Also, merchandising companies report both Sales of goods and Cost of Goods Sold on the income statement, while service companies on the merits and terms of any cash discount offered to c
Trang 12 Merchandising companies report Merchandise Inventory on the balance sheet, service companies do not Also, merchandising companies report both Sales (of goods) and Cost of Goods Sold on the income statement, while service companies
on the merits and terms of any cash discount offered to customers
5 For a perpetual inventory system, inventory shrinkage is determined by taking a physical count of the inventory available at the end of a period and comparing that amount with the amount recorded in the Merchandise Inventory account
6 Cash discounts are granted in return for early payment and reduce the amount paid below the negotiated price Cash discounts are recorded in the accounting records (as a reduction of Merchandise Inventory) Trade discounts are deducted from the list or catalog price to determine the purchase (negotiated) price Trade discounts are not recorded in the accounting records
7 Sales discount is a term used by a seller to describe a cash discount granted to a customer Purchase discount is a term used by a purchaser to describe a cash discount received from a seller (It is a matter of perspective: seller versus buyer.)
8 A manager is concerned about the quantity of its purchase returns because the company incurs costs in receiving, inspecting, identifying, and returning the merchandise More returns create more expenses By knowing more about returns, the manager can decide if they are a problem and how they can be minimized
Trang 210 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)
calculation of cost of goods sold is not presented for Best Buy
QUICK STUDIES
Quick Study 4-1 (10 minutes)
Mar 5 Merchandise Inventory 4,800
Returned defective units [(25/600) x $4,800]
Mar 15 Accounts Payable 4,600
Cash 4,508 Merchandise Inventory* 92
Paid for purchase less cash discount
*[(4,800 - $200) x 2%]
Trang 3Quick Study 4-2 (10 minutes)
Apr 1 Accounts Receivable 3,000
Sales 3,000
To record credit sale
1 Cost of Goods Sold 1,800
Merchandise Inventory 1,800
To record cost of credit sale
4 Sales Returns and Allowances 600
Accounts Receivable 600
To record sales return
4 Merchandise Inventory 360
Cost of Goods Sold 360
Restore cost of returned goods to inventory
S ales returns and allowances (20,000) (6,000) (5,300) (900) Net sales 124,800 526,500 32,800 250,600 Cost of goods sold (79,600) (329,700) (24,300) (126,900) Gross profit $ 45,200 $196,800 $ 8,500 $123,700
Gross margin ratio:
(Gross profit / Net sales) 36.2% 37.4% 25.9% 49.4%
Interpretation of gross margin ratio for case a: The ratio of 36.2% implies
that for each dollar in net sales the company earns 36.2 cents in gross profit The company must still deduct other expenses that it incurs in
Trang 4Quick Study 4-4 (10 minutes)
July 31 Cost of Goods Sold 1,900
To close temporary accounts with credit balances
July 31 Income Summary 165,900
Sales Discounts 4,700 Sales Returns and Allowances 6,500 Cost of Goods Sold* 106,900 Depreciation Expense 10,300 Salaries Expense 32,500 Miscellaneous Expenses 5,000
To close temporary accounts with debit
balances (*$105,000 + $1,900 —from QS 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
Trang 5acid-Quick Study 4-8 A (5 minutes)
a Perpetual inventory system
b Perpetual inventory system
c Periodic inventory system
d Perpetual inventory system
e Perpetual inventory system
Quick Study 4-9 A (10 minutes)
Purchases Returns & Allowances 200
Returned defective units [(25/600) x $4,800]
15 Accounts Payable 4,600
Cash 4,508 Purchases Discounts* 92
Paid for purchase less cash discount
* [($4,800 - $200) x 2%)]
Quick Study 4-10 A (10 minutes)
Apr 1 Accounts Receivable 3,000
Sales 3,000
To record credit sale
4 Sales Returns and Allowances 600
Trang 6*[($8,500 - $1,100) x 2%]
Paid balance (less 2%) within discount period
Trang 7*[24,000 x 3%]
Paid account payable within 3% discount period
2 SELLER – Mesa Company
Credit Sale
Accounts Receivable 24,000
Sales 24,000
Sold merchandise on account
Cost of Goods Sold 16,000
Collected account receivable
3 Amount borrowed to pay with discount $ 23,280
