Ex 6.

2 Income Statement Balance Sheet

Trans- Net - Cost of - All Other = Net Assets = Liabilities + Owners'
action Sales Goods Sold Expenses Income Equity

a. NE NE NE NE I I NE
b. I NE NE I I NE I
c. NE I NE D D NE D
d. NE NE NE NE NE NE NE
e. NE I NE D D NE D

Ex 6.3
a.
Step 1
Net sales $ 2,460,000,000
Multiplied by the gross profit margin x 13%
Equals gross profit $ 319,800,000
Step 2
Net sales $ 2,460,000,000
Less: cost of goods sold ?
Equals gross profit (see Step 1) $ 319,800,000

Step 3
###
Cost of goods sold ($2.46 $ 2,140,200,000

b.
Step 1
Merchandise inventory (beginning of the year) $ 79,000,000
Add: Purchases ?
Less: Merchandise inventory (end of the year) 91,000,000
Equals cost of goods sold (see part a) $ 2,140,200,000

Step 2
Purchases ($2,140.2 million + $91 million - $79 million) $ 2,152,200,000

c. The company’s low gross profit margin of 13% reflects the intense levels of price
competition in the personal computing industry. In order to stay competitive,
computer retailers like PC Connection have significantly reduced selling prices to their
customers. With gross profit being only thirteen cents of every sales dollar, it is
essential that these retailers control other expenses (such advertising expense, wages
expense, and insurance expense) in order to remain profitable.

d. PC Connection uses a perpetual inventory system for several reasons: (1) its inventory
has a relatively high unit cost, (2) its sales volume is extremely high, as evidenced by its
$2.46 billion in net sales, (3) immediate information about the availability of specific
products is required when customers contact the company to place orders, and (4) the
benefits derived from using a perpetual system outweigh the cost of implementing and
maintaining it.

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Ex. 6.4
a. Net sales - Cost of goods sold = Gross profit
$ 31,200,000 ? $ 18,000,000

Cost of goods sold = $13,200,000

b. Beginning inventory + Purchases - Cost of goods sold = Ending Inventory

$ 7,740,000 $ 11,400,000 $13,200,000 (from part a) $ 5,940,000

c. The entry to record inventory shrinkage at the end of the year increased the Cost of
Goods Sold account and reduced its Merchandise Inventory account by $12,000.
Thus, immediately prior to recording inventory shrinkage, the Cost of Goods Sold
account had a debit balance of $13,188,000 ($13,200,000 computed in part a minus
$12,000), whereas the Merchandise Inventory account had a debit balance of
$5,952,000 ($5,940,000 computed in part b plus $12,000).

Ex. 6.5 a. The change in net sales provides an overall measure of the effectiveness of the
company in generating revenue. A major limitation of this measure is that sales may
have changed largely because of the opening of new stores or the closing of
unprofitable ones. Thus, an increase in net sales is not always “good,” and a decrease
is not always “bad.”

Users of financial statements often compute changes in gross profit rates from one
period to the next. Increasing margins often mean that a company’s net sales growth
is outpacing its growth in the cost of goods sold. This often is the result of successful
marketing strategies. A declining gross profit rate, on the other hand, may indicate
weakening customer demand or intensified price competition.

Percentage changes in comparable store sales represent the increase or

decrease in net sales of the same stores from one period to the next. By factoring out
the effects of opening new stores (and/or closing existing stores), this statistic provides
a better measure of marketing strategy effectiveness and revenue growth.

b. Both Wal-Mart and Target reported modest increases in net sales, largely consistent
with the growth rate experienced in the overall economy. Both companies
experienced a smaller increase in comparable store net sales, so part of the increase in
net sales reported by both Wal-Mart and Target was due to both companies opening
new stores. The increase in comparable store net sales was almost three times as
large for Target as for Wal-Mart. Wal-Mart's gross profit increased at the same rate
as net sales, whereas Target's gross profit grew more slowly than net sales suggesting
that costs increased at a faster pace than selling price or that less profitable goods
became a larger percentage of Target's overall sales.

