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4-12
Demonstration Problem 4-3 Solution
Lisa’s Dress Supply
Schedule of Cost of Goods Sold
Beginning inventory
$ 0
Purchases
54,000
Purchase returns and allowances
(4,000)
Purchase discounts
(1,000)
Transportation-in
1,000
Cost of goods available for sale
$50,000
Ending inventory
(10,800)
Cost of goods sold
$39,200
The financial statements are the same as those prepared for Demonstration Problem 4-
2. The periodic inventory method is an alternative accounting approach that produces
the same end result.
4-13
Demonstration Problem 4-1 Workpaper
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Inven.
=
Liab.
+
Com. Stk.
+
Ret. Earn.
Beg. bal.
0
+
0
=
0
+
0
+
0
0
–
0
=
0
0
1
+
=
+
+
–
=
2
+
=
+
+
–
=
3(a)
+
=
+
+
–
=
3(b)
+
=
+
+
–
=
4
+
=
+
+
–
=
Totals
4,500
+
1,000
=
0
+
5,000
+
500
6,000
–
5,500
=
500
4,500 NC
Jefferson Hardware Store
Financial Statements
Income Statement
For the Year Ended December 31,
2015
Sales
$
Cost of goods sold (product cost)
Gross margin
Operating expenses (period cost)
Net income
$ 500
Balance Sheet as of December 31
Assets
Cash
$
Inventory
Total assets
$ 5,500
Stockholders’ equity
Common stock
$
Retained earnings
Total stockholders’ equity
$ 5,500
4-14
Demonstration Problem 4-2 Workpaper
The embedded spreadsheet associated with Problem 4-2 solution should
be used as the workpaper. The amounts in each of the columns associat-
ed with events 1 – 10 should be deleted so that the students can fill these
amounts in as they work the problem. Leaving the ending balances in
each column will help the students know when they have completed the
workpaper correctly.
4-15
Demonstration Problem 4-2 Workpaper - Financial Statements
Lisa’s Dress Supply
Financial Statements
Income Statement
For the Year Ended December 31,
2015
Net sales
$
Cost of goods sold (product cost)
Gross margin
24,300
Transportation-out (period cost)
Other operating expenses (period cost)
Net income
$ 13,500
Balance Sheet at December 31
Assets
Cash
$
Accounts receivable
Inventory
Total assets
$73,500
Stockholders’ equity
Common stock
$
Retained earnings
Total stockholders’ equity
$73,500
Statement of Cash Flows
Net cash flow from operating activities
$( )
Net cash flow from investing activities
Net cash flow from financing activities
Net change in cash
48,700
Beginning cash balance
Ending cash balance
$
4-16
Demonstration Problem 4-3 Workpaper
Date
Account Titles
Debit
Credit
Event No.
1
Cash
60,000
Common Stock
60,000
Event No.
2
Event No.
3
Event No.
4
Event No.
5a
Event No.
5b
Event No.
6
Event No.
7
Event No.
8
Event No.
9a
Event No.
9b
Event No.
10
Adjusting
Closing
4-17
Demonstration Problem 4-3 Workpaper
Lisa’s Dress Supply
Schedule of Cost of Goods Sold
Beginning inventory
$ 0
Purchases
Purchase returns and allowances
Purchase discounts
Transportation-in
Cost of goods available for sale
$ 50,000
Ending inventory
Cost of goods sold
$ 39,200
The financial statements are the same as those prepared for Demonstration Problem 4-
2. The periodic inventory method is an alternative accounting approach that produces
the same end result.
4-18
Quiz Questions for Chapter 4
1. Under the perpetual inventory method,
a. assets increase when inventory is purchased on account.
b. ignoring the effects of revenue recognition, assets decrease when inventory is sold.
c. ignoring the effects of revenue recognition, equity increases when inventory is sold.
d. a and b.
2. Gomez Co. purchased $5,000 of inventory on account with payment terms of 2/10, n/30. The goods were
delivered FOB shipping point. Gomez paid freight costs of $200 in cash. Gomez paid for the goods within
the discount period. Assuming a beginning inventory balance of zero, what would be the balance in the in-
ventory account after the purchase and payment for inventory were recorded? Gomez Co. keeps perpetual
inventory records and uses the gross method of accounting for inventory purchases.
a. $4,900.
b. $5,300.
c. $5,100.
d. $4,700.
3. X Co. purchased $2,000 of inventory on account. This inventory was sold for $3,000 cash. The amount of
gross margin reported on the income statement and the amount of net cash inflow from operating activities
reported on the statement of cash flows would be
a. $1,000 / $3,000.
b. $3,000 / $1,000.
c. $1,000 / $-0-.
d. $-0- / $1,000.