Annual rate of interest x 8% Interest per year $1,862.40 Interest per day ($1,862.40 / 365 days) $ 5.10 Savings from discount taken ($24,000 - $23,280) $ 720.00 Interest paid on 50-day loan (50 days x $5.10) (255.00) Net savings from borrowing to pay in discount period $ 465.00
Trang 8Sold merchandise on credit (1,500 x $14)
5 Cost of Goods Sold 15,000
Cost of Goods Sold 2,000
Returned merchandise to inventory (200 x $10)
Trang 9To record allowance for mis-colored goods and
return of mis-colored merchandise
$120 + (40 x $14)
Exercise 4-6 (25 minutes)
1 Entries for Sydney Company (BUYER):
May 11 Merchandise Inventory 40,000
Trang 10Exercise 4-6 — continued
2 Entries for Troy Corporation (SELLER):
May 11 Accounts Receivable 40,000
Sales 40,000
Sold merchandise on account
11 Cost of Goods Sold 30,000
Merchandise Inventory 30,000
To record cost of sale
13 Sales Returns and Allowances 1,400
Accounts Receivable 1,400
Accepted a return from a customer
13 Merchandise Inventory 800
Cost of Goods Sold 800
Returned goods to inventory
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
Trang 11Exercise 4-8 (30 minutes)
Note: The original missing numbers are blocked
Sales $62,000 $43,500 $46,000 $79,000 $25,600
Cost of goods sold
Merch inv (beg.) 8,000 17,050 7,500 8,000 4,560
Total cost of merch
purchases 38,000 1,950 43,750 32,000 6,600
Merch inv (end.) (11,950) (3,000) (9,000) (6,600) (4,160)
Cost of goods sold 34,050 16,000 42,250 33,400 7,000
Gross profit 27,950 27,500 3,750 45,600 18,600
Expenses 10,000 10,650 12,150 3,600 6,000
Net income (loss) $17,950 $16,850 $ (8,400) $42,000 $12,600
Explanations:
a Find merchandise inventory (ending) by subtracting cost of goods sold from goods
available for sale Find gross profit as the difference between the sales and cost of
goods sold Find net income as the gross profit less the expenses
b Find total cost of merchandise purchases by finding the number that makes the total
equal the cost of goods sold Find gross profit from sales less cost of goods sold
c Find cost of goods sold from sales less gross profit Find cost of merchandise
purchases by finding the number to make the calculation equal cost of goods sold
d Calculate cost of goods sold as usual Calculate sales as gross profit plus cost of
goods sold
e Find merchandise inventory (ending) by subtracting cost of goods sold from goods
available for sale Find gross profit from sales less cost of goods sold Find net
income as gross profit less expenses
Exercise 4-9 (30 minutes)
Merchandise Inventory Balance, Dec 31, 2007 25,000 Purchase discounts received 1,700 Invoice cost of purchases 192,500 Purchase returns and allow 4,000 Returns by customers 2,100 Cost of sales transactions 196,000 Transportation-in 2,900 Shrinkage 800
Trang 12Exercise 4-10 (25 minutes)
Adjusting entries
Dec 31 Sales Salaries Expense 1,700
Salaries Payable 1,700
To record accrued salaries
Dec 31 Selling Expenses 3,000
Prepaid Selling Expenses 3,000
To record expired prepaid selling expenses
Dec 31 Cost of Goods Sold 1,550
Dec 31 Income Summary 444,750
Sales Returns and Allowances 17,500 Sales Discounts 5,000 Cost of Goods Sold ($212,000 + $1,550) 213,550 Sales Salaries Exp ($48,000 + $1,700) 49,700 Utilities Expense 15,000 Selling Expenses ($36,000 + $3,000) 39,000 Administrative Expenses 105,000
To close temporary accounts with debit
Trang 13Exercise 4-11 (20 minutes)
The employee’s oversight in omitting these goods from the physical count would cause the cost of the physical count of ending inventory to be understated Therefore, the comparison of the perpetual inventory records with the physical count would incorrectly indicate an additional shrinkage of $3,000 An entry would be made to debit Cost of Goods Sold and credit Merchandise Inventory for this amount As a result, the company’s ending inventory, current assets, total assets, equity, and net income would all be understated by $3,000
As a result of this error:
Return on assets would be understated (numerator impact outweighs the
Case X Case Y Case Z
Current ratio computation
Current assets $5,200 $3,500 $7,300 Current liabilities $2,200 $1,200 $3,750 Current ratio 2.36 2.92 1.95
Acid-test ratio computation
Cash $ 900 $ 810 $1,000
