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Brief
Exercises
B. Ex. 6.1
B. Ex. 6.2
B. Ex. 6.3 Analysis
B. Ex. 6.4
B. Ex. 6.5 Analysis
B. Ex. 6.6
B. Ex. 6.7
B. Ex. 6.8
B. Ex. 6.9
B. Ex. 6.10
B. Ex. 6.11
6.1 6-1, 6-6
6.2 6-1
6.3 6-2, 6-5, 6-8
6.4 6-3, 6-8
6.5 Evaluating performance 6-6, 6-8
6.6 6-3
6.7 6-4
6.8 6-4
6.9 6-5, 6-8
6.10 Cash discounts 6-6
6.11 Evaluating performance 6-8
6.12 6-3, 6-5
6.13 Periodic inventory system 6-4, 6-5
CHAPTER 6
MERCHANDISING ACTIVITIES
Analysis, communication
Analysis, communication
Skills
You as a student
Analysis
Learning
Exercises
Understanding inventory cost
flows
Learning
Topic
Objectives
6-6
6-8
Computation of gross profit
Special journals
6-7
Periodic inventory system - closing
process
6-2, 6-4
Analysis
Periodic inventory system -
working backwards through the
COGS section
Objectives
Comparison of inventory
systems
Analysis
Selecting an inventory system
Perpetual inventory systems
Analysis
Skills
Relationships within periodic
inventory systems
Topic
Taking a physical inventory
Periodic inventory systems
Analysis, communication
Effects of basic merchandising
transactions
Analysis, communication,
Analysis
Analysis, communication
Analysis, communication,
Analysis, communication
Analysis, communication,
Communication, judgment
Analysis, communication,
Communication, judgment
Ethics, fraud, and corporate
governance
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Accounts receivable subsidiary
ledger
Perpetual inventory system -
computation of income
Periodic inventory system -
determine cost of goods sold
6-2, 6-3, 6-8
Periodic inventory system -
inventory balance during year
6-2, 6-4, 6-8
Analysis
Sales returns and allowances
6-6
Analysis
Benefit of taking a purchase
discount
Analysis
Analysis
6-7
Analysis
6-2, 6-4, 6-8
Analysis
6-2, 6-8
6-2, 6-4, 6-8
6.14 6-8
6.15
Real World: Home Depot, Inc.Using an annual
report
6-8
Problems
Sets A, B
6.1 A,B 6-1, 6-3, 6-8
6.2 A,B
and interpretation
6.3 A,B 6-8
6.4 A,B 6-3, 6-6
6.5 A,B 6-3, 6-6
6.6 A,B 6-2, 6-3, 6-6
6.7 A,B 6-1, 6-3, 6-6
6.8 A,B 6-1–6-8
6.1 6-5
6.2 6-4, 6-8
6.3 6-3–6-5, 6-7
6.4 6-8
& corporate governance) 6-8
6.5 6-8
annual report (Internet) technology
Analysis, communication,
Accrual Accounting, Cash Flow, and Fair Value
Evaluating inventory systems
Analysis, communication
Analysis, communication
Merchandising transactions
Correcting Errors - Recording of Merchandising
Transactions
A cost-benefit analysis
Analysis, communication,
Analysis, communication,
judgment
A comprehensive problem
Manipulating income (Ethics, fraud
Communication,
Critical Thinking Cases
Real World: GAP Exploring an
Communication,
Communication,
Selecting an inventory system
Communication,
Analysis, communication
Analysis, communication,
Trend analysis
Analysis, communication
Income statement preparation
Net cost and gross price methods
Analysis, communication
6-1-6-3, 6-6, 6-
8
Learning
Analysis, communication
Skills
Analysis, communication,
judgment
Skills
Difference between income and cash flows
Exercises
Topic
Objectives
Topic
Learning
Evaluating profitability
Objectives
DESCRIPTIONS OF PROBLEMS AND
CRITICAL THINKING CASES
Problems (Sets A and B)
35 Medium
6.2 A,B 15 Easy
6.3 A,B 20 Medium
6.4 A,B
6.5 A,B 30 Strong
6.6 A,B 45 Strong
A problem that requires students to evaluate the effects of
accounting errors on various balance sheet and income statement
accounts and to prepare journal entries to correct the errors. The
problem requires the errors to be corrected both assuming that the
books remain open and assuming that the books have already been
closed.
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates
assume use of the partially filled-in working papers.
6.1 A,B
Claypool Hardware/Big Oak Lumber
Hendry's Boutique/Harry's Haberdashery
Knauss Supermarkets/Pete's Auto Parts
Introduction to both perpetual inventory systems and financial
statement analysis. After making journal entries for merchandising
transactions, students are asked to compare the company’s gross
profit rate with the industry average and draw conclusions.