4. Rice Co. sold for $12,000 inventory that had cost $8,000. Freight terms for the sale were FOB destination
and payment terms were 1/10, n/30. Rice records sales transactions at the gross amount. Rice paid freight
costs of $400 in cash. The receivable was collected within the discount period. Based on this information
alone, the amount of gross margin would be
a. $3,480.
b. $3,880.
c. $3,600.
d. $4,000.
5. XYZ Co. purchased $5,000 of inventory on account. Assuming that XYZ Co. uses the perpetual inventory
method, which of the following entries would it make to record this transaction?
a. Debit purchases / credit accounts payable
b. Debit accounts payable / credit purchases
c. Debit accounts payable / credit inventory
d. Debit inventory / credit accounts payable
6. High Ridge Merchandising Co. sold for $12,000 cash inventory that had cost $10,000. Assuming High
Ridge uses the perpetual inventory method, the entries to record this transaction would
a. decrease equity by $10,000.
b. increase assets by $2,000.
c. increase net income by $12,000.
d. increases expenses by $2,000.
4-19
The following information pertains to the next two questions. Ace Co. purchased inventory that cost
$10,000 under terms 2/10, n/30. The inventory was delivered under terms FOB destination. Freight costs of
$500 were paid in cash. Ace paid for the inventory within ten days. Ace sold the goods on account for
$13,000, freight terms FOB destination. Freight costs of $320 were paid in cash.
7. Ace would report net income on its income statement of
a. $2,880.
b. $2,700.
c. $2,380.
d. $3,200.
8. Ace would report net cash inflow from operating activities on its statement of cash flows of
a. $(9,800).
b. $(10,120).
c. $2,880.
d. $3,200.
9. Identify the true statement.
a. Transportation-out is a product cost.
b. Sales allowances increase net income.
c. FOB shipping point designates the seller as the party responsible for freight costs.
d. Purchase discounts decrease book value of inventory under the perpetual inventory method.
10. Which of the following is not a period cost?
a. Advertising cost.
b. Goods purchased for resale.
c. Salary of the company president.
d. Interest paid on a company note.
11. Which of the following statements is true?
a. The product costs associated with inventory are expensed when the inventory is purchased.
b. Administrative salaries are product costs.
c. Product costs are initially recorded as assets.
d. All period costs are expensed in the period they are paid for in cash.
12. Rowen Company paid $500 cash for freight costs to have merchandise inventory delivered to its customers.
Which of the following illustrates how this event affects Rowen’s financial statements?
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
a.
–
NA
–
NA
+
–
– OA
b.
–
NA
–
NA
+
–
– FA
c.
+
NA
+
NA
NA
NA
– OA
d.
+
+
NA
NA
NA
NA
+ FA
4-20
13. Swann Company experienced an accounting event that affected its financial statements as indicated below:
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
+ –
NA
NA
NA
NA
NA
– OA
Assuming Swann uses the perpetual inventory method, which of the following events could have caused
these effects?
a. Purchased inventory on account.
b. Wrote down inventory to recognize a market value that was below cost.
c. Paid transportation-in costs.
d. Recognized a sale.
14. Lemon Company experienced an accounting event that is recorded in the following T-accounts:
Inventory
Accounts Payable
2,000
2,000
Which of the following illustrates how this event affects Lemon’s financial statements? (Assume the perpetual in-
ventory method.)
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
a.
+
+
NA
NA
+
–
NA
b.
+
+
NA
NA
NA
NA
– OA
c.
+
+
NA
NA
NA
NA
+ OA
d.
+
+
NA
NA
NA
NA
NA
4-21
Quiz Answers
Question
Answer
1
D
2
C
3
A
4
B
5
D
6
B
7
A
8
B
9
D
10
B
11
C
12
A
13
C
14
D
4-22
Summary Outline of a Lesson Plan for Chapter 4
I. Define merchandise inventory. Distinguish product from period costs.
II. Introduce the multistep income statement, contrasting it with a service company
income statement.
III. Using Demonstration Problem 4-1 and the perpetual inventory method, illus-
trate how product versus period costs affect financial statements differently.
IV. Use Demonstration Problem 4-2 as a platform for your classroom discussion of ac-
counting for returns and allowances, cash discounts (gross method), and freight terms
using the perpetual inventory method.
V. Use Event 5 of Demonstration Problem 4-2 to show the cost of paying for pur-
chases after the discount period has expired.
VI. Use Demonstration Problem 4-3 if you plan to include the periodic inventory
method covered in the appendix. Whether a company uses the perpetual or the pe-
riodic inventory method the resulting financial statements will be the same. Students
should understand the two methods represent alternative approaches to the same end.
VII. Use a horizontal financial statements model and the final balances in Demon-
stration Problem 4-2 to demonstrate how lost, damaged, or stolen merchandise
affects financial statements.
VIII. Enrichment. Select an enrichment exercise that reinforces your personal objectives.
