103
CHAPTER 4
ACCOUNTING FOR RETAIL OPERATIONS
CLASS DISCUSSION QUESTIONS
1. Retail businesses acquire merchandise for
resale to customers. It is the selling of mer-
chandise, instead of a service, that makes
the activities of a retail business different
from the activities of a service business.
2. Under the periodic method, the inventory
3. a. A 2% discount is allowed if paid within
10 days of date of invoice; otherwise,
the entire amount of the invoice is due
within 30 days of date of invoice.
b. Payment is due within 90 days of date of
invoice.
c. Payment is due by the end of the month
6. Since the buyer is paying for the destination
charge, the car is being purchased FOB
shipping point.
7. Sales to customers who use credit cards are
generally treated as cash sales. The credit
card invoices representing these sales are
9. The major advantages of the single-step
form of the income statement are its simplicity
and its emphasis on total revenues and total
expenses as the determinants of net income.
The major objection to the form is that such
relationships as gross profit to sales and
operating income to sales are not as readily
determinable as when the multiple-step form
104
EXERCISES
E4–1
a. $512,000 ($3,200,000 – $2,688,000)
b. 16% ($512,000 ÷ $3,200,000)
E4–2
$51,125 million ($71,879 million – $20,754 million)
E4–3
a. $7,350 {Purchase of $8,820 [$9,000 – ($9,000 × 2%)] less return of $1,470
E4–4
Offer B is lower than offer A. Details are as follows:
A B
List price …………………………………………………………… $78,000 $80,000
Less discount ……………………………………………………. (780) (1,600)
105
E4–5
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
Inventor
y
= Pa
y
able
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
Inventor
y
= Pa
y
able
(
15,680
)
*
(
15,680
)
Statement of Cash Flows Income Statement
No effect 0 No effect 0
* $15,680 = $16,000 – ($16,000 × 2%)]
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
y
(
(
106
E4–6
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
y
y
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
Cash + = Payable
(
198,000
)
(
198,000
)
Statement of Cash Flows Income Statement
Operating (198,000) No effect 0
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
y
y
(
(
d.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
Inventor
y
= Pa
y
able
17,325* 17,325
Statement of Cash Flows Income Statement
No effect 0 No effect 0
* $17,325 = $17,500 – ($17,500 × 1%)
107
E4–6, Continued
e.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
Cash = Pa
y
able
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
Rec. + Inventor
y
29,700*
(
29,700
)
Statement of Cash Flows Income Statement
No effect 0 No effect 0
* $29,700 = $30,000 – ($30,000 × 1%)
d.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
y
y
108
E4–6, Concluded
e.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts. Accts.
Cash + Rec. = Pa
y
able
12,375
(
29,700
)
(
17,325
)
Statement of Cash Flows Income Statement
Operating 12,375 No effect 0
E4–7
a. $11,682 [($12,800 – $1,000) – ($11,800 × 1%)]
b. $5,565 [($6,000 – $500) – ($5,500 × 2%) + $175]
109
E4–8
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Retained
y
g
(
)
g
(
)
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts. Retained
Rec. + Inventor
y
= Earnin
g
s
27,800
(
16,000
)
11,800
Statement of Cash Flows Income Statement
No effect 0 Sales 27,800
Cost of
g
oods sold
(
16,000
)
Gross profit 11,800
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Retained
y
g
(
g
(
)
110
E4–9
a. $15,680 [$16,000 – ($16,000 × 2%)]
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Est. Ret. Customer
E4–10
a. $7,920 [$8,000 – ($8,000 × 1%)]
b. $8,220 ($7,920 + $300)
E4–11
a. At the time of sale
b. $5,000
111
E4–12
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts. Sales Tax Retained
y
(
)
(
)
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Sales Tax
Cash = Pa
y
able
(
1,350
)
(
1,350
)
Statement of Cash Flows Income Statement
Operatin
g
(
1,350
)
No effect 0
112
E4–13
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts. Retained
Rec. + Inventor
y
= Earnin
g
s
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Accts. Cust. Refunds
Rec. = Payable
(4,900)* (4,900)
Statement of Cash Flows Income Statement
No effect 0 No effect 0
* $4,900 = $5,000 – ($5,000 × 2%)
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
113
E4–14
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
y
y
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
Inventor
y
= Pa
y
able
(
4,900
)
*
(
4,900
)
Statement of Cash Flows Income Statement
No effect 0 No effect 0
* $4,900 = $5,000 – ($5,000 × 2%)
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
y
(
)
(
)
(
)
114
E4–15
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Retained
Inventory = Earnings
E4–16
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Estimated Returns Custome
r
Retained
Inventory = Refunds Payable Earnings
July 31. 6,000 13,500* (7,500)
115
E4–17
a. Selling expense, (1), (2), (7), (8)
E4–18
a.