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Ex. 6.8 Cost of Net
Net Beginning Net Ending Goods Gross Income
Sales Inventory Purchases Inventory Sold Profit Expense or
a. 240,000 76,000 104,000 35,200 144,800 95,200 s
72,000 (Loss)
23,200
b. 480,000 72,000 272,000 80,000 264,000 216,000 196,000 20,000
c. 630,000 207,000 400,500 166,500 441,000 189,000 148,500 40,500
d. 810,000 261,000 450,000 135,000 576,000 234,000 270,000 (36,000)
e. 531,000 156,000 393,000 153,000 396,000 135,000 150,000 (15,000)

Ex. 6.9 a. It is not uncommon for companies in the same industry to report similar gross profit
percentages. This is especially true of large supermarket retailers. This particular
industry is extremely competitive with respect to pricing strategies. Furthermore,
each retailer sells identical items of inventory acquired from the same manufacturers
at competitive purchase prices (e.g., Green Giant Foods, General Mills, Procter &
Gamble, etc.).

b. Supermarket chains account for millions of fast selling items, valued in billions of
dollars, that are stocked at thousands of geographically disbursed locations.
Advances in technology have made it possible for even these retailers to account for
their inventories using perpetual inventory systems. Specific examples of these
technologies include point-of-sale terminals (scanners), computerized distribution
centers, and integrated computer networking with major suppliers.

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Ex. 6.10 a. Entries in the accounts of Golf World:
Accounts Receivable (Mulligans) ………………………… 10,000
Sales …………………………………………………… 10,000
Sold merchandise on account to Mulligans.

Cost of Goods Sold …………………………………………… 6,500

Inventory ……………………………………………… 6,500
To recognize cost of goods sold relating to sale to
Mulligans.

Cash …………………………………………………………… 9,900

Sales Discounts …………………………………………… 100
Accounts Receivable (Mulligans) …………………… 10,000
To record collection of account receivable from
Mulligans, less 1% cash discount.

b. Entries in the accounts of Mulligans:

Inventory ……………………………………………………… 9,900
Accounts Payable (Golf World) …………………… 9,900
Purchased merchandise from Golf World (net cost,
$10,000 ´ 99% = $9,900).

Accounts Payable (Golf World) ………………………… 9,900

Cash ……………………………………………………… 9,900
Paid account payable to Golf World within the discount
period.

c. Entry by Mulligans if discount not taken:

Accounts Payable (Golf World) ………………………… 9,900
Purchase Discounts Lost …………………………………… 100
Cash …………………………………………………… 10,000
To record payment of account payable to Golf World and
loss of purchase discount due to failure to pay within
discount period.

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Ex. 6.12 a.
Cash …………………………………………………………… 117,000
Sales ………………………………………………… 117,000
To record sale of telescope to Central State University
for cash.

Cost of Goods Sold ……………………………………… 90,000

Inventory …………………………………………… 90,000
To record cost of telescope sold to Central State
University.

Inventory …………………………………………………… 50,000

Accounts Payable (Lunar Optics) ………… 50,000
To record purchase of merchandise on account from
Lunar Optics, net 30 days.

b. Computation of inventory at January 7:

Inventory at Dec. 31 ………………………………… 250,000
Deduct: Cost of goods sold …………………………… (90,000)
Add: Cost of merchandise purchased …………… 50,000
Inventory at Jan. 7 ……………………………………… 210,000

c. Cash …………………………………………………………… 117,000

Sales ………………………………………………… 117,000
To record sale of telescope to Central State University
for cash.

Purchases ………………………………………………… 50,000

Accounts Payable (Lunar Optics) …………… 50,000
To record purchase of merchandise on account from
Lunar Optics. Terms, net 30 days.

d. Cost of goods sold:

Inventory, Jan. 1 ……………………………………… $ 250,000
Purchases ………………………………………………… 50,000
Cost of goods available for sale …………………… $ 300,000
Less: Inventory, Jan. 7 (per part b) ……………………………… 210,000
Cost of goods sold ……………………………………… $ 90,000

e. The company would probably use a perpetual inventory system because it sells
merchandise with a high unit cost and has a relatively small number of sales
transactions.

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Ex. 6.13
a. Computation of the cost of goods sold:
Beginning inventory …………………………………………………… $6,240
Add: Purchases ……………………………………………………………… 74,400
Cost of goods available for sale ……………………………………… $80,640
Less: Ending inventory …………………………………………………… 4,560
Cost of goods sold …………………………………………………………… $76,080

b.

