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Ex 6.1 a.
b.
c.
Option #2
Option #4
Option #3
Advantages : Cash is collected immediately. Members of the band become an entire
Advantages : Control over cash receipts and inventory is maintained by the bookstore.
The bookstore is a high traffic area that caters to students, alumni, and visitors.
Advantages : A 5% purchase discount applies to the purchase.
T-shirts.
Advantages : T-shirts are ordered only when inventory levels become depleted.
SOLUTIONS TO EXERCISES
Option #2 enables the band to have the least possible amount of cash invested in
inventory at any given time throughout the basketball season. Option #3 enables the
Option #1 results in the band having an excessive amount invested in inventory early
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
e. NE I NE D D NE D
Ex 6.3
a.
Step 1
Net sales
Multiplied by the gross profit margin
b.
Step 1
Merchandise inventory (beginning of the year)
Step 2
c.
d.
Balance SheetIncome Statement
Ex 6.2
The company’s low gross profit margin of 13% reflects the intense levels of price
competition in the personal computing industry. In order to stay competitive, computer
2,150,000,000$
x 13%
77,000,000$
PC Connection uses a perpetual inventory system for several reasons: (1) its inventory
has a relatively high unit cost, (2) its sales volume is extremely high, as evidenced by its
a. Net sales - Cost of goods sold = Gross profit
b. Beginning inventory + Purchases - Cost of goods sold = Ending Inventory
$ 6,450,000 $ 9,500,000 $ 4,950,000
c.
Ex. 6.5 a.
Ex. 6.4
$11,000,000 (from part a)
The entry to record inventory shrinkage at the end of the year increased the Cost of
Goods Sold account and reduced its Merchandise Inventory account by $10,000.
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
have changed largely because of the opening of new stores or the closing of
unprofitable ones. Thus, an increase in net sales is not always “good,” and a decrease
is not alwa
y
s “bad.”
Users of financial statements often compute changes in gross profit rates from one
Ex. 6.6 a.
b. 4,000
c.
Ex. 6.7 a.
$ 2,800
c. Dec. 33,000
Inventory (Dec. 31, year 1) ……………
3,000
Cost of Goods Sold ……………………
…
$ 79,600
b. Computation of the cost of goods sold during year 2:
Inventory (December 31, year 1) ……………………………………………
…
To remove from the Cost of Goods Sold
account the cost of merchandise still on hand
at year-end.
Inventory (Dec. 31, year 2) ……………………
…
y
ear.
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
To reduce inventory to the quantities reflected in the year-end physical count.
Both portions of the preceding entry should be posted to the general ledger. In
The amounts of beginning and ending inventory were determined by taking
complete physical inventories at (or near) the ends of year 1 and year 2. “Taking a
Cost of Goods Sold ……………………………………………
…
31 3,000
Year 231 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
Ex. 6.9 a.
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
Entries in the accounts of Golf World:
Accounts Receivable (Mulligans) …………………………
…
Sold merchandise on account to Mulligans.
Ex. 6.11 a.
Walgreen Rite Aid
Company Corporation
Net sales $71.6 $26.1
Cost of goods sold $51.3 (2) $19.3
Gross profit $20.3 (1) $6.8 (4)
Dollar figures are stated in billions except for sales per square foot of selling space:
(2) $71.6 - $20.3 = $51.3
space
Computations:
(1) $71.6 * .284 = $20.3
Ex. 6.12 a. 117,000
Sales ………………………………………………
…
117,000
Accounts Pa
y
able
(
Lunar O
p
tics
)
………………
…
50,000
b. 250,000 (90,000) 50,000
Computation of inventory at January 7:
Inventory at Dec. 31 ……………………………………
…
Cash ………………………………………………………
…
To record purchase of merchandise on account from
Lunar Optics, net 30 days.
Deduct: Cost of goods sold ……………………………
…
Ex. 6.13
a. $6,240
74,400
b.
c.
Ex. 6.14 4,800$
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,
“management” seems to consist of the owners, who may be in the store every day and
Computation of the cost of goods sold:
Beginning inventory ………………………………………………………
Add: Purchases ……………………………………………………………
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
information is used in quarterly reports to stockholders, reports to corporate
management, and monthly reports measuring the profitability of the individual sales
Revenues (4 x $1,200)……………………………………………………..
Cost of goods sold (4 x $800)……………………………………………..
Also, a store such as Sears uses point-of-sale terminals to simplify the processing of
sales transactions. These terminals permit the maintenance of perpetual inventory
records at very little cost and with no special effort required of accounting personnel.
Education.
Ex. 6.15 a.
Feb. 3 Jan. 29 Jan. 30
2013 2012 2011
b.
Home Depot's gross profit percentage has been essentially unchanged over the past
three years. Although management wants to improve the gross margin, Home
Depot faces a serious competitor in Lowe's, likely constraining its ability to raise
All of the following figures are shown in million’s (except percentages):
Year Ended
35 Minutes, Medium
Nov. 5 13,390
Sales 13,390
5 9,105
Inventor
y
9,105
SOLUTIONS TO PROBLEMS SET
A
PROBLEM 6.1
A
a.
(1)
General Journal
CLAYPOOL HARDWAR
E
Accounts receivable (Bemidji Construction)
Sold merchandise on account.
Cost of Good Sold
To record the cost of goods sold relating to the
sales of merchandise to Bemidji Construction.
