Chapter 5, P 8. (Continued)
Second, the components of gross margin and operating expenses can be ex-
When possible, an analysis would also include comparing the ratios above for
Robert’s Shop, Inc., to prior years and to other companies of similar size within
the same industry for the same period of time.
2. User Insight: Income statement discussed
amined. The gross margin is $84,300, or 51.7 percent of net sales; the operating
First, the statement shows net income of $2,435, which was earned on net sales
of $163,000. This is a profit margin of only 1.5 percent.
284
7 3,000
3,000
10 9,000
600
9,600
14 2,400
2,400
freight paid by supplier
Sales
Accounts Receivable
Chapter 5, P 9.
2011
Accounts Receivable
n/30, FOB shipping point
Sold merchandise to Ron Moore, terms
Sales
Oct.
Freight-In
Accounts Payable
Purchased merchandise from Maria’s
Company, terms n/30, FOB shipping point;
1. Transactions recorded
Purchases
285
19 1,800
1,800
20 9,600
9,600
Chapter 5, P 9. (Continued)
2011
Cash
Sales
Accounts Payable
Cash
Sold merchandise for cash
Oct.
2. User Insight: Cash rebates discussed
Cash rebates should not be recorded as revenue because doing so overstates rev-
2. Recommended changes that would improve the system
ence of the cashier. Another person, such as the manager, should remove the tape
One way of overcoming the internal control weakness over cash sales is to have
with the existing assets at reasonable intervals. The comparison of the cash regis-
from the cash register for comparison with the amount turned in to the cashier.
Chapter 5, P 10.
the salesclerk take the cash drawer to the cashier and count the cash in the pres-
ter tape with the cash in the cash drawer at the end of each day accomplishes this
Cash sales One objective of internal control is to compare the records of assets
1. Significant internal control weaknesses
1.
2.
3.
The Perpetual Inventory System
Reduce the inventory period. (Suggestions: Analyze inventory to reduce in-
ventory on hand; try to get inventory on consignment.)
Reduce the receivable period. (Suggestions: Encourage customers to use
Chapter 5, C 2.
administer. There may be some merit to the system of relying on the judgment of
petual inventory system.
Note to the instructor: This case can be used for class discussion or as a writing
exercise. It is also excellent for use with small groups, with the participants being
asked to develop arguments for either the periodic inventory system or the per-
An advantage of the periodic inventory system is that it is usually less costly to
The Periodic Inventory System
A principal advantage of the perpetual inventory system is that sales and inven-
Increase the payable period. (Suggestions: Pay suppliers at last possible time
instead of when invoice is received; negotiate longer payment times.)
288
was before. Thus, when McDonald’s prepares its financial statements in dollars,
sales in Europe translate into more dollars than previously. Assume, for instance,
Chapter 5, C 3.
A weak U.S. dollar means that one dollar may be exchanged for less than previ-
ously or, conversely, that one euro is now worth more in terms of dollars than it
ployees must be trained to follow procedures in recording sales, purchases, and
returns and in maintaining the records. This may be much more costly than hiring
and training qualified store managers. Also, the centralization of the records takes
vantage of the perpetual inventory system is the cost to install and maintain it. Em-
from stores where sales have been slow to those where sales are better. A disad-
sales trends among the stores could be monitored, allowing inventory to be shifted
little or no say in the titles or other products that are stocked.
Chapter 5, C 2. (Continued)
289
a.
Authorization: These expenditures were probably not authorized by a person
who would understand their implications.
Chapter 5, C 4.
The control activities that were likely violated in this case are as follows:
290
1.
2.
Chapter 5, C 5.
CVS’s operating cycle described
Memorandum
Date:
To:
The operating cycle is the length of time from the purchase of inventory until it
From:
Re:
Student’s Name
CVS’s Operating Cycle
Today’s Date
Instructor’s Name
Purchase of inventory: Maintaining an adequate merchandise inventory is
very important to CVS’s operating cycle. The company maintains about 45
days’ inventory on hand at any one time.
Cash sales and collection on account: Accounts receivable are not as im-
291
2009 % 2009 %
$98,729 100.0% $63,335 100.0%
78,349 79.4% 45,722 72.2%
margin than that of CVS, but has higher operating expenses that more than offset
Cost of sales
Net sales
Chapter 5, C 6.
(Dollars in millions)
These companies have very comparable operations. Walgreens has a higher gross
CVS Walgreens
292
$ 53,000 $ —
$200,000 $271,000
$32,000 shown by the physical inventory. If the actual inventory had been $57,000,
An inventory loss of $25,000 appears to have occurred in 2011. The amount is the
difference between the computed inventory level of $57,000 and the actual level of
Chapter 5, C 7.
2011
Purchases
2010
1. Cost of goods sold recomputed
Cost of goods sold
Beginning inventory
the cost of goods sold for 2011 would have been $200,000 ($257,000 in cost of
(1) assume a more active role in managing the original store, including being physi-
2.
Possible reasons for the inventory loss suggested
The inventory loss could have occurred as the result of embezzlement or theft. In-
cally present on a random schedule; (2) institute controls over cash receipts to en-
Chapter 5, C 7. (Continued)