Week 3 Discussions and Required ResourcesPart 1 and Part 2 must be at least 200 wordsPart 1: Perpetual Inventory SystemPresent a detailed explanation of the recording of purchases under a perpetual in

4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05if … 1/101 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05if … 2/101 LEARNING OBJE CTIVE 1 Identify the forms of business or ganization and the uses of accounting inf ormation.  Suppose y ou gr aduat e with a business degr ee and decide y ou w ant to start y our o wn business. But w hat kind of business? You enjo y working with people, especiall y t eaching them new skills. Y ou also spend most of y our fr ee time out doors, k ay aking, back packing, skiing, r ock climbing, and mountain biking. Y ou think y ou mig ht be successful in opening an out door guide service w her e y ou gr ew up, in the Sierr a Ne vada mountains.

F ORMS OF BUSINESS OR GANIZA TION Your ne xt decision is t o det ermine the or ganizational f orm of y our business. Y ou ha ve thr ee choices—sole pr opriet orship, partnership, or corpor ation. SOLE PROPRIET ORSHIP You mig ht choose the sole pr opriet orship form for y our out door guide service. A business o wned b y one person is a sole pr opriet orship . It is simple t o set up and gi ves y ou c ontr ol o ver the business. Small o wner-oper ated businesses such as bar ber shops, la w ofices, and aut o repair shops ar e oft en sole pr opriet orships, as are farms and small r etail st ores. PAR TNER SHIP Another possibility is for y ou to join f or ces with other indi viduals t o f orm a partnership. A business o wned b y tw o or mor e persons associat ed as partners is a partnership . P artnerships oft en ar e formed because one indi vidual does not ha ve enoug h ec onomic r esour ces t o initiat e or e xpand the business. Sometimes partners bring unique skills or r esour ces to the partnership. Y ou and y our partners should formalize y our duties and contributions in a writt en partnership agr eement . R etail and service-type businesses, including pr ofessional pr actices (la wy ers, doct ors, ar chit ects, and certiied public accountants), oft en organize as partnerships. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05if … 3/101 Alt ernati ve T erminolog y not es pr esent synon ymous terms that y ou ma y come acr oss in practic e . CORP ORATION As a thir d alt ernati ve, y ou mig ht or ganize as a corpor ation. A business or ganized as a separ ate leg al entity o wned b y st ockholders is a c orpor ation . Invest ors in a corpor ation recei ve shar es of st ock t o indicat e their o wnership claim. Bu ying st ock in a corpor ation is oft en mor e attr active than in vesting in a partnership because shar es of st ock ar e eas y to sell (tr ansf er o wnership). Selling a pr opriet orship or partnership int erest is much mor e in vol ved. Also, indi viduals can become st ockholders b y in vesting relati vel y small amounts of mone y. Ther efor e, it is easier for c orpor ations t o r aise funds . Successful corpor ations oft en have thousands of st ockholders, and their st ock is tr aded on or ganized st ock e xchanges lik e the New Y or k Stock Ex change . Man y businesses start as sole propriet orships or partnerships and eventuall y incorpor ate. Other f act ors t o consider in deciding w hich or ganizational f orm t o choose ar e tax es and leg al liability . If y ou choose a sole pr opriet orship or partnership, you gener ally r ecei ve mor e f a v or able tax tr eatment than a corpor ation. Ho wev er , pr opriet ors and partners ar e personall y liable for all debts and leg al oblig ations of the business; corpor ate st ockholders ar e not . In other w or ds, corpor ate st ockholders gener ally pa y hig her taxes but have no personal leg al liability . We will discuss these issues in mor e depth in a later chapt er. Finall y, w hile sole pr opriet orships, partnerships, and corpor ations r epr esent the main types of business or ganizations, h ybrid forms ar e no w allo wed in all stat es. These h ybrid business forms combine the tax ad vantages of partnerships with the limit ed liability of corpor ations. Pr obabl y the most common among these h ybrids types ar e limit ed liability companies (LL Cs) and subchapt er S corpor ations. These f orms ar e discussed ext ensi vel y in business la w classes. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05if … 4/101 The combined number of propriet orships and partnerships in the Unit ed Stat es is mor e than i ve times the number of corpor ations. Howev er , the r e v enue pr oduced by corpor ations is eig ht times gr eat er. Most of the lar gest businesses in the Unit ed States—f or example, Coca-Cola , Exx onMobil , Gener al Motors , Citigr oup , and Microsoft —are corpor ations. Because the majority of U.S. business is done by corpor ations, the emphasis in this t ext book is on the corpor ate form of or ganization. AL TERN ATIVE TERMINOL OGY Stockholders ar e sometimes called shar eholders . USER S AND USES OF FINANCIAL INF ORMA TION The purpose of inancial inf ormation is to pr ovide inputs for decision-making. A ccounting is the inf ormation s y st em that identiies, r ecor ds, and communicat es the economic e v ents of an or ganization to int erest ed users. Users of accounting inf ormation can be di vided br oadl y int o tw o gr oups: int ernal users and e xt ernal users. Int ernal Users Internal users of accounting inf ormation ar e managers w ho plan, or ganize, and run a business. These include mar keting managers , pr oduction supervisors , inanc e dir ectors , and c ompan y ofic ers . In running a business, managers must ans wer man y important questions, as sho wn in Illustr ation 1-1 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 01lo 1 #c0 1- ig-0 001) . ILL USTRA TION 1-1 Questions that internal users ask Accounting A cr oss the Or ganiz ation boxe s sho w applic ations of accounting information in v arious busine ss functions . To ans wer these and other questions, y ou need detailed inf ormation on a timel y basis. F or int ernal users, accounting pr ovides int ernal reports, such as inancial comparisons of oper ating alt ernati ves, pr ojections of income fr om new sales campaigns, and for ecasts of cash needs for the ne xt y ear . In addition, companies pr esent summarized inancial inf ormation in the form of inancial stat ements. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05if … 5/101  ACCOUNTING A CR OSS THE OR GANIZA TION  Clif Bar & Compan y Owning a Piece of the Bar The original Clif Bar ® energy bar was cr eat ed in 1990 aft er six months of e xperimentation b y Gary Erick son and his mother in her kit chen. Toda y, the compan y has almost 300 emplo yees and is consider ed one of the leading Landor's Br eak aw ay Br ands ® . One of Clif Bar & Compan y 's pr oudest moments w as the cr eation of an emplo yee st ock ownership plan (ESOP) in 2010. This plan gi ves its emplo yees 20% o wnership of the compan y. The ESOP also r esult ed in Clif Bar enacting an open-book management pr ogr am, including the commitment to educat e all emplo yee-o wners about its inances. Armed with basic accounting kno wledge, emplo yees ar e mor e a w ar e of the inancial impact of their actions, w hich leads to bett er decisions.