Mountain Mabel’s appears to be a very small business that probably has no external
reporting obligations (other than in the owners’ annual income tax return). Also,
“management” seems to consist of the owners, who may be in the store every day and
therefore do not need an inventory ledger to know what merchandise is in inventory. In
a situation such as this, the additional recordkeeping required to maintain a perpetual
inventory system simply may not be worthwhile.
c. A larger business, such as a Sears store, needs to have up-to-date information as to the
cost and quantity of merchandise in inventory and also the cost of goods sold. This
information is used in quarterly reports to stockholders, reports to corporate
management, and monthly reports measuring the profitability of the individual sales
departments. In addition, information about the quantities of specific products sold
and the quantities currently on hand is needed for such daily decisions as: (1) when to
reorder specific products, (2) how much merchandise to order, and (3) which products
to advertise in special sales.

Also, a store such as Sears uses point-of-sale terminals to simplify the processing of
sales transactions. These terminals permit the maintenance of perpetual inventory
records at very little cost and with no special effort required of accounting personnel.

Ex. 6.14
Revenues (4 x $1,200)…………………………………………………….. $ 4,800
Cost of goods sold (4 x $800)…………………………………………….. 3,200
Other expenses……………………………………………………………. 1,000
Net income (accrual basis)………………………………………………… $ 600

Cash revenues (4 x $1,200)………………………………………………… $ 4,800

Cash expenses (20 x $800)…………………………………………….. 16,000
Other cash expenses………………………………………………………… 1,000
Net loss (cash basis)………………………………………………………. ($12,200)

The difference between the accrual-basis net income of $600 and the cash-basis net loss
of $12,200 is explained by the $12,800 (16 units x $800) of unsold inventory still held by
SCTS. Under a cash-basis system, the purchase of merchandise is charged to expense
at the time the merchandise is purchased. Conversely, under accrual accounting, the
purchase of goods to be held for sale is recorded as an asset, inventory, at the time of
purchase and is not charged to expense, cost of goods sold, until the inventory is sold. If
a business is building its inventory balance, net income is often higher than cash flow
from operations (similar to computing income under a cash-basis system).
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 SOLUTIONS TO PROBLEMS SET A
35 Minutes, Medium PROBLEM 6.1A
CLAYPOOL HARDWARE
a.
General Journal

(1)
Nov. 5 Accounts receivable (Bemidji Construction) 13,390
Sales 13,390
Sold merchandise on account.

5 Cost of Good Sold 9,105

Inventory 9,105
To record the cost of goods sold relating to the
sales of merchandise to Bemidji Construction.

9 Inventory 3,800
Accounts Payable (Owatonna Tool Co.) 3,800
Purchased merchandise on credit.

Dec. 5 Cash 13,390

Accounts Receivable (Bemidji Construction) 13,390
Collected accounts receivable.

9 Accounts Payable (Owatonna Tool. Co.) 3,800

Cash 3,800
Paid account payable to supplier.

31 Cost of Goods Sold 1,710

Inventory 1,710
To adjust inventory records to reflect the results
of the year-end physical count.
Inventory per accounting records $ 183,790
Inventory per physical count 182,080
Adjustment for inventory shrinkage $ 1,710

b.
CLAYPOOL HARDWARE
Partial Income Statement
For the Year Ended December 31, Current Year
Net sales $ 1,024,900
Cost of goods sold (1) 696,932
Gross profit $ 327,968

(1) Cost of goods sold prior to adjustment at Dec. 31 $ 695,222

Add: Shrinkage adjustment at Dec. 31 1,710
Cost of goods sold (adjusted balance) $ 696,932

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 PROBLEM 6.1A
CLAYPOOL HARDWARE (concluded)

c. Claypool seems quite able to pass its extra transportation costs on to its customers and, in
fact, enjoys a significant financial benefit from its remote location. The following data
support these conclusions:
Claypool Industry
Hardware Average Difference
Annual sales …………………………….. $1,024,900 $1,000,000 $24,900
Gross profit ……………………………… 327,968 250,000 (1) 77,968
Gross profit rate ………………………… 32% (2) 25% 7%

(1) $1,000,000 sales ´ 25% = $250,000

(2) $327,968 gross profit ¸ $1,024,900 net sales = 32%
Claypool earned a gross profit rate of 32%, which is significantly higher than the industry
average. Claypool’s sales were above the industry average, and it earned $77,968 more
gross profit than the “average” store of its size. This higher gross profit was earned even
though its cost of goods sold was $18,000 to $20,000 higher than the industry average
because of the additional transportation charges.