Current receivables 0 1,090 700 Quick assets $ 900 $1,900 $2,300 Current liabilities $2,200 $1,200 $3,750 Acid-test ratio 0.41 1.58 0.61
Interpretation:
Case Y has the highest current ratio Case Y also has the highest acid-test ratio
Trang 14To record cash payment in discount period
3)
Nov 7 Cash 196
Purchases Returns and Allowances 196
To record check received for return of purchases
previously paid for with discount already taken
Trang 15Exercise 4-13 A (Continued)
3)
Nov 7 Cash 196
Merchandise Inventory 196
To record check received for return of purchases
previously paid for with discount already taken
To record sale of merchandise on credit
Nov 13 Cost of Goods Sold 800
To record return of merchandise sold on credit
Nov 16 Merchandise Inventory 150
Cost of Goods Sold 150
To record cost of merchandise returned
Trang 16Purchases Returns & Allowances 600
Returned unacceptable merchandise
17 Accounts Payable—Lyon 4,000
Purchases Discounts 80 Cash 3,920
Paid balance (less 2%) within discount period
18 Purchases 8,500
Accounts Payable—Frist 8,500
Purchased merchandise on credit
21 Accounts Payable—Frist 1,100
Purchases Returns & Allowances 1,100
Received an allowance on purchase
28 Accounts Payable—Frist 7,400
Purchases Discounts 148 Cash 7,252
Paid balance (less 2%) within discount period
Trang 17Paid account payable within 3% discount period
Trang 18Purchases Returns and Allowances 1,400
Returned unacceptable merchandise
20 Accounts Payable 38,600
Purchases Discounts 1,158 Cash 37,442
Paid balance within the 3% discount period
2 Entries for Troy Corporation (SELLER):
May 11 Accounts Receivable 40,000
Sales 40,000
Sold merchandise on account
13 Sales Returns and Allowances 1,400
Trang 19PROBLEM SET A
Problem 4-1A (40 minutes)
July 1 Merchandise Inventory 6,000
Accounts Payable—Boden 6,000
Purchased goods on credit, terms 1/15, n/30
2 Accounts Receivable—Creek 900
Sales 900
Sold goods on credit, terms 2/10, n/60
2 Cost of Goods Sold 500
Sold goods for cash
8 Cost of Goods Sold 1,300
Trang 20Problem 4-1A (Concluded)
July 16 Accounts Payable—Boden 6,000
Merchandise Inventory (1%) 60 Cash 5,940
Paid payable within discount period
19 Accounts Receivable—Art 1,200
Sales 1,200
Sold goods on credit, terms 2/15, n/60
19 Cost of Goods Sold 800
Merchandise Inventory 800
To record cost of the July 19 sale
21 Sales Returns and Allowances 200
Accounts Receivable—Art 200
Issued credit memo for allowance on
goods sold to customer
24 Accounts Payable—Leight 2,000
Merchandise Inventory * 40 Cash 1,960
Paid payable in discount period (*2% x $2,000)
Sold goods on credit
31 Cost of Goods Sold 4,800
Merchandise Inventory 4,800
To record cost of the July 31 sale.
Trang 21Problem 4-2A (40 minutes)
Aug 1 Merchandise Inventory 7,500
5 Cost of Goods Sold 4,000
Paid shipping charges on August 5 sale
10 Sales Returns and Allowances 600
Accounts Receivable—Laird 600
Customer returned merchandise
10 Merchandise Inventory 400
Cost of Goods Sold 400
Returned goods to inventory
12 Accounts Payable—Waters 700
Merchandise Inventory 700
Received a credit memorandum for August 8
purchase
Trang 22Problem 4-2A (Concluded)
Paid payable within discount period
*(1% x $4,700)
19 Accounts Receivable—Tux 4,800
Sales 4,800
Sold goods on credit, terms 1/10, n/30
19 Cost of Goods Sold 2,400
Merchandise Inventory 2,400
To record cost of the August 19 sale
22 Sales Returns and Allowances 500
Trang 23Problem 4-3A (60 minutes)
Part 1
Adjustment (a) Jan 31 Store Supplies Expense 4,050
Store Supplies 4,050
To record store supplies expense
($5,800 - $1,750)
Adjustment (b) Jan 31 Insurance Expense 1,400
Prepaid Insurance 1,400
To record expired insurance
Adjustment (c) Jan 31 Depreciation Expense—Store Equip 1,525
Accumulated Deprec.—Store Equip 1,525
To record depreciation expense
Adjustment (d) Jan 31 Cost of Goods Sold 1,600
Merchandise Inventory 1,600
To adjust inventory for shrinkage
($12,500 - $10,900)
Trang 24Problem 4-3A (Continued)
Part 2 Multiple-step income statement
NELSON COMPANY Income Statement For Year Ended January 31, 2008 Sales $111,950 Less: Sales discounts $ 2,000
Sales returns and allowances 2,200 4,200 Net sales 107,750 Cost of goods sold* 40,000 Gross profit 67,750 Expenses
Selling expenses
Depreciation expense—Store equipment 1,525