Siogo Shoes and Sole Mates/Hip Pants and Sleek
Kitchen Electrics/Mary's TV
Students prepare an income statement for a small retail store using
information from an adjusted trial balance. Using this income
statement, they are asked to compute the company’s gross profit
margin, evaluate customer satisfaction, interpret the meaning of
several accounts, and identify the accounts in the store’s operating
cycle.
Illustrates performance evaluation of a merchandising company
using changes in net sales, sales per square foot of selling space, and
comparable store sales.
King Enterprises/Queen Enterprises
30 Medium
A comprehensive problem on merchandising transactions. Also asks
students to evaluate whether it is worthwhile to take advantage of a
1/10, n/30 cash discount.
A straightforward comparison of the net cost and gross invoice price
methods of recording purchases of merchandise.
Problems (continued)
6.7 A,B 30 Strong
6.8 A,B 40 Strong
Thompson Plumbing/Computer Resources
CPI/Hearthstone
A comprehensive problem addressing every learning objective in the
chapter. Closely parallels the Demonstration Problem.
A problem that requires students to calculate gross profit under an
accrual-based system and under a cash-based system, and to explain
the difference between the two computations. Also, students are
introduced to fair value accounting, and are required to prepare a
journal entry to revalue inventory (for loan evaluation purposes) to
fair value.
Critical Thinking Cases
Selecting an Inventory System
A Cost-Benefit Analysis
Group Assignment - Evaluating an Inventory System
6.4 Manipulating Income 20 Medium
Ethics, Fraud & Corporate Governance
Exploring the Annual Report of GAP, Inc.
Internet
25 Easy
Visit the home page of The Gap, Inc., and gather financial information to
evaluate sales performance.
25 Medium
35 Medium
6.3
No time estimate
Students are to visit two local businesses to gain an understanding of the
inventory systems in use. They are then asked to evaluate those systems in
terms of the information needs and resources of the businesses.
6.2
6.1
Students are asked the type of inventory system they would expect to find
in various types of business operations. Leads to an open-ended discussion
of why different types of businesses maintain different types of inventory
systems. A very practical assignment.
Using the company’s markup policy, students are asked to determine the
amount of shrinkage loss included in the cost of goods sold in a business
using a periodic inventory system. Having determined the amount of loss,
they then are asked to evaluate the economic benefit of hiring a security
guard.
Students must react to a supervisor's request to alter financial records in
order to improve the appearance of the company's financial performance.
6.5
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
3.
4.
5.
6.
General ledger accounts show the total amounts of various assets, liabilities, revenue, and
The cost of goods sold appears in the income statement of any business that sells
Green Bay Company is not necessarily more profitable than New England Company.
Inventory shrinkage refers to the decrease (shrinkage) in inventory resulting from such
The statement is correct. A perpetual inventory system requires an entry updating the
inventory records as each item of merchandise is sold. In the days of manual accounting
In a perpetual inventory system, ledger accounts for inventory and the cost of goods sold
7. a.
b.
8.
10.
11.
The financial statements would not include sales tax expense because sales taxes are not an
A balance arises in the Purchase Discounts Lost account when the company fails to take
advantage of an available cash discount and, therefore, pays more than the net cost of the
Yes; Outback should take advantage of 4/10, n/60 cash discounts even if it must borrow the
A general journal is capable of recording any type of business transaction. However,
A special journal is an accounting record or device that is designed for recording one
9.
The freight charges should not be charged to delivery expense. Delivery expense is a selling
12.
13.
15.
An inventory subsidiary ledger is maintained under a perpetual inventory system but not under a
Gross profit margin, also called gross profit rate, is gross profit expressed as a percentage of
net sales revenue. It may be computed for the company as a whole (the overall gross profit
To sellers, the “cost” of offering cash discounts is the resulting reduction in revenue. This cost
is measured by initially recording the account receivable from the customer at the full invoice
14.
Even companies that use a perpetual inventory system will generally complete a physical count
of their merchandise inventory at least once a year to compare their actual physical inventory
The balance in Home Sweet Home's inventory account at February 1st would be
$720,000, the same balance as of the beginning of the year. Under a periodic
inventory system, the inventory account balance on the balance sheet is only updated
B. Ex 6.6
Yang & Min Inc. purchased $600,000 of goods during the year. Since Yang & Min
B. Ex. 6.4
SOLUTIONS TO BRIEF EXERCISES
Office Today's gross profit is $160 million ($800 million - $640 million). Its gross
B. Ex 6.1
792,000
Inventory (beginning balance)…………… 192,000
Cost of Goods Sold…………………………………
B. Ex 6.7
The customer return was received before year end and as such needs to be recorded
in the period in which it occurred. Your cooperation with the controller's scheme to
B. Ex 6.11
Pag Inc.'s equivalent annual rate of return by always paying its bills within the
B. Ex. 6.8
Ex 6.1 a.
b.
c.