To have a higher-than-average cost of goods sold and still earn a much larger-than-
average amount of gross profit, Claypool must be able to charge substantially higher
sales prices than most hardware stores. Presumably, the company could not charge such
prices in a highly competitive environment. Thus, the remote location appears to
insulate it from competition and allow it to operate more profitably than hardware stores
with nearby competitors.

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30 Minutes, Medium PROBLEM 6.4A
KITCHEN ELECTRICS
a.
General Journal
Date
(1)
April 10 Inventory 5,880
Accounts Payable (Polar Co.) 5,880
To record purchase of 10 refrigerators at net cost of
$588 per unit ($600, less 2%).

15 Cash 900
Sales 900
Sold 1 Polar refrigerator for cash.

15 Cost of Goods Sold 588

Inventory 588
To record cost of refrigerator sold.

20 Accounts Payable (Polar Co.) 5,880

Cash 5,880
Paid account within discount period.
(2)
April 10 Inventory 6,000
Accounts Payable (Polar Co.) 6,000
To record purchase of 10 refrigerators at gross
invoice price ($600 per unit).

15 Cash 900
Sales 900
Sold 1 Polar refrigerator for cash.

15 Cost of Goods Sold 600

Inventory 600
To record cost of refrigerator sold.

20 Accounts Payable (Polar Co.) 6,000

Cash 5,880
Purchase Discounts Taken 120
Paid account payable, less 2%.
b.
(1)
May 10 Accounts Payable (Polar Co.) 5,880
Purchase Discounts Lost 120
Cash 6,000
Made payment after discount period had expired.
(2)
May 10 Accounts Payable (Polar Co.) 6,000
Cash 6,000
Made payment after discount period had expired.

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 PROBLEM 6.4A
KITCHEN ELECTRICS (concluded)
c. The net cost method provides more useful information for evaluating the company's
efficiency in paying its bills. This method clearly indicates the lowest price that the
company may pay, and separately records any additional costs incurred as purchase
discounts lost.

Under the gross method, the liability is not recorded at the lowest price at which it can be
settled. Hence, management is not made aware of available discounts that were not taken.

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30 Minutes, Strong PROBLEM 6.5A
SIOGO SHOES AND SOLE MATES

General Journal

a. Journal entries by Siogo Shoes:

Feb . 9 Accounts Receivable (Sole Mates) 10,000

Sales 10,000
Sold merchandise on account; terms, 1/10, n/30.

9 Cost of Goods Sold 6,000

Inventory 6,000
To record cost of merchandise sold (100 pr. X $60/pr.).

12 Delivery Expense 40
Cash 40
Paid delivery charges on outbound shipment.

13 Sales Returns & Allowances 1,000

Accounts Receivable (Sole Mates) 1,000
Customer returned merchandise (10 pr. X $100/pr.).

13 Inventory 600
Cost of Goods sold 600
Reduce cost of goods sold for cost of merchandise
returned (10 pr. X $60/pr.).

19 Cash 8,910
Sales Discount 90
Accounts Receivable (Sole Mates) 9,000
Collected amount due, less $1,000 return and less
1% cash discount on remaining $9,000 balance.

b. Journal entries by Sole Mates:

Feb. 9 Inventory 9,900

Accounts Payable (Siogo Shoes) 9,900
Purchased 100 pairs of boots; terms. 1/10, n/30. Net
cost, $99 per pair ($100, less 1%).

12 Transportation-in 40
Cash 40
Paid transportation charge on inbound shipment.

13 Accounts Payable (Siogo Shoes) 990

Inventory 990
Returned 10 pairs of boots to supplier. (Net cost,
$99 per pair x 10 pairs = $990.

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 PROBLEM 6.5A
SIOGO SHOES AND SOLE MATES (concluded)

General Journal

Feb . 19 Accounts Payable (Siogo Shoes) 8,910

Cash 8,910
Paid within discount period balance owed to
Siogo Shoes ($9,900 - $990 = $8,910).

c. Yes. Sole Mates should take advantage of 1/10, n/30 purchase discounts, even if it must
borrow money for a short period of time at an annual rate of 11%. By taking advantage of
the discount, the company saves 1% by making payment 20 days early. At an interest rate
of 11% per year, the bank charges only 0.6% interest over a 20-day period (11% ´ 20¤365
= 0.6%). Thus, the cost of passing up the discount is greater than the cost of short-term
borrowing.

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