17 500
500
18 100
100
18 60
60
2. User Insight: Net sales discussed
Net sales reflects gross sales adjusted for any sales discounts, sales returns, or
Chapter 5, P 2. (Continued)
July Cash
Cost of Goods Sold
To transfer cost of merchandise returned to
2011
Sales
Sold merchandise for cash
Merchandise Inventory
Accepted return of merchandise for full credit
from Tina Lands
Accounts Receivable
Sales Returns and Allowances
$ 95,474
5,039
100,513
10,100
232
900
$ 64,007
96,569
$ 11,970
2,500
$ 9,470
Advertising expense
Net income
Income taxes
Net purchases
Chapter 5, P 3.
1. Income statement prepared
Total operating expenses
Income before income taxes
Depreciation expense—store equipment
Store supplies expense
Total selling expenses
Hill Sporting Equipment, Inc.
Income Statement
Net sales
For the Year Ended September 30, 2011
Freight-in
Net cost of purchases
Chapter 5, P 3. (Continued)
First, the statement shows the net income of Hill Sporting Equipment, Inc. The
Second, the components of gross margin and operating expenses can be exam-
2. User Insight: Income statement discussed
shop earned $9,470 on net sales of $211,331. This is a profit margin of 4.5 percent.
(1) as a whole, (2) in components, and (3) in relation to other information.
1 1,050
1,050
1,800
12 300
18 100
100
1. Transactions recorded
Accounts Receivable
credit from Tina Lands
Accepted return of merchandise for full
Sales Returns and Allowances
Purchased merchandise from Arbor Supply
Accounts Payable
Accounts Payable
Chapter 5, P 4.
Accounts Receivable
Sold merchandise to Tina Lands, terms
Sales
July
2011
Company, terms n/30, FOB shipping point;
freight paid by supplier
275
24 1,600
1,600
$1,050 – $100 = $950
2011
Cash
Accounts Payable
July
Chapter 5, P 4. (Continued)
Net sales reflects gross sales adjusted for any sales discounts, sales returns, or
2. User Insight: Net sales discussed
1.
clerk authorizes purchases of supplies based on purchase requisitions received
supplies storeroom. This new and essential control procedure protects the sup-
plies from waste and theft and means that the supplies clerk can be held account-
able for the inventory of supplies.
Physical controls Physical controls are established through the designation of a
tem. First, the supplies clerk is routinely authorized to release a predetermined
amount of supplies to each supervisor based on the job. Second, the purchasing
Recording transactions There is no major difference between the old and new
systems regarding the recording of transactions. In both cases, the accounting
department records the purchase of supplies. Additional inventory records are
Documents and records Several new documents and records were established
by the new system. Requisitions by supervisors, purchase requisitions by the
using too many supplies or stealing them.
Chapter 5, P 5.
maintained, however, as explained in the next section.
Authorization Two major points of authorization have been put into the new sys-
1. Control activities identified
2. User Insight: New control activities explained
d
277
Chapter 5, P 5. (Continued)
tem. Many employees have new duties with more rigorous procedures to follow
and more forms to complete than before. The case does not specify what steps,
if any, were taken to train the employees in the new procedures and to motivate
Sound personnel practices This is an area of apparent weakness in the new sys-
it against the records maintained by the accounting department. This is a major
improvement over the old system because employees are motivated not to waste
Separation of duties The new system represents a good example of the sepa-
ration of duties. The supervisors and the supplies clerk, who have access to
or steal the supplies and because losses can be uncovered quickly.
278
36,400
3,328
3,600
$260,028
372,276
$ 10,522
5,000
$ 5,522
Chapter 5, P 6.
Joseph’s Video Store, Inc.
For the Year Ended June 30, 2011
Net sales
1. Income statement prepared
Store supplies expense
Total selling expenses
Income taxes
Net income
Total operating expenses
Depreciation expense—store equipment
Income before income taxes
Advertising expense
Income Statement
279
Chapter 5, P 6. (Continued)
2. User Insight: Income statement discussed
and (3) in relation to other information.
First, overall, the statement shows net income of $5,522, which was earned on net
Second, the components of gross margin and operating expenses can be exam-
sales of $845,324. This is a profit margin of only 0.7 percent.
7 3,000
3,000
9 254
254
10 9,000
1,440
14 600
600
1. Transactions recorded
Freight-In
Accounts Payable
Chapter 5, P 7.
Oct.
2011
Accounts Receivable
Sold merchandise to Ron Moore, terms
Sales
Paid shipping charges to Warta Company
for October 8 purchase
Cash
Merchandise Inventory
Merchandise Inventory
Cost of Goods Sold account
Merchandise Inventory
To transfer cost of merchandise sold to
19 1,800
1,800
19 1,080
1,080
$6,000 – $600 = $5,400
24 200
200
24 120
Cash rebates should not be recorded as revenue because doing so overstates rev-
Accepted return from Kate Lang
To transfer cost of merchandise sold to
Sold merchandise for cash
Cash
Sales
Merchandise Inventory
2. User Insight: Cash rebates discussed
Chapter 5, P 7. (Continued)
2011
Sales Returns and Allowances
Accounts Receivable
Oct. Cash
Cost of Goods Sold
Merchandise Inventory
282
2,300
69,900
$108,100
1,050
$ 60,855
$12,875
$ 3,435
1,000
$ 2,435
Robert’s Shop, Inc.
Income statement prepared
Net sales
Income before income taxes
Depreciation expense—store equipment
Income Statement
Chapter 5, P 8.
1.
For the Year Ended March 31, 2011
Freight-in
Net cost of purchases
Cost of goods available for sale
Office salaries expense
General and administrative expenses
Total selling expenses
Net income
Income taxes