Advantages : A 5% purchase discount applies to the purchase.
Disadvantages : A large amount of cash is invested in inventory early in the season.
SOLUTIONS TO EXERCISES
Option #2 enables the band to have the least possible amount of cash invested in
Option #1 results in the band having a large amount invested in inventory early in the
Option #1
Trans-
Net - Cost of - All Other = Net Assets = Liabilities + Owners'
action Sales Goods Sold Expenses Income Equity
a. NE NE NE NE I I NE
Ex 6.3
a.
Step 1
Net sales
b.
Step 1
Merchandise inventory (beginning of the year)
c.
d.
Balance Sheet
Income Statement
Ex 6.2
The company’s low gross profit margin of 13% reflects the intense levels of price
2,460,000,000$
79,000,000$
PC Connection uses a perpetual inventory system for several reasons: (1) its inventory
a. Net sales - Cost of goods sold = Gross profit
c.
Ex. 6.5 a.
b
Both Wal-Mart and Target reported modest increases in net sales, largely consistent
with the growth rate experienced in the overall economy. Both companies
Ex. 6.4
The entry to record inventory shrinkage at the end of the year increased the Cost of
The change in net sales provides an overall measure of the effectiveness of the
company in generating revenue. A major limitation of this measure is that sales may
Ex. 6.6 a.
Ex. 6.7 a.
c.
Dec. 33,000
Inventory (Dec. 31, year 1) …………………….
$ 79,600
b.
Computation of the cost of goods sold during year 2:
Net sales …………………………………………………………………………….
d.
For the Year Ended December 31, Year 2
BOSTON BAIT SHOP
Partial Income Statement
The reason why an actual physical count is likely to indicate a smaller inventory
than does the perpetual inventory records is inventory shrinkage —the normal loss
The amounts of beginning and ending inventory were determined by taking
Year 2
31
Cost of Goods Sold ……………………………………..
2,800
Cost of Net
Net Beginning Net Ending Goods Gross Income
Sales Inventory Purchases Inventory Sold Profit
Expense
or
a. 240,000 76,000 104,000 35,200 144,800 95,200 72,000 23,200
b. 480,000 72,000 272,000 80,000 264,000 216,000 196,000 20,000
Ex. 6.9 a.
b.
Supermarket chains account for millions of fast selling items, valued in billions of
Ex. 6.8
It is not uncommon for companies in the same industry to report similar gross profit
percentages. This is especially true of large supermarket retailers. This particular
Ex. 6.10 a.
10,000
Sales …………………………………………………………….
10,000
b.
9,900
Accounts Payable (Golf World) ……………………………..
9,900
c.
9,900
Entry by Mulligans if discount not taken:
Inventory ……………………………………………………………….
Entries in the accounts of Golf World:
Accounts Receivable (Mulligans) …………………………………….
Entries in the accounts of Mulligans:
Accounts Payable (Golf World) ……………………………………….
Ex. 6.11 a.
Walgreen Boots Rite Aid
Alliance Corporation
Net sales $103.4 $26.5
Cost of goods sold $76.5 (2) $19.0
b.
Walgreens Boots Alliance is more profitable than Rite Aid in absolute terms ($26.9
billion gross profit as compared to a $7.5 billion gross profit), but Rite Aid is more
Dollar figures are stated in billions except for sales per square foot of selling space:
Ex. 6.12 a.
117,000
Sales …………………………………………………………….
117,000
b.
250,000
c. 117,000
Sales …………………………………………………………
117,000
d.
Inventory, Jan. 1 …………………………………………………
250,000$
Cost of goods sold:
Computation of inventory at January 7:
Inventory at Dec. 31 ………………………………………………
Cash ……………………………………………………………………..
To record sale of telescope to Central State University
for cash.
Cash ……………………………………………………………………..
Ex. 6.13
a.
$6,240
b.
c.
Ex. 6.14
4,800$
3,200
Mountain Mabel’s appears to be a very small business that probably has no external
reporting obligations (other than in the owners’ annual income tax return). Also,
Computation of the cost of goods sold:
Beginning inventory ………………………………………………………………
A larger business, such as a Sears store, needs to have up-to-date information as to the
cost and quantity of merchandise in inventory and also the cost of goods sold. This
Revenues (4 x $1,200)……………………………………………………..
Cost of goods sold (4 x $800)……………………………………………..
Ex. 6.15
a.
Jan. 31 Feb. 1 Feb. 2
2016 2015 2014
(1) Net sales $88,519 $83,176 $78,812
b.
Home Depot's gross profit percentage has been essentially unchanged over the past
All of the following figures are shown in million’s (except percentages):
Year Ended