VIBE TRIBE INC.
Income Statement
For the Year Ended March 31, 20Y5
Sales ……………………………………………………… $ 8,925,000
Cost of goods sold ………………………………….. (5,175,000)
Gross profit …………………………………………….. $ 3,750,000
Operating expenses:
Selling expenses ………………………………… $825,000
Administrative expenses …………………….. 475,000
116
E4–19
LOMA COMPANY
Income Statement
For the Year Ended April 30, 20Y6
Revenues:
Sales …………………………………………………………………. $ 13,580,000
Rent revenue ……………………………………………………… 120,000
Total revenues………………………………………………… $ 13,700,000
Expenses:
117
E4–20
a. 1. Deducting cost of goods sold from sales yields $1,570,000 not $1,930,000.
2. Deducting the cost of goods sold from sales yields gross profit and not
operating income.
b. A correct income statement would be as follows:
CARLSBAD COMPANY
Income Statement
For the Year Ended February 28, 20Y8
Sales ………………………………………………………. $ 4,220,000
Cost of goods sold ………………………………….. (2,650,000)
Gross profit …………………………………………….. $ 1,570,000
Expenses:
118
E4–21 (Appendix 1)
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Accounts Retained
Receivable + Inventory = Earnings
g
(
)
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Retained
Cash + Receivable = Earnin
g
s
9,800
(
10,000
)
(
200
)
Statement of Cash Flows Income Statement
Operatin
g
9,800 Sales
(
200
)
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Retained
g
(
g
119
E4–22 (Appendix 1)
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Accounts Retained
r
g
(
)
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Retained
Receivable + Inventor
y
= Earnin
g
s
Mar. 8. 24,000
(
14,400
)
9,600
Statement of Cash Flows Income Statement
No effect 0 Mar. 8. Sales 24,000
Cost of
g
oods sold
(
14,400
)
Gross profit 9,600
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Retained
Cash + Receivable = Earnin
g
s
(
g
(
)
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Retained
Cash + Receivable = Earnin
g
s
Mar. 20. 23,520
(
24,000
)
(
480
)
Statement of Cash Flows Income Statement
Mar. 20. Operatin
g
23,520 Mar. 11. Sales
(
480
)
E4–23 (Appendix 1)
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Accounts Allowance fo
r
Retained
b. Sales would be reported as $9,993,000 ($10,000,000 − $7,000) on the income
statement. Accounts receivable would be reported as a current asset on the
balance sheet as follows:
Accounts receivable $850,000
Allowance for sales discounts (7,400)
Net accounts receivable $842,600
E4–24 (Appendix 1)
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Allowance for
121
PROBLEMS
P4–1
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
Inventor
y
= Pa
y
able
g
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts.
Inventor
y
= Pa
y
able
Au
g
. 9.
(
1,225
)
*
(
1,225
)
Statement of Cash Flows Income Statement
No effect 0 No effect 0
*$1,225 = $1,250 – ($1,250 × 2%)
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Accts.
122
P4–1, Concluded
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Accts.
Cash = Payable
g
g
(
)
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Accts.
Cash = Payable
Aug. 31. (12,500) (12,500)
Statement of Cash Flows Income Statement
Au
g
. 31. Operatin
g
(
12,500
)
No effect 0