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18 400
18 240
24 6,400
25 3,800
2.
Net sales reflects gross sales adjusted for any sales discounts, sales returns, or allow-
P9. Merchandising Transactions: Perpetual Inventory System (Concluded)
Cash
to Merchandise Inventory account
Received check from Lina Lopez
July
Made payment on account to Ruff Company
To transfer cost of merchandise returned
Sales Returns and Allowances
credit from Lina Lopez
Accepted return of merchandise for full
Merchandise Inventory
Accounts Payable
2014
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
1 4,200
3 7,600
5 580
15 2,400
17 2,000
18 400
24 6,400
25 3,800
2. Cash rebates should not be recorded as revenue because doing so overstates revenues.
Made payment on account to Ruff Company
Received check from Lina Lopez
Cash
Sales Returns and Allowances
Accounts Payable
from Lina Lopez
Accepted return of merchandise for full credit
Sold merchandise to Peter Watts, terms n/30,
Accounts Receivable
Returned some of merchandise purchased
P10. Merchandising Transactions: Periodic Inventory System
FOB shipping point
from Ruff Company
FOB shipping point
Sold merchandise to Lina Lopez, terms n/30,
Purchases
2014
Accounts Receivable
July
Freight-In
terms n/30, FOB shipping point
Purchased merchandise from Ruff Company,
Sold merchandise for cash
Cash
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
$165,000
$32,625
$12,875
P11. Merchandising Income Statement: Periodic Inventory System
Office salaries expense
General and administrative expenses:
Income Statement
For the Year Ended September 30, 2014
Store salaries expense
Selling expenses:
Operating expenses:
Sales
Net sales:
Will’s Sports Equipment
6-31
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
2.
P11. Merchandising Income Statement: Periodic Inventory System (Concluded)
First, the statement shows net income of $3,435, which was earned on net sales of
$163,000. This is a profit margin of only 2.1 percent.
The gross margin is $84,300, or 51.7 percent of net sales; the operating expenses are
An analyst would want to examine the balance sheet in relation to the income
statement.
for Will’s Sports Equipment to prior years and to other companies of similar size,
within the same industry, and covering the same period of time.
(1) as a whole, (2) in components, and (3) in relation to other information.
This question is meant to get the students thinking about how to analyze financial
Third, the net income, $3,435, can be compared with the total assets of the business
Second, the components of gross margin and operating expenses can be examined.
Fourth, when possible, an analysis would also include comparing the ratios above
to compute return on assets and with total owner's equity to compute return on equity.
gross margin and/or by decreasing the operating expenses.
$80,865, or 49.6 percent of net sales. Net income can be improved by increasing the
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
7 12,000
8 24,000
9 1,016
14 9,600
14 2,400
17 12,000
19 7,200
20 38,400
21 21,600
24 800
Accepted return from David Johnson
Sales Returns and Allowances
Accounts Payable
Made payment on account to Surf Company for
purchase of October 8, net of return on October 14
P12. Merchandising Transactions: Periodic Inventory System
Made payment on account to Tata Company
Received check from Mel Forde
for purchase of October 10
Accounts Payable
Sold merchandise for cash
Cash
Returned damaged merchandise to Surf
Company for credit
Sold merchandise to David Johnson, terms
Accounts Payable
n/30, FOB shipping point
Accounts Receivable
Purchased merchandise from Tata Company,
Accounts Receivable
FOB shipping point
Oct.
Sold merchandise to Mel Forde, terms n/30,
Company, terms n/30, FOB shipping point
2014
Freight-In
Purchases
Purchased merchandise from Surf
terms n/30, FOB shipping point; Tata Company
paid freight costs
Cash
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
inventory system like the one proposed for Books Unlimited. Sales are monitored at the
Note to Instructor: Many specialty store chains, including bookstores, use a perpetual
can be monitored on a day-by-day basis. Fast-selling books can be reordered quickly,
and slow-selling books can be moved to other stores or returned to the publisher before
Centralization of the records would mean that sales trends among the stores could be
national or regional level, and individual store managers have little or no say in the titles
or other products that are stocked.
ing sales, purchases, and returns and in maintaining the records. This may be much more
of the periodic inventory system is that financial statements are prepared only when a
physical inventory is taken, in this case every six months.
The Perpetual Inventory System
A principal advantage of the perpetual inventory system is that sales and inventory levels
ister. There may be some merit to the system of relying on the judgment of the store man-
The Periodic Inventory System
An advantage of the periodic inventory system is that it is usually less costly to admin-
is also excellent for use with small groups, with the participants being asked to develop
arguments for either the periodic inventory system or the perpetual inventory system.
C1. Conceptual Understanding: Periodic versus Perpetual Inventory Systems
Note to Instructor: This case can be used for class discussion or as a writing exercise. It
Cases
monitored, allowing inventory to be shifted from stores where sales have been slow to
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1.
3.
C2. Conceptual Understanding: Effects of a Weak Dollar
A weak U.S. dollar means that one dollar may be exchanged for fewer euros or, con-
versely, that one euro is now worth more in terms of dollars. Thus, when McDonald's pre-
pares its financial statements in dollars, sales in Europe translate into more dollars than
previously. Assume, for instance, that the company sold €12,000,000 worth of Big Macs in
Europe in each of two years. Also assume that in the first year one euro is worth $1.06
cash flow management in one or all of the following ways:
Reduce the inventory period. (Suggestions: Analyze inventory to reduce inventory
ceivables. For Amazing, it is 140 days (160 days minus 20 days). Amazing can improve its
Increase the payable period. (Suggestions: Pay suppliers at last possible time instead
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
2.
Cash sales and collection on account: Accounts receivable are not as important to
C4. Annual Report Case: The Operating Cycle and Financing Period
Memorandum
Date: Today's Date
To: Instructor's Name
From: Student's Name
Re: CVS's Operating Cycle
The operating cycle is the length of time from the purchase of inventory until it is sold and
Purchase of inventory: Maintaining an adequate merchandise inventory is very impor-
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$ 53,000 $ —
$200,000 $271,000
15,000 20,000
2.
1.
2013
Beginning inventory
Purchases
C6. Decision Analysis: Analysis of a Merchandising Income Statement
2014
The inventory loss could have occurred as the result of embezzlement or theft. In-
ventory may have been stolen, either by shoplifters or by the manager or by either
of the two sales clerks. The manager may have failed to record sales of inventory
Less purchases allowances
C7. Continuing Case: Annual Report Project
students.
Note to Instructor: Answers will vary depending on the company selected by the
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