What are the beneits to the c ompan y and to the emplo yees of making the inancial stat ements available t o all emplo yees? (Go t o Wile yPLUS for this ans wer and additional questions.) Ext ernal Users Ther e ar e se ver al types of e xt ernal users of accounting inf ormation. Invest ors (o wners) use accounting inf ormation to mak e decisions to bu y, hold, or sell st ock. Cr edit ors such as suppliers and bank ers use accounting inf ormation to e v aluat e the risk s of selling on cr edit or lending mone y. Some questions that in vest ors and credit ors ma y ask about a compan y are sho wn in Illustr ation 1-2 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 01lo 1 #c0 1- ig-0 002) . ILL USTRA TION 1-2 Questions that ext ernal users ask The inf ormation needs and questions of other ext ernal users vary consider ably. T axing authorities , such as the Int ernal R ev enue Service, w ant t o kno w w hether the compan y complies with the tax la w s. Cust omers are int erest ed in w hether a compan y lik e Gener al Mot ors will continue to honor pr oduct w arr anties and 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05if … 6/101 otherwise support its product lines. Labor unions , such as the Major League Baseball Pla yers Association, w ant to kno w w hether the o wners ha ve the ability to pa y incr eased w ages and beneits. R egulat ory agencies , such as the Securities and Exchange Commission or the Feder al Trade Commission, w ant t o kno w whether the compan y is oper ating within pr escribed rules. F or e xample, Enr on , Dynegy , Duk e Ener gy , and other big ener gy-tr ading companies report ed recor d pr oits at the same time as Calif ornia w as pa ying extr emel y hig h prices for ener gy and suff ering fr om black outs. This disparity caused regulat ors to in vestig ate the ener gy traders to mak e sure that the proits were earned by legitimat e and fair pr actices. ACCOUNTING A CR OSS THE OR GANIZA TION Spinning the Career Wheel How will the stud y of accounting help y ou? A w or king kno wledge of accounting is desir able for virtuall y ev ery ield of business. Some examples of ho w accounting is used in business car eers include the follo wing. Gener al management: Managers of For d Mot ors , Massachusetts Gener al Hospital, California State University – Fullert on, a McDonald's franchise, and a Trek bik e shop all need to understand accounting data in or der to mak e wise business decisions. Marketing: Mar keting specialists at Pr oct er & Gamble must be sensiti ve t o costs and beneits, w hich accounting helps them quantify and understand. Making a sale is meaning less unless it is a proitable sale. Financ e: Do you w ant to be a bank er for Citicorp , an in vestment anal yst f or Goldman Sachs , or a st ock br oker for Merrill L ynch ? These ields rel y hea vily on accounting kno wledge to anal yze inancial statements. In fact , it is dificult to get a good job in a inance function without tw o or thr ee courses in accounting. Real estat e: Are you int erest ed in being a real estat e broker for Prudential R eal Estat e ? Because a third party —the bank— is almost alway s in vol ved in inancing a r eal estat e transaction, brok ers must understand the numbers invol ved: Can the bu yer aff ord to mak e the payments to the bank? Does the cash lo w from an industrial pr operty justify the pur chase price? What are the tax beneits of the pur chase? How mig ht accounting help y ou? (Go to Wile yPLUS for this ans wer and additional questions.) 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05if … 7/101 ETHICS IN FINANCIAL REPOR TING People w on 't gamble in a casino if the y think it is “rigged. ” Similar ly , people w on 't “pla y” the st ock mar ket if the y think st ock prices ar e rigged. A t one time, the inancial pr ess w as full of articles about inancial scandals at Enr on , Wor ldCom , HealthSouth , and AIG . As mor e scandals came t o lig ht, a mistrust of inancial r eporting in gener al seemed t o be de veloping. One article in the W all S tr eet Journal not ed that “r epeat ed disclosur es about questionable accounting pr actices ha ve bruised in vest ors' faith in the reliability of earnings r eports, w hich in turn has sent st ock prices tumbling. ” Imagine trying to carry on a business or in vest mone y if y ou could not depend on the inancial stat ements to be honestl y pr epar ed. Inf ormation would ha ve no cr edibility . Ther e is no doubt that a sound, w ell-functioning econom y depends on accur ate and dependable inancial reporting. Unit ed Stat es r egulat ors and la wmak ers w er e v ery concerned that the econom y w ould suff er if in vest ors lost conidence in corpor ate accounting because of unethical inancial reporting. Congr ess passed the S ar banes-Oxle y A ct (SO X) to r educe unethical corpor ate beha vior and decr ease the lik elihood of futur e corpor ate scandals. As a result of SO X, top management must no w certify the accur acy of inancial inf ormation. In addition, penalties for fr audulent inancial acti vity ar e much mor e se ver e. Also, SO X incr eased both the independence of the outside audit ors w ho r e view the accur acy of corpor ate inancial stat ements and the oversig ht role of boar ds of directors. ETHIC S NOTE Circus-f ounder P.T . Barnum is alleged to ha ve said, “T rust every one, but cut the deck. ” What Sarbanes-Oxle y does is t o pr ovide measur es that (lik e cutting the deck of pla ying car ds) help ensur e that fraud will not occur . Ethics Notes he lp sensitiz e you to some of the ethic al issue s in accounting . Eff ecti ve inancial r eporting depends on sound ethical beha vior. To sensitize you t o ethical situations and t o gi ve y ou pr actice at sol ving ethical dilemmas, we addr ess ethics in a number of w ay s in this t e xt book. (1) A number of the F eatur e Storie s and other parts of the t e xt discuss the centr al importance of ethical beha vior to inancial r eporting. (2) Ethics Insight bo xe s and mar ginal Ethics Not es hig hlig ht ethics situations and issues in actual business settings. (3) Man y of the P eople, Planet , and Pr oit Insight bo xe s focus on ethical issues that companies f ace in measuring and r eporting social and en vir onmental issues. (4) A t the end of each chapt er, an Ethics C ase simulat es a business situation and ask s y ou t o put y ourself in the position of a decision-mak er in that case. When anal yzing these v arious ethics cases and y our o wn ethical e xperiences, y ou should appl y the thr ee steps outlined in Illustration 1-3 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 01lo 1 #c0 1- ig-0 003) . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05if … 8/101 ILLUSTRA TION 1-3 Steps in anal yzing ethics cases  ETHIC S INSIGHT  Dewey & LeBoeuf LLP I F elt the Pr essur e—Would You? “I felt the pr essur e.” That's w hat some of the emplo yees of the no w- defunct la w irm of Dew ey & LeBoeuf LLP indicat ed w hen the y helped t o o verstat e rev enue and use accounting trick s to hide losses and co ver up cash shortages. These emplo yees w or ked for the former inance dir ect or and f ormer chief inancial oficer (CF O) of the irm. Her e ar e some of their comments: “I w as instruct ed by the CF O to cr eat e invoices, kno wing they would not be sent to clients. When I cr eat ed these invoices, I knew that it w as inappr opriate.” “I int entionall y gav e the audit ors incorr ect information in the course of the audit .” What happened her e is that a small gr oup of lo wer-le vel emplo yees o ver a period of y ears carried out the instructions of their bosses. Their bosses, ho wev er , seemed to ha ve no concern as e videnced b y v arious e-mails with one another in w hich the y r ef err ed to their inancial manipulations as accounting trick s, cooking the book s, and fak e income. So u rc e : A shb y J o n es, “ G uilt y P le as o f De wey S taff De tai l t he A lle g ed F rau d,” W all S tr e et J o u rn al (Mar ch 2 8, 2 014). Wh y did these emplo yees lie, and w hat do you belie ve should be their penalty f or these lies? (Go t o Wile yPLUS for this ans wer and additional questions.) Insight bo xe s pr ovide e xample s of busine ss situations fr om v arious perspecti ves—ethics, in vest or , int ernational, and corpor ate social responsibilit y. Guide line answ ers t o the critic al thinking que stions 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05if … 9/101 are available in WileyPL US and at www.wiley.c om/c ollege/w eygandt (h ttp ://www .wile y.c om /c olle ge /w eyga n dt) . A dditional que stions are offer ed in WileyPL US . DO IT! 1 Business Organization F orms DO IT ! e xer cise s pr ompt y ou t o st op and r eview the k ey points y ou ha ve just studied. The A ction Plan offers y ou tips about ho w to appr oach the problem . In choosing the organizational f orm for y our out door guide service, you should consider the pr os and cons of each. Identify each of the f ollo wing or ganizational char acteristics with the or ganizational f orm or forms with w hich it is associat ed. 1. Easier to r aise funds. 2. Simple to establish. 3. No personal leg al liability . 