a forecasted net income of $2,131,000 This compares favorably to the prior year’s net income of $1,900,000 Accordingly, based on these facts alone Joel should implement the proposal There are many issues that Joel should consider Among them are: First, there is the issue of the prediction itself That is, are estimates reasonable or could reality be markedly different from these estimates Second, and related to the first, there is a need to consider ―ranges‖ of possible scenarios since the future is unpredictable This would involve looking at alternative possibilities and then assessing the range of outcomes Third, there is a concern with the impact of these changes on customer attitudes For example, one concern might be with the proposed change to an FOB shipping point policy from FOB destination We need to be certain that our customers will not object to this change and look elsewhere for their merchandise In addition to issues of confidence in prediction, Joel should also consider that he may be speeding up cash collections Customers now have 15 days to earn a 1% discount By changing the terms, customers will have only 10 days to earn a 3% discount That additional discount may motivate some customers to pay sooner Currently, Joel is sending a signal to customers by having terms of n/60 that he is willing to wait 60 days for payment By changing the terms to n/30, he is sending a signal that he is now only willing to wait 30 days before payments are overdue This may motivate customers to pay sooner In sum, we must consider alternative possibilities, both good and bad, with these proposed policy changes ©McGraw-Hill Companies, 2008 288 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Hitting the Road — BTN 4-9 There is no formal solution for this field activity As the discussion facilitator, the instructor should try to develop a sense of how willing retail managers are in granting sales allowances, the range of return policies employed, and strategies managers use to stem return abuses Global Decision — BTN 4-10 (in millions) Dixon’s Revenues* ₤6,458 Best Buy $27,433 Cost of sales 5,821 20,938 7,904 Gross margin ₤ 637 $ 6,495 $ 2,568 Gross margin ratio 9.9% 23.7% 24.5% Gross Margin % Circuit City 24.5% Circuit City $10,472 Rank Best Buy 23.7% Dixon’s 9.9% Both Best Buy and Circuit City use the multiple-step format for their income statements Dixon’s income statement is somewhat different from what most U.S companies use Their revenue account is called ―turnover‖ and they not show either cost of sales or gross margin on their income statement The information about cost of sales and gross margin is found in the notes to the financial statements, specifically in note (Operating profit) Best Buy’s and Circuit City’s income statement are easier for investors to interpret, particularly for U.S investors Dixon’s gross margin information is available, but readers must more searching to find it Circuit City provides the gross margin ratio on its income statement, making it even easier for potential investors to interpret their performance ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 289 ... reported in financial statements provided to investors, creditors, and other external users ©McGraw-Hill Companies, 2008 234 Financial Accounting, 4th Edition To download more slides, ebook, solutions... business when computing net income ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 227 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... to satisfy current obligations ©McGraw-Hill Companies, 2008 228 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com