Accounting Chapter 5 Homework What is one benefit of preparing a multi-step income statement

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Critical Thinking

Tying It All Together Case 5-1

Macy’s, Inc. is a premier retailer in the United States, operating nearly 900 stores in 45 states.

Macy’s, Bloomingdale’s, and Bloomingdale’s Outlet are all brands that operate under Macy’s, Inc.

The company sells a wide range of merchandise including apparel and accessories, cosmetics, home

furnishings, and other goods. Macy’s, Inc. purchases it merchandise from many suppliers and also

develops its own private label brands.

Requirements

1. Under the new revenue recognition rules, how will Macy’s record and recognize sales revenue?

Which financial statement is sales revenue reported on?

2. Macy’s, Inc. reported cost of sales of $16,496 million for the year ending January 30, 2016.

Which financial statement is cost of sales (also known as cost of goods sold) reported on? What

does cost of sales represent? What type of account is cost of sales?

3. Assume Macy’s, Inc. purchases $100,000 of inventory from one of its vendors. The terms of the

purchase are FOB shipping point. Who pays the freight and how does the cost of the freight get

recorded? Assume Macy’s uses the perpetual inventory system.

4. On which financial statement will Macy’s report its merchandise inventory?

5. Assume Macy’s, Inc. prepares a multi-step income statement. What would the format of that

income statement look like? What is one benefit of preparing a multi-step income statement for

merchandising companies such as Macy’s, Inc.?

SOLUTION

Decision Case 5-1

Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first

year of operations, and the shareholders are generally pleased with operating results as shown by the

following income statement:

Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to

increase profits to $100,000 during 2018.

a. Hildebrand believes he should advertise more heavily. He believes additional advertising

costing $20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume

that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales

increase in 2018, Cost of Goods Sold will increase proportionately.

b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to

the existing product line. An importer can supply a minimum of 1,000 dresses for $40 each;

Party-Time can mark these dresses up 100% and sell them for $80. Hildebrand realizes he will have

to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to

sell only 80% of these dresses during the coming year.

Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to

show the expected net income under each plan.

SOLUTION

Ethical Issue 5-1

Dobbs Wholesale Antiques makes all sales under terms of FOB shipping point. The company usually

ships inventory to customers approximately one week after receiving the order. For orders received

late in December, Kathy Dobbs, the owner, decides when to ship the goods. If profits are already at

an acceptable level, Dobbs delays shipment until January. If profits for the current year are lagging

behind expectations, Dobbs ships the goods during December.

Requirements

1. Under Dobbs’s FOB policy, when should the company record a sale?

2. Do you approve or disapprove of Dobbs’s manner of deciding when to ship goods to customers

and record the sales revenue? If you approve, give your reason. If you disapprove, identify a

better way to decide when to ship goods. (There is no accounting rule against Dobbs’s practice.)

SOLUTION

Fraud Case 5-1

Rae Philippe was a warehouse manager for Atkins Oilfield Supply, a business that operated across

eight Western states. She was an old pro and had known most of the other warehouse managers for

many years. Around December each year, auditors would come to do a physical count of the

inventory at each warehouse. Recently, Rae’s brother started his own drilling company and

persuaded Rae to “loan” him 80 joints of 5-inch drill pipe to use for his first well. He promised to

have it back to Rae by December, but the well encountered problems and the pipe was still in the

ground. Rae knew the auditors were on the way, so she called her friend Andy, who ran another

Atkins warehouse. “Send me over 80 joints of 5-inch pipe tomorrow, and I’ll get them back to you

ASAP,” said Rae. When the auditors came, all the pipe on the books was accounted for, and they

filed a “no-exception” report.

Requirements

1. Is there anything the company or the auditors could do in the future to detect this kind of

fraudulent practice?

2. How would this kind of action affect the financial performance of the company?

SOLUTION

ending inventory is overstated, net income (and equity) are overstated.

Financial Case 5-1

This case uses both the income statement (consolidated statements of operations) and the balance

Requirements

1. What was the value of the company’s inventory at January 30, 2016, and January 31, 2015?

2. Review Note 12 (specifically Inventories) in the Notes to Consolidated Financial Statements.

What does Target include in the cost of inventory?

3. What was the amount of Target’s cost of goods sold (cost of sales) for the year ending January

30, 2016, and the year ending January 31, 2015?

4. What income statement format does Target use? Explain.

5. Compute Target’s gross profit percentage for the year ending January 30, 2016, and the year

ending January 31, 2015. Did the gross profit percentage improve, worsen, or hold steady?

Assuming the industry average for gross profit percentage is 35%, how does Target compare in

the industry?

SOLUTION

Requirement 1

Requirement 2