4. Tax ad vantages. 5. Easier t o tr ansf er ownership. A ction Plan ✓  Kno w which or ganizational f orm best mat ches the business type, size, and prefer ences of the owner(s). 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 10/101 SOLUTION 1. Easier to r aise funds: Corpor ation. 2. Simple to establish: Sole pr opriet orship and partnership. 3. No personal legal liability: Corpor ation. 4. Tax ad vantages: Sole pr opriet orship and partnership. 5. Easier to tr ansf er ownership: Corpor ation. Relat ed exer cise mat erial: BE1-1 and DO IT! 1-1 . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 11/101 5 Mer chandising Oper ations and the Multiple- Step Income Stat ement  CHAPTER PREVIEW  Merchandising is one of the largest and most inluential industries in the Unit ed Stat es. It is lik ely that a number of you will w or k f or a mer chandiser . Ther efor e, understanding the inancial stat ements of mer chandising companies is important . In this chapt er, y ou will learn the basics about r eporting mer chandising tr ansactions. In addition, y ou will learn ho w to pr epar e and anal yze a commonl y used form of the income stat ement—the multiple-st ep income statement . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 12/101 Buy No w, V ot e Lat er Have y ou ever shopped f or out door gear at an REI (R ecr eational E quipment Incorpor ated) st or e? If so, y ou mig ht ha ve been surprised if a salescler k ask ed if y ou w er e a member . A member? What do y ou mean a member? REI is a consumer cooper ative, or “co-op ” f or short . T o igur e out w hat that means, consider this quot e from the compan y's annual report: As a cooper ative, the Compan y is owned b y its members. Each member is entitled t o one v ot e in the election of the Compan y's Boar d of Dir ectors. Since January 1, 2008, the nonr efundable, nontr ansferable, one-time membership fee has been $20 dollars. As of December 31, 2010, ther e were appr oximat ely 10.8 million members. Voting rig hts? No w that's something y ou don 't get fr om shopping at W al-Mart . REI members get other beneits as w ell, including sharing in the compan y's pr oits thr oug h a di vidend at the end of the y ear . The mor e you spend, the bigger your di vidend. Since REI is a co-op, y ou mig ht w onder w hether management's incenti ves mig ht be a little diff erent . Management is still concerned about making a pr oit , as it ensur es the long-t erm viability of the compan y. REI's members also w ant the compan y to be run eficientl y, so that prices remain lo w. In or der for its members t o e valuat e just ho w w ell management is doing, REI publishes an audit ed annual r eport , just lik e publicl y traded companies do. Ho w w ell is this business model w or king for REI? W ell, it has consist ently been r at ed as one of the best places t o w ork in the Unit ed Stat es b y Fortune mag azine. Also, REI had sustainable business pr actices long bef ore social r esponsibility became popular at other companies. The CEO 's St ew ardship R eport stat es “w e reduced the absolut e amount of energy we use despit e opening f our new st or es and gr owing our business; w e gr ew the amount of FSC-certiied paper w e use t o 58.4 per cent of our t otal paper footprint—including our cash r egist er r eceipt paper; w e f acilitat ed 2.2 million v olunt eer hours and w e pr ovided $3.7 million t o mor e than 330 conserv ation and recr eation nonpr oits.” So, w hile REI, lik e other r etailers, closel y monit ors its inancial r esults, it also stri ves to succeed in other ar eas. And, with over 10 million v ot es at stak e, REI's management knows that it has to deli ver . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 13/101 LEARNING OBJE CTIVE 1 Describe merchandising oper ations and invent ory syst ems.  REI , Wal-Mart , and Amazon.com ar e called mer chandising companies because the y bu y and sell mer chandise r ather than perf orm services as their primary sour ce of r e v enue. Mer chandising companies that pur chase and sell dir ectl y to consumers ar e called r etailers . Mer chandising companies that sell to r etailers ar e kno wn as w holesalers . F or e xample, retailer W algr eens mig ht bu y goods fr om w holesaler McK esson ; r etailer Ofice Depot mig ht bu y ofice supplies fr om w holesaler Unit ed Stationers . The primary sour ce of rev enue f or mer chandising companies is the sale of merchandise, often ref err ed to simpl y as sales r e venue or sales . A mer chandising compan y has tw o cat egories of e xpenses: cost of goods sold and oper ating expenses. Cost of goods sold is the t otal cost of mer chandise sold during the period. This e xpense is dir ectl y r elat ed to the re v enue recognized from the sale of goods. Illustr ation 5-1 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 1 #c0 5- ig-0 001) sho ws the income measur ement pr ocess for a mer chandising compan y. The it ems in the tw o blue bo xes ar e unique to a mer chandising compan y; they are not used by a service compan y. ILL USTRA TION 5-1 Income measur ement process for a mer chandising compan y OPERA TING CYCLES The oper ating cy cle of a mer chandising compan y or dinaril y is longer than that of a service compan y. The pur chase of invent ory and its ev entual sale lengthen the cycle. Illustr ation 5-2 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 1 #c0 5- ig-0 002) contr asts the oper ating cy cles of service and mer chandising companies. Not e that the added asset account for a mer chandising compan y is the Invent ory account . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 14/101 ILLUSTRA TION 5-2 Oper ating cycles for a servic e compan y and a merchandising compan y FLOW OF C OS TS The lo w of costs for a mer chandising compan y is as follo ws. Beginning in vent ory plus the cost of goods pur chased is the cost of goods a v ailable f or sale. As goods ar e sold, the y ar e assigned t o cost of goods sold. Those goods that ar e not sold by the end of the accounting period r epr esent ending in vent ory. Illustr ation 5-3 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 1 #c0 5- ig-0 003) describes these r elationships. Companies use one of tw o s y st ems t o account f or in vent ory: a perpetual in vent ory s y st em or a periodic in vent ory syst em . ILL USTRA TION 5-3 Flow of costs 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 15/101 Perpetual S yst em In a perpetual in vent ory s y st em , companies maintain detailed recor ds of the cost of each in vent ory pur chase and sale. These r ecor ds continuousl y—perpetuall y—sho w the in vent ory that should be on hand for e v ery it em. F or e xample, a F or d dealership has separ ate in vent ory r ecor ds for each aut omobile, truck, and v an on its lot and sho wroom loor . Similar ly , a gr ocery store uses bar codes and optical scanners to k eep a dail y running r ecor d of e v ery bo x of cer eal and e v ery jar of jell y that it bu ys and sells. Under a perpetual in vent ory syst em, a compan y determines the cost of goods sold each time a sale occurs . ▼ HELPFUL HINT Even under perpetual in vent ory sy st ems, companies perf orm ph ysical in vent ory counts. This is done as a contr ol pr ocedur e to v erify in vent ory levels, in or der to det ect theft or “shrink age.” Periodic S yst em In a periodic in vent ory s y st em , companies do not k eep detailed in vent ory r ecor ds of the goods on hand thr oug hout the period. The y determine the cost of goods sold onl y at the end of the ac counting period — that is, periodicall y. A t that point , the compan y tak es a ph ysical in vent ory count to det ermine the cost of goods on hand. T o det ermine the cost of goods sold under a periodic invent ory syst em, the follo wing steps ar e necessary: 1. Det ermine the cost of goods on hand at the beginning of the accounting period. 2. Add to it the cost of goods pur chased. 3. Subtr act the cost of goods on hand as determined by the ph ysical in vent ory count at the end of the accounting period. Illustr ation 5-4 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b oo k s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 1 #c0 5- ig-0 004) gr aphicall y compar es the sequence of activities and the timing of the cost of goods sold computation under the tw o invent ory syst ems. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 16/101 ILLUSTRA TION 5-4 Comparing perpetual and periodic in vent ory syst ems A dvantages of the P erpetual Syst em Companies that sell mer chandise with hig h unit v alues, such as aut omobiles, furnitur e, and major home appliances, ha ve tr aditionall y used perpetual sy st ems. The gr owing use of comput ers and electr onic scanners has enabled man y mor e companies to install perpetual in vent ory sy st ems. The perpetual in vent ory sy st em is so named because the accounting recor ds continuousl y—perpetuall y—sho w the quantity and cost of the in vent ory that should be on hand at any time. A perpetual in vent ory s y st em pr ovides bett er contr ol o ver in vent ories than a periodic s y st em. Since the in vent ory recor ds show the quantities that should be on hand, the compan y can count the goods at any time t o see w hether the amount of goods actuall y on hand agr ees with the in vent ory r ecor ds. If shortages ar e unco ver ed, the compan y can in vestig ate immediat ely. Althoug h a perpetual in vent ory sy st em requir es additional clerical w or k and additional cost to maintain in vent ory recor ds, a comput erized s y st em can minimize this cost . Much of Amazon.com 's success is attribut ed to its sophisticat ed invent ory syst em. Some businesses ind it either unnecessary or uneconomical to in vest in a sophisticat ed, comput erized perpetual in vent ory s y st em such as Amazon 's. Ho wev er , man y small mer chandising businesses no w use basic accounting softw are, w hich pr ovides some of the essential beneits of a perpetual in vent ory s y st em. Yet , managers of some small businesses still ind that the y can contr ol their mer chandise and manage da y- to-da y oper ations using a periodic invent ory syst em. Because of the widespr ead use of the perpetual in vent ory s y st em, w e illustr ate it in this chapt er. An appendix t o this chapt er describes the journal entries for the periodic s yst em. INVES TOR INSIGHT Morr ow Sno wboar ds, Inc. Improving St ock Appeal 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 17/101 Invest ors ar e oft en eager to in vest in a compan y that has a hot new pr oduct . Ho wev er , w hen sno wboar d mak er Morr ow Sno wboar ds, Inc. issued shar es of st ock to the public for the irst time, some in vest ors expr essed reluctance to in vest in Morr ow because of a number of accounting contr ol pr oblems. T o reduce in vest or concerns, Morr ow implement ed a perpetual invent ory s y st em t o impr ove its contr ol o ver in vent ory. In addition, it stat ed that it w ould perf orm a ph ysical in vent ory count e v ery quart er until it f elt that its perpetual in vent ory sy st em w as reliable. If a perpetual s yst em keeps tr ack of in vent ory on a dail y basis, why do companies e ver need to do a ph ysical count? (Go t o Wile yPLUS for this ans wer and additional questions.) DO IT! 1 Mer chandising Oper ations and Invent ory Syst ems Indicat e whether the follo wing stat ements are true or f alse. If f alse, indicat e ho w t o corr ect the stat ement . 1. The primary source of rev enue f or a mer chandising compan y results fr om perf orming services for cust omers. 2. The oper ating cycle of a service compan y is usually shorter than that of a merchandising compan y. 3. Sales r ev enue less cost of goods sold equals gr oss pr oit . 4. Ending invent ory plus the cost of goods pur chased equals cost of goods available for sale. A ction Plan ✓  R eview mer chandising concepts. ✓  Understand the low of costs in a mer chandising compan y. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 18/101 SOLUTION 1. False. The primary sour ce of rev enue f or a service compan y results fr om perf orming services for cust omers. 2. True. 3. True. 4. False. Beginning in vent ory plus the cost of goods pur chased equals cost of goods available f or sale. R elat ed exer cise mat erial: BE1-1 and DO IT! 5-1 . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 19/101 LEARNING OBJE CTIVE 2 Recor d purchases under a perpetual invent ory syst em.  Companies ma y pur chase in vent ory f or cash or on account (cr edit). The y normall y r ecor d pur chases w hen the y r ecei ve the goods fr om the seller . E very pur chase should be support ed b y business documents that pr ovide writt en e vidence of the tr ansaction. Each cash pur chase should be support ed b y a canceled check or a cash regist er receipt indicating the it ems pur chased and amounts paid. Companies recor d cash pur chases by an incr ease (debit) in Invent ory and a decr ease (credit) in Cash. Each pur chase should be support ed b y a pur chase in voic e , w hich indicat es the total pur chase price and other r ele vant inf ormation. Ho wev er , the pur chaser does not pr epar e a separ ate pur chase in voice. Inst ead, the pur chaser uses as a purchase invoice the cop y of the sales in voice sent b y the seller . In Illustr ation 5-5 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 2 #c0 5- ig-0 005) , for e xample, Sauk St er eo (the bu yer) uses as a pur chase in voice the sales in voice pr epar ed b y PW A udio Suppl y, Inc. (the seller). ILL USTRA TION 5-5 Sales in voic e used as pur chase invoic e by Sauk St ereo 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 20/101 The associated entry for Sauk St ereo for the in voice fr om PW Audio Suppl y increases (debits) Invent ory and incr eases (credits) Accounts Pay able. Under the perpetual in vent ory sy st em, companies recor d pur chases of mer chandise for sale in the In vent ory account . Thus, REI w ould incr ease (debit) In vent ory for clothing, sporting goods, and an ything else pur chased for r esale to cust omers. Not all purchases are debit ed to In vent ory, howev er . Companies recor d purchases of assets acquir ed f or use and not f or r esale, such as supplies, equipment , and similar it ems, as incr eases to speciic asset accounts r ather than t o In vent ory. F or e xample, t o r ecor d the pur chase of mat erials used to mak e shelf signs or for cash r egist er receipt paper , REI would incr ease (debit) Supplies. ▼ HELPFUL HINT To bett er understand the cont ents of this invoice, identify these it ems: 1. Seller 2. In voice dat e 3. Purchaser 4. Salesperson 5. Credit terms 6. Freig ht terms 7. Goods sold: catalog number , description, quantity , price per unit 8. Total in voice amount FREIGHT C OS TS The sales agreement should indicat e w ho—the seller or the bu yer—is t o pa y f or tr ansporting the goods t o the bu yer's place of business. When a common carrier such as a railr oad, trucking compan y, or air line transports the goods, the carrier pr epar es a freig ht bill in accor d with the sales agreement . Freig ht terms ar e expr essed as either FOB shipping point or FOB destination. The lett ers F OB mean fr ee on boar d . Thus, F OB shipping point means that the seller places the goods fr ee on boar d the carrier , and the bu yer pa ys the fr eig ht costs. Con versel y, F OB destination means that the seller places the goods fr ee on 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 21/101 board to the bu yer's place of business, and the seller pa ys the fr eig ht. F or e xample, the sales in voice in Illustr ation 5-5 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b oo k s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 2 #c0 5- ig-0 005) indicat es F OB shipping point . Thus, the bu yer (Sauk St er eo) pa ys the fr eig ht char ges. Illustr ation 5-6 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 2 #c0 5- ig-0 006) illustr ates these shipping terms. ILL USTRA TION 5-6 Shipping terms F reig ht Costs Incurr ed by Bu yer When the bu yer pa ys the tr ansportation costs, these costs ar e consider ed part of the cost of pur chasing invent ory. As a result , the account In vent ory is incr eased (debit ed) . F or e xample, if Sauk St er eo (the bu yer) pa ys Public F reig ht Compan y $150 for fr eig ht char ges on May 6, the entry on Sauk Stereo 's book s is: Thus, an y fr eig ht costs incurr ed b y the bu yer ar e part of the cost of mer chandise pur chased. The r eason: In vent ory cost should include all costs t o acquir e the in vent ory, including fr eig ht necessary to deli ver the goods t o the bu yer . Companies recognize these costs as cost of goods sold w hen in vent ory is sold. Freig ht Costs Incurr ed by Seller In contr ast, freig ht costs incurr ed by the seller on out going mer chandise ar e an oper ating e xpense t o the seller . These costs incr ease an expense account titled F reig ht-Out (sometimes called Deli very Expense). F or example, if the freig ht terms on the invoice in Illustr ation 5-5 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 2 #c0 5- ig-0 005) had requir ed that PW A udio Suppl y (the seller) pay the $150 freig ht char ges, the entry by PW A udio Suppl y would be: When the seller pa ys the fr eig ht char ges, the seller will usuall y establish a hig her in voice price for the goods, t o co ver the e xpense of shipping. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 22/101 PURCHA SE RETURNS AND ALL OW ANCES A pur chaser ma y be dissatisied with the mer chandise recei ved because the goods ar e damaged or def ecti ve, of inf erior quality , or do not meet the purchaser's speciications. In such cases, the pur chaser ma y return the goods t o the seller f or cr edit if the sale w as made on cr edit , or f or a cash r efund if the pur chase was f or cash. This tr ansaction is kno wn as a pur chase r eturn . Alt ernati vel y, the pur chaser ma y choose to k eep the mer chandise if the seller is willing t o gr ant a r eduction of the pur chase price. This tr ansaction is kno wn as a pur chase allo wanc e . Assume that Sauk Stereo returned goods costing $300 to PW A udio Suppl y on May 8. The follo wing entry b y Sauk St er eo for the returned mer chandise decr eases (debits) A ccounts P ay able and decr eases (cr edits) Invent ory.

Because Sauk Stereo incr eased In vent ory w hen the goods w er e r ecei ved, In vent ory is decr eased (cr edit ed) when Sauk St ereo returns the goods. Suppose inst ead that Sauk Stereo chose to k eep the goods aft er being grant ed a $50 allo wance (r eduction in price). It w ould reduce (debit) A ccounts Pay able and r educe (cr edit) Invent ory for $50. PUR CHA SE DISC OUNTS The cr edit terms of a pur chase on account ma y permit the bu yer to claim a cash discount for pr ompt pa yment . The buyer calls this cash discount a pur chase disc ount . This incenti ve off ers ad vantages t o both parties. The pur chaser sa ves mone y, and the seller is able t o short en the oper ating cy cle b y con verting the accounts r ecei vable int o cash ear lier. The cr edit t erms specify the amount of the cash discount and time period during w hich it is off ered. The y also indicat e the length of time in w hich the pur chaser is e xpect ed t o pa y the full in voice price. In the sales in voice in Illustr ation 5-5 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 2 #c0 5- ig-0 005) (page 220) , cr edit terms ar e 2/10, n/30, w hich is r ead “tw o-ten, net thirty .” This means that a 2% cash discount ma y be tak en on the in voice price, less (“net of ”) an y r eturns or allo wances, if pa yment is made within 10 da ys of the in voice dat e (the disc ount period ). Otherwise, the in voice price, less an y returns or allo wances, is due 30 da ys fr om the in voice dat e. Alternati vel y, the discount period ma y e xt end t o a speciied number of da ys f ollo wing the month in w hich the sale occurs. F or e xample, 1/10 EOM (end of month) means that a 1% discount is a v ailable if the in voice is paid within the irst 10 da ys of the ne xt month.

When the seller elects not t o off er a cash discount f or pr ompt pa yment , cr edit terms will specify onl y the maximum time period f or pa ying the balance due. F or e xample, the cr edit t erms ma y stat e the time period as n/30, n/60, or n/10 EOM. This means, r especti vel y, that the bu yer must pa y the net amount in 30 da ys, 60 da ys, or within the irst 10 da ys of the ne xt month. When an invoice is paid within the discount period, the amount of the discount decr eases In vent ory. Wh y? Because the mer chandiser r ecor ds in vent ory at its cost and, b y pa ying within the discount period, it has r educed that cost . T o illustr ate, assume Sauk St er eo pa ys the balance due of $3,500 ( gr oss in voice price of 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 23/101 $3,800 less purchase returns and allo wances of $300) on Ma y 14, the last da y of the discount period. Since the t erms ar e 2/10, n/30, the cash discount is $70 ($3,500 ×2% ) and the amount of cash Sauk St er eo paid is $3,430 ($3,500 −$70 ). The entry Sauk St er eo mak es to recor d its Ma y 14 pa yment decr eases (debits) A ccounts P ay able b y the amount of the gr oss invoice price, r educes (cr edits) In vent ory b y the $70 discount , and reduces (cr edits) Cash by the net amount ow ed. If Sauk St er eo f ailed t o tak e the discount and inst ead made full pa yment of $3,500 on June 3, Sauk St er eo would reduce (debit) A ccounts Pay able and r educe (cr edit) Cash for $3,500 each. A mer chandising compan y usuall y should tak e all a v ailable discounts. P assing up the discount ma y be view ed as pa ying int erest for use of the mone y. F or example, passing up the discount off ered b y PW A udio Suppl y would be lik e Sauk Stereo pa ying an int erest rat e of 2% for the use of $3,500 f or 20 da ys. This is the equi valent of an annual int erest rat e of appr oximat ely 36.5 % (2% ×365 /20 ). Ob viousl y, it w ould be bett er for Sauk St ereo to borr ow at pr ev ailing bank int erest rat es of 6% to 10% than to lose the discount . ▼ HELPFUL HINT The t erm net in “net 30” means the r emaining amount due aft er subtr acting any returns and allo wances and partial pa yments. SUMMAR Y OF PURCHASING TRANS ACTIONS The follo wing T -account (with tr ansaction descriptions in red) pr ovides a summary of the eff ect of the pr evious tr ansactions on In vent ory. Sauk St er eo originall y pur chased $3,800 w orth of in vent ory f or r esale. It then r eturned $300 of goods. It paid $150 in fr eig ht char ges, and inall y, it r ecei ved a $70 discount off the balance o w ed because it paid within the discount period. This results in a balance in In vent ory of $3,580. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 24/101 DO IT! 2 Purchase Transactions On Sept ember 5, De La Ho ya Compan y bu ys mer chandise on account fr om Junot Diaz Compan y. The pur chase price of the goods paid b y De La Ho ya is $1,500. On Sept ember 8, De La Ho ya r eturns def ective goods with a selling price of $200. R ecor d the tr ansactions on the book s of De La Hoya Compan y. A ction Plan ✓  Pur chaser recor ds goods at cost . ✓  When goods are returned, pur chaser reduces In vent ory. Relat ed exer cise mat erial: BE5-2, BE5-4, DO IT! 5-2, E5-1, E5-2, and E5-4. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 25/101 LEARNING OBJE CTIVE 3 Recor d sales under a perpetual invent ory syst em.  In accor dance with the rev enue r ecognition principle, companies recor d sales rev enue, lik e service r e v enue, w hen the perf ormance oblig ation is satisied. T ypicall y, that perf ormance oblig ation is satisied w hen the goods ar e transf erred fr om the seller t o the bu yer . A t this point , the sales tr ansaction is complet ed and the sales price is established. Sales ma y be made on cr edit or for cash. E very sales tr ansaction should be support ed b y a business document that pr ovides writt en e vidence of the sale. Cash r egist er documents pr ovide e vidence of cash sales. A sales invoic e , like the one that was shown in Illustr ation 5-5 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 2 #c0 5- ig-0 005) (page 220) , provides support for each sale. The original cop y of the in voice goes t o the cust omer , and the seller k eeps a cop y for use in r ecor ding the sale. The in voice sho ws the dat e of sale, cust omer name, t otal sales price, and other r ele vant inf ormation. The seller mak es two entries for each sale. (1) It incr eases (debits) A ccounts R ecei vable or Cash, as w ell as incr eases (cr edits) Sales R ev enue. (2) It incr eases (debits) Cost of Goods Sold and decr eases (cr edits) Invent ory. As a r esult , the In vent ory account will sho w at all times the amount of in vent ory that should be on hand. T o illustr ate a cr edit sales transaction, PW Audio Suppl y recor ds the sale of $3,800 on Ma y 4 t o Sauk St er eo (see Illustr ation 5-5 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b oo k s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 2 #c0 5- ig- 0 005) ) as f ollo ws (assume the mer chandise cost PW Audio Suppl y $2,400). For int ernal decision-making purposes, mer chandising companies ma y use mor e than one sales account . For e xample, PW A udio Suppl y ma y decide to k eep separ ate sales accounts for its sales of TV s, Blu-r ay pla yers, and headsets. REI mig ht use separ ate accounts for camping gear , childr en's clothing, and ski equipment—or it mig ht ha ve e v en mor e narr ow ly deined accounts. B y using separ ate sales accounts for major pr oduct lines, rather than a sing le combined sales account , compan y management can monit or sales tr ends mor e closel y and respond to changes in sales patt erns mor e strategicall y. F or example, if TV sales ar e incr easing while Blu-r ay pla yer sales ar e decr easing, the compan y might ree valuat e both its ad vertising and pricing policies on each of these it ems to ensur e they are optimal. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 26/101 On its income statement present ed to outside in vest ors, a mer chandising compan y w ould normall y pr ovide onl y a sing le sales igur e—the sum of all of its individual sales accounts. This is done f or tw o r easons. First , providing detail on all of its indi vidual sales accounts w ould add consider able length to its income stat ement . Second, companies do not w ant their competit ors t o kno w the details of their oper ating r esults. Ho wev er , at one time Micr osoft expanded its disclosur e of rev enue fr om thr ee to i ve types. The r eason: The additional cat egories enabled inancial stat ement users to bett er e v aluat e the gr owth of the compan y's consumer and Internet businesses. AN AT OMY OF A FRA UD 1 (http://c ontent.thuzelearning .com/books/Kimmel.2745.17.1/sections/ch05ifrs#c05- not e-0006) Holl y Harmon was a cashier at a national superst ore for onl y a short time when she beg an stealing mer chandise using thr ee methods. Under the irst method, her husband or friends t ook UPC labels fr om cheaper items and put them on mor e e xpensi ve it ems. Holl y then scanned the goods at the regist er. Using the second method, Holl y scanned an it em at the r egist er but then voided the sale and left the mer chandise in the shopping cart. A third appr oach w as to put goods int o lar ge plastic containers. She scanned the plastic containers but not the goods within them. Aft er Holl y quit , a r e view of past surv eillance tapes enabled the store to observ e the thefts and to identify the participants. T otal tak e: $12,000 THE MISSING CONTR OLS Human re sour ce contr ols . A back ground check w ould ha ve re v ealed Holl y's pr evious criminal r ecor d. She would not ha ve been hir ed as a cashier . Physic al contr ols . Softw are can lag hig h numbers of voided tr ansactions or a hig h number of sales of lo w-priced goods. R andom comparisons of video recor ds with cash regist er recor ds can ensur e that the goods r eport ed as sold on the r egist er ar e the same goods that ar e sho wn being pur chased on the video recor ding. Finall y, emplo yees should be a w ar e that the y are being monit ored. So u rc e : A dap te d fr om W ells, F ra u d C a se b ook ( 2 007), p p. 2 51–2 59. A t the end of “A nat omy of a F raud” st orie s, w hic h de scribe real-w orld frauds, w e discuss the missing contr ol acti vity that w ould lik ely ha ve pr esent ed or uncover ed the fr aud . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 27/101 ▼ HELPFUL HINT The mer chandiser cr edits the Sales R ev enue account onl y for sales of goods held f or r esale. Sales of assets not held f or r esale, such as equipment or land, ar e cr edit ed directl y to the asset account . ETHIC S NOTE Many companies are trying to impr ove the quality of their inancial r eporting. F or e xample, Gener al Electric no w pr ovides mor e detail on its r e v enues and oper ating proits. SALES RETURNS AND ALL OW ANCES We no w look at the “lip side” of pur chase returns and allo wances, w hich the seller recor ds as sales returns and allo wanc es . These ar e tr ansactions w her e the seller either accepts goods back fr om a pur chaser (a r eturn) or gr ants a reduction in the pur chase price (an allo wance) so that the bu yer will k eep the goods. PW A udio Suppl y's entries t o r ecor d cr edit f or r eturned goods in vol ve (1) an incr ease (debit) in Sales R eturns and Allo wances (a contr a account t o Sales R ev enue) and a decr ease (cr edit) in A ccounts R ecei vable at the $300 selling price, and (2) an incr ease (debit) in In vent ory (assume a $140 cost) and a decr ease (cr edit) in Cost of Goods Sold, as sho wn belo w. (W e assumed that the goods w er e not def ecti ve. If the y w er e def ecti ve, PW A udio Suppl y would mak e an entry to the In vent ory account to r elect their decline in v alue.) Suppose inst ead that the goods w er e not returned but the seller gr ant ed the bu yer an allo wance b y reducing the pur chase price. In this case, the seller w ould debit Sales R eturns and Allo wances and cr edit Accounts R ecei vable f or the amount of the allo wance. An allo wance has no impact on In vent ory or Cost of Goods Sold. Sales R eturns and Allo wances is a c ontr a r e venue ac count to Sales R ev enue, w hich means it is off set against a rev enue account on the income stat ement . The normal balance of Sales R eturns and Allo wances is a debit . Companies use a contr a account , inst ead of debiting Sales R ev enue, t o disclose in the accounts and in the income stat ement the amount of sales returns and allo wances. Disclosur e of this inf ormation is important to management . Ex cessi ve returns and allo wances suggest pr oblems—inf erior mer chandise, 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 28/101 ineficiencies in illing or ders, err ors in billing cust omers, or mistak es in deli very or shipment of goods. Mor eover , a decr ease (debit) r ecor ded dir ectl y t o Sales R ev enue w ould obscur e the r elati ve importance of sales r eturns and allo wances as a per centage of sales. It also could dist ort comparisons betw een t otal sales in diff erent accounting periods. At the end of the accounting period, if the compan y anticipat es that sales r eturns and allo wances will be mat erial, the compan y should mak e an adjusting entry to estimat e the amount of returns. In some industries, such as those relating to the sale of book s and periodicals, returns ar e oft en mat erial. The accounting f or situations w her e returns must be estimat ed is addressed in advanced accounting courses.  A CCOUNTING A CR OSS THE OR GANIZA TION  Cost co Wholesale C orp . The Point of No R eturns? In most industries, sales r eturns ar e relati vel y minor . But returns of consumer electr onics can r eall y tak e a bit e out of pr oits. R ecentl y, the mar keting executi ves at Cost co Wholesale Corp. faced a dificult decision. Cost co has al w ay s prided itself on its gener ous r eturn policy . Most goods ha ve had an unlimit ed gr ace period for returns. A new policy will r equir e that certain electr onics must be r eturned within 90 da ys of their pur chase. The reason? The cost of returned pr oducts such as hig h-deinition TV s, comput ers, and iP ods cut an estimat ed 8¢ per shar e off Cost co's earnings per shar e, which was $2.30. So u rc e : K ris H ud so n, “ C ost co T ig ht en s P oli c y o n R etu rn in g E le ctr o n ic s, ” W all S tr e et J o u rn al (F eb ru ar y 2 7, 2 007), p . B 4. If a c ompan y expects signiicant returns, w hat ar e the implications for revenue rec ognition? (Go to Wile yPLUS for this ans wer and additional questions.) SALES DISC OUNTS As mentioned in our discussion of purchase transactions, the seller ma y off er the cust omer a cash discount —called b y the seller a sales disc ount —for the pr ompt pa yment of the balance due. Lik e a pur chase discount , a sales discount is based on the in voice price less returns and allo wances, if an y. The seller incr eases (debits) the Sales Discounts account f or discounts that ar e tak en. The entry b y PW A udio Suppl y to r ecor d the cash receipt on Ma y 14 from Sauk St ereo within the discount period is: 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 29/101 Like Sales R eturns and Allo wances, Sales Discounts is a c ontr a r e venue ac count to Sales R ev enue. Its normal balance is a debit . Sellers use this account , instead of debiting Sales Rev enue, t o disclose the amount of cash discounts tak en b y cust omers. If the cust omer does not tak e the discount , PW A udio Suppl y increases (debits) Cash for $3,500 and decr eases (cr edits) A ccounts R ecei vable f or the same amount at the dat e of collection. At the end of the accounting period, if the amount of pot ential discounts is mat erial, the compan y should mak e an adjusting entry t o estimat e the discounts. This w ould not usuall y be the case for sales discounts but mig ht be necessary for other types of discounts such as v olume discounts, w hich ar e addr essed in mor e advanced accounting courses. The f ollo wing T-accounts summarize the thr ee sales-r elated tr ansactions and sho w their combined effect on net sales. DO IT! 3 Sales Transactions On Sept ember 5, De La Ho ya Compan y bu ys mer chandise on account fr om Junot Diaz Compan y. The selling price of the goods is $1,500, and the cost t o Diaz Compan y w as $800. On Sept ember 8, De La Ho ya r eturns goods with a selling price of $200 and a cost of $105. R ecor d the transactions on the book s of Junot Diaz Compan y. A ction Plan ✓  Seller recor ds both the sale and the cost of goods sold at the time of the sale. ✓  When goods are returned, the seller recor ds the return in a contr a account , Sales Returns and Allo wances, and reduces Accounts R ecei vable. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 30/101 ✓  Any goods returned incr ease Invent ory and reduce Cost of Goods Sold. The in vent ory should be recor ded at the lower of its cost or its fair v alue (scr ap value). Relat ed exer cise mat erial: BE5-2, BE5-3, DO IT! 5-3, E5-2, E5-3, and E5-4. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 31/101 LEARNING OBJE CTIVE 4 Prepar e a multiple-st ep income statement and a compr ehensive income stat ement .  SINGLE- STEP INC OME STA TEMENT Companies widel y use tw o f orms of the income stat ement . One is the sing le-st ep inc ome stat ement . The stat ement is so named because only one step, subtr acting t otal e xpenses fr om t otal r e v enues, is r equir ed in det ermining net income (or net loss). In a sing le-st ep stat ement , all data ar e classiied int o tw o cat egories: (1) r e venues , w hich include both oper ating rev enues and nonoper ating rev enues and g ains (f or example, int erest rev enue and g ain on sale of equipment); and (2) e xpenses , w hich include cost of goods sold, oper ating e xpenses, and nonoper ating expenses and losses (f or example, int erest expense, loss on sale of equipment , or income tax e xpense). The sing le-st ep income stat ement is the form w e ha ve used thus far in the te xt . Illustr ation 5-7 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 007) (page 228) sho ws a sing le-st ep statement for REI . ILL USTRA TION 5-7 Sing le-st ep income stat ements Ther e ar e tw o primary r easons f or using the sing le-st ep f orm. (1) A compan y does not r ealize an y type of pr oit or income until t otal r e v enues e xceed t otal e xpenses, so it mak es sense t o di vide the stat ement int o these tw o cat egories. (2) The form is simple and eas y to r ead. M UL TIPLE- STEP INC OME STA TEMENT 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 32/101 A second form of the income stat ement is the multiple-st ep inc ome stat ement . The multiple-st ep income stat ement is oft en consider ed mor e useful because it hig hlig hts the components of net income. The REI income statement in Illustration 5-8 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 008) is an e xample. ILL USTRA TION 5-8 Multiple-st ep income stat ements The multiple-st ep income stat ement has thr ee important line it ems: gr oss pr oit , income fr om oper ations, and net income. They are det ermined as follo ws. 1. Subtr act cost of goods sold from net sales to det ermine gross pr oit . 2. Deduct oper ating expenses fr om gr oss pr oit to det ermine income from oper ations . 3. Add or subtr act the results of acti vities not relat ed to oper ations to det ermine net inc ome . Note that companies r eport income tax e xpense in a separ ate section of the income stat ement bef ore net income. The net incomes in Illustrations 05-07 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 007) and 05-0008 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 008) ar e the same. The tw o income stat ements diff er in the amount of detail displa yed and the or der pr esent ed. The follo wing discussion provides additional inf ormation about the components of a multiple-st ep income statement . INTERN ATION AL NOTE The IA SB and F A SB ar e in vol ved in a joint pr oject to e v aluat e the format of inancial stat ements. The irst phase of that pr oject in vol ves a f ocus on ho w t o 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 33/101 best pr esent re v enues and e xpenses. One longer-t erm result of the pr oject ma y be an income stat ement format that bett er r elects ho w businesses ar e run. Sales The income stat ement for a mer chandising compan y typicall y pr esents gr oss sales for the period. The compan y deducts sales returns and allo wances and sales discounts (both contr a accounts) fr om sales re v enue in the income statement to arrive at net sales . Illustr ation 5-9 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 009) sho ws the sales section of the income stat ement for PW A udio Suppl y. ILL USTRA TION 5-9 Statement presentation of sales section Gr oss Pr oit The excess of net sales o ver cost of goods sold is gr oss pr oit . It is det ermined b y deducting c ost of goods sold from net sales. As shown in Illustration 5-8 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 008) , REI had a gr oss pr oit of $960 million for the y ear ended January 3, 2015. This computation uses net sales , w hich tak es int o account sales returns and allo wances and sales discounts. On the basis of the PW Audio Suppl y sales data present ed in Illustr ation 5-9 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 009) (net sales of $460,000) and the cost of goods sold (assume a balance of $316,000), PW A udio Suppl y's gr oss pr oit is $144,000, comput ed as follo ws. Net sales $ 460,000 Cost of goods sold 316,000 Gr oss pr oit $144,000 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 34/101 It is important to understand w hat gr oss pr oit is—and w hat it is not . Gr oss pr oit repr esents the mer chandising pr oit of a compan y. Because oper ating e xpenses ha ve not been deduct ed, it is not a measur e of the o ver all pr oit of a compan y. Ne vertheless, management and other int erest ed parties closel y watch the amount and tr end of gr oss pr oit . Comparisons of curr ent gr oss pr oit with past amounts and r at es and with those in the industry indicat e the eff ecti veness of a compan y's pur chasing and pricing policies. AL TERN ATIVE TERMINOL OGY Gross pr oit is sometimes ref err ed to as gr oss mar gin . Oper ating Expenses Operating expenses ar e the ne xt component in measuring net income for a mer chandising compan y. A t REI, f or e xample, oper ating expenses w ere $778 million for the y ear ended January 3, 2015. At PW A udio Suppl y, oper ating e xpenses w er e $114,000. The irm det ermines its income fr om oper ations by subtr acting oper ating e xpenses fr om gr oss pr oit . Thus, income fr om oper ations is $30,000, as sho wn belo w. Gr oss pr oit $144,000 Oper ating expenses 114,000 Income fr om oper ations $  30,000 Nonoper ating Acti vities Nonoper ating activities consist of various r e v enues and e xpenses and g ains and losses that ar e unr elat ed to the compan y's main line of oper ations. When nonoper ating it ems ar e included, the label “ Inc ome fr om oper ations ” (or “Oper ating income”) pr ecedes them. This label clear ly identiies the results of the compan y's normal oper ations, an amount det ermined b y subtr acting cost of goods sold and oper ating expenses fr om net sales. The results of nonoper ating acti vities ar e sho wn in the cat egories “ Other re venues and gains ” and “ Other expenses and losses .” Illustr ation 5-10 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 010) lists examples of each. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 35/101 ILLUSTRA TION 5-10 Examples of nonoper ating activities Nonoper ating income is sometimes v ery signiicant . F or e xample, in one quart er, Sears Holdings earned mor e than half of its net income from in vestments in deri vati ve securities. The distinction betw een operating and nonoper ating acti vities is crucial t o e xt ernal users of inancial data. These users view oper ating income as sustainable and man y nonoper ating acti vities as non-r ecurring. When for ecasting ne xt year's income, anal ysts put the most w eig ht on this y ear's oper ating income and less w eig ht on this year's nonoper ating activities.  ETHIC S INSIGHT  IBM Disclosing More Details After Enr on , incr eased in vest or criticism and r egulat or scrutin y f or ced man y companies to impr ove the clarity of their inancial disclosur es. For e xample, IBM beg an pr oviding mor e detail reg arding its “Other g ains and losses. ” It had pr eviousl y included these it ems in its selling, gener al, and administr ative expenses, with little disclosur e. For example, pr eviousl y if IBM sold off one of its buildings at a g ain, it included this g ain in the selling, gener al, and administr ative e xpense line it em, thus reducing that e xpense. This made it appear that the compan y had done a bett er job of contr olling oper ating e xpenses than it actuall y had. As another e xample, w hen eBa y r ecentl y sold the r emainder of its in vestment in Skype to Micr osoft , it report ed a gain in “Other rev enues and g ains” of $1.7 billion. Since eBa y's t otal income fr om oper ations was $2.4 billion, it was very important that the g ain fr om the Skype sale not be buried in oper ating income. Why have in vest ors and anal ysts demanded mor e accur acy in isolating “Other gains and losses” fr om oper ating items? (Go to Wile yPLUS for this ans wer and additional questions.) 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 36/101 Nonoperating acti vities ar e report ed in the income stat ement immediat ely aft er oper ating acti vities. Included among “Other re v enues and gains” in Illustr ation 5-11 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 011) (page 231) are Int erest Rev enue and Gain on Disposal of Plant Assets. Included in “Other e xpenses and losses” ar e Int erest Expense and Casualty Loss fr om Vandalism. In Illustr ation 5-11 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b oo k s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig- 0 011) , w e ha ve pr ovided the multiple-st ep income stat ement of PW A udio Suppl y. This stat ement pr ovides mor e detail than that of REI and thus is useful as a guide for homew ork. For homew ork pr oblems, use the multiple-st ep form of the income statement unle ss the requir ements state other wise . ILLUSTRA TION 5-11 Multiple-st ep income stat ement ETHIC S NOTE Companies manage earnings in v arious w ay s. ConAgr a F oods r ecor ded a non- r ecurring g ain f or $186 million fr om the sale of Pilgrim 's Pride st ock to help meet an earnings pr ojection for the quart er. C OMPREHENSIVE INC OME STA TEMENT Chapt er 2 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 02#ch 02) discussed the fair v alue principle. A ccounting standar ds r equir e companies to mar k the r ecor ded v alues of certain types of assets and liabilities to their fair v alues at the end of each reporting period. In some instances, the unr ealized g ains or losses that r esult fr om adjusting r ecor ded amounts to fair v alue ar e included in net income. Ho wev er , in other cases, these unr ealized g ains and losses ar e not included in net income. Inst ead, 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 37/101 these e xcluded it ems ar e r eport ed as part of a mor e inclusi ve earnings measur e, called c ompr ehensi ve inc ome . Ex amples of such it ems include certain adjustments to pension plan assets, g ains and losses on for eign curr ency translation, and unr ealized gains and losses on certain types of in vestments. It ems that ar e excluded fr om net income but included in compr ehensi ve income ar e either report ed in a combined stat ement of net income and compr ehensive income, or in a separ ate compr ehensive income stat ement . The compr ehensi ve inc ome stat ement pr esents it ems that ar e not included in the det ermination of net income, ref err ed to as other compr ehensi ve income. Illustr ation 5-12 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 012) (page 232) sho ws ho w compr ehensi ve income is pr esent ed in a separ ate compr ehensi ve income stat ement . It assumes that PW A udio Suppl y had an unr ealized g ain of $2,700 with $400 of r elat ed tax e xpense. Use this format w hen pr eparing your homew ork . ILL USTRA TION 5-12 Combined stat ement of net income and compr ehensi ve inc ome DO IT! 4 Multiple- Step Income Stat ement The follo wing information is available f or Art Cent er Corp. for the y ear ended December 31, 2017. Other r ev enues and g ains $   8,000 Sales rev enue $462,000 Other e xpenses and losses 3,000 Oper ating expenses 187,000 Cost of goods sold 147,000 Sales discounts 20,000 Other compr ehensive income 10,000 Pr epar e a multiple-st ep income stat ement and compr ehensi ve income stat ement for Art Cent er Corp. The compan y has a tax rat e of 25%. This rat e also applies to other compr ehensi ve income. A ction Plan ✓  Subtr act cost of goods sold from net sales to det ermine gross proit . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 38/101 ✓  Subtract operating expenses fr om gr oss pr oit to det ermine income from oper ations. ✓  Add/subtr act nonoperating items to det ermine income before tax. ✓  Multipl y the tax rat e by income bef ore tax to det ermine tax expense. R elat ed exer cise mat erial: BE5-5, BE5-6, BE5-7, DO IT! 5-4, E5-5, E5-6, E5-7, E5-8, E5-9, E5-10, and E5-11. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 39/101 LEARNING OBJE CTIVE 5 Determine cost of goods sold under a periodic invent ory syst em.  Det ermining cost of goods sold is diff erent w hen a periodic in vent ory sy st em is used rather than a perpetual s yst em. As you ha ve seen, a compan y using a perpetual s yst em mak es an entry t o r ecor d cost of goods sold and t o r educe in vent ory each time a sale is made . A compan y using a periodic s y st em does not det ermine cost of goods sold until the end of the period. A t the end of the period, the compan y performs a count t o det ermine the ending balance of in vent ory. It then calculat es c ost of goods sold b y subtr acting ending in vent ory fr om the goods a v ailable for sale . Cost of goods a v ailable for sale is the sum of beginning invent ory plus purchases, as shown in Illustr ation 5-13 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 5 #c0 5- ig-0 013) . ILL USTRA TION 5-13 Basic formula for cost of goods sold using the periodic sy st em Another diff erence betw een the two appr oaches is that the perpetual s y st em dir ectl y adjusts the In vent ory account for an y tr ansaction that aff ects in vent ory (such as fr eig ht costs, pur chase r eturns, and pur chase discounts). The periodic syst em does not do this. Inst ead, it creat es diff erent accounts f or pur chases, fr eig ht costs, pur chase r eturns, and pur chase discounts. These v arious accounts ar e sho wn in Illustr ation 5-14 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 5 #c0 5- ig-0 014) , w hich pr esents the calculation of cost of goods sold for PW A udio Suppl y using the periodic appr oach. Not e that the basic elements from Illustr ation 5-13 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 5 #c0 5- ig-0 013) ar e hig hlig hted in Illustr ation 5-14 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 5 #c0 5- ig-0 014) . Y ou will learn more in Chapter 6 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 06#ch 06) about ho w to det ermine cost of goods sold using the periodic s yst em. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 40/101 ILLUSTRA TION 5-14 Cost of goods sold for a mer chandiser using a periodic invent ory syst em The use of the periodic in vent ory s y st em does not aff ect the f orm of pr esentation in the balance sheet . As under the perpetual s yst em, a compan y reports in vent ory in the curr ent assets section. Appendix 5A (h ttp ://c on te n t.t hu ze le a rn in g.c om /b oo k s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 7 #a pp5) pr ovides further detail on the use of the periodic s yst em. DO IT! 5 Cost of Goods Sold—P eriodic Syst em Aer osmith Compan y's accounting recor ds show the follo wing at the y ear-end December 31, 2017. Pur chase Discounts $   3,400 Freig ht-In 6,100 Pur chases 162,500 Beginning Invent ory 18,000 Ending Invent ory 20,000 Pur chase Returns and Allo wances 5,200 Assuming that A er osmith Compan y uses the periodic s y st em, comput e (a) cost of goods pur chased and (b) cost of goods sold. Action Plan ✓  T o det ermine cost of goods pur chased, adjust purchases for returns, discounts, and fr eig ht-in. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 41/101 ✓  To det ermine cost of goods sold, add cost of goods pur chased to beginning in vent ory, and subtr act ending invent ory. Relat ed exer cise mat erial: BE5-8, BE5-9, BE5-10, DO IT! 5-5, E5-12, and E5-13. ▼ HELPFUL HINT The f ar rig ht column identiies the primary it ems that mak e up cost of goods sold of $316,000. The middle column e xplains cost of goods pur chased of $320,000. The left column r eports contr a purchase items of $17,200. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 42/101 LEARNING OBJE CTIVE 6 Comput e and analyze gross pr oit rat e and pr oit mar gin.  GROSS PR OFIT RA TE A compan y's gr oss pr oit ma y be e xpr essed as a per centage b y di viding the amount of gr oss pr oit b y net sales. This is r ef err ed to as the gr oss pr oit r at e . F or PW A udio Suppl y, the gr oss pr oit rat e is 31.3 % ($144,000 ÷$460,000 ). Anal ysts gener ally consider the gr oss pr oit rat e to be mor e inf ormati ve than the gr oss pr oit amount because it e xpr esses a mor e meaningful (qualitati ve) r elationship betw een gr oss pr oit and net sales. F or example, a gr oss pr oit amount of $1,000,000 ma y sound impr essive. But if it w as the result of sales of $100,000,000, the compan y's gross proit rat e was only 1%. Illustr ation 5-15 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 6 #c0 5- ig-0 015) demonstr ates that gr oss pr oit rat es diff er greatl y across industries. ILLUSTRA TION 5-15 Gross pr oit rat e by industry A decline in a compan y's gr oss pr oit r at e mig ht ha ve se ver al causes. The compan y ma y ha ve begun t o sell pr oducts with a lo wer “mar kup ”—f or e xample, budget blue jeans v ersus designer blue jeans. Incr eased competition ma y ha ve r esult ed in a lo wer selling price. Or , ma ybe the compan y w as for ced to pa y hig her prices to its suppliers and w as not able to pass these costs on to its cust omers. The gross pr oit r at es f or REI and Dick's Sporting Goods , and the industry av er age, are present ed in Illustr ation 5-16 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 6 #c0 5- ig-0 016) . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 43/101 ILLUSTRA TION 5-16 Gross pr oit rat e REI's gr oss pr oit rat e incr eased from 43.1% in 2013 t o 43.3% in 2014. What mig ht cause changes in REI's gr oss pr oit r at e? When the econom y changes, r etailers also oft en adjust their selling prices. Changes in national w eather patt erns can also affect the amount of time people spend out doors—and ther efor e impact their pur chases of REI mer chandise. Why does REI's gr oss pr oit rat e diff er so much fr om that of Dick's Sporting Goods and the industry av er age? The gr oss pr oit r at e oft en diff ers acr oss r etailers because of diff erences in the natur e of their goods. First , REI focuses on out door equipment , while Dick's also sells sporting goods and hunting gear . The mar kup ma y diff er signiicantl y in these diff erent pr oduct sect ors. Also, althoug h REI and Dick's both sell out door equipment , the quality of the equipment the y sell diff ers. REI t ends t o sell mor e “hig h-end” goods, w hile Dick's t ends t o sell goods in a mor e “aff ordable” r ange. Hig her-quality goods oft en