Sales salaries expense** 17,500
Rent expense—Selling space** 7,500
Store supplies expense 4,050
Advertising expense 9,800
Total selling expenses 40,375
General and administrative expenses
Insurance expense 1,400
Office salaries expense 17,500
Rent expense—Office space 7,500
Total general and administrative expenses 26,400
Total expenses 66,775 Net income $ 975
* $40,000 = $38,400 + $1,600 (shrinkage)
**Salaries and rent expenses are equally divided between selling activities
and general and administrative activities
Trang 25Problem 4-3A (Concluded)
Part 3 Single-step income statement
NELSON COMPANY Income Statement For Year Ended January 31, 2008 Net sales $107,750 Expenses
Cost of goods sold $40,000
Selling expenses 40,375*
General and administrative expense 26,400*
Total expenses 106,775 Net income $ 975 *From Part 2
Trang 26Problem 4-4A (40 minutes)
1 Net sales
Sales $225,600 Less: Sales discounts (2,250)
Sales returns and allowances (12,000) Net sales $211,350
2 Cost of Merchandise purchased
Invoice cost of merchandise purchased $ 92,000 Purchase discounts received (2,000) Purchase returns and allowances (4,500) Costs of transportation-in 4,600 Total cost of merchandise purchased $ 90,100
Trang 27Problem 4-4A (Continued)
3 Multiple-step income statement
VALLEY COMPANY Income Statement For Year Ended August 31, 2008 Sales $225,600 Less: Sales discounts $ 2,250
Sales returns and allowances 12,000 14,250 Net sales 211,350 Cost of goods sold * 74,500 Gross profit 136,850 Expenses
Selling expenses
Sales salaries expense 32,000
Rent expense—Selling space 8,000
Store supplies expense 1,500
Advertising expense 13,000
Total selling expenses 54,500 General and administrative expenses
Office salaries expense 28,500
Rent expense—Office space 3,600
Office supplies expense 400
Total general and administrative expenses 32,500 Total expenses 87,000 Net income $ 49,850
*Cost of goods sold (alternative computation):
Merchandise inventory, August 31, 2007 $ 25,400
Total cost of merchandise purchased (from part 2) 90,100
Merchandise available for sale 115,500
Merchandise inventory, August 31, 2008 41,000
Cost of goods sold $ 74,500
Trang 28Problem 4-4A (Concluded)
4 Single-step income statement
VALLEY COMPANY Income Statement For Year Ended August 31, 2008 Net sales $211,350 Expenses
Cost of goods sold $74,500
Selling expenses 54,500
General and administrative expenses 32,500
Total expenses 161,500 Net income $ 49,850
Trang 29Problem 4-5A (30 minutes)
To close temporary accounts with
debit balances
Aug 31 Income Summary 49,850
Retained Earnings 49,850
To close the Income Summary account
Aug 31 Retained Earnings 8,000
Dividends 8,000
To close the dividends account
Trang 30Problem 4-5A (Concluded)
Part 2
The first step is to determine the amount of purchases that are subject to a discount during the year:
Invoice cost of merchandise purchases $92,000
Purchase returns and allowances (4,500)
Total cost of merchandise payable $87,500
This amount is used to determine the maximum discount, which is then compared to the actual discount:
Maximum discount available (3% x $87,500) $ 2,625
Purchase discounts received (2,000)
Purchase discounts missed $ 625
As a percent of available discounts ($625/$2,625) 23.8%
This analysis suggests that nearly 24% of available discounts have been missed As a result, it would appear that cash is not being well managed Management should try to identify a better system for ensuring that all favorable discounts are taken It is possible that the discounts not taken are actually not favorable to the company—further information is required
to assess this possibility
Part 3
The first step is to compute this year’s sales returns and allowances rate:
Sales $225,600
Sales returns and allowances $ 12,000
Percent of returns and allowances to sales 5.3%
This calculation shows that the company’s customers are returning or requiring allowances on items at a higher rate than the 4% rate observed in
Trang 31Problem 4-6A B (50 minutes)
NELSON COMPANY Work Sheet For Year Ended January 31, 2008 Unadjusted
Trial Balance Adjustments
Adjusted Trial Balance
Income Statement Balance Sheet
Trang 32Sold goods on credit, terms 2/10, n/60
4 Cost of Goods Sold 5,600
Sold goods for cash
9 Cost of Goods Sold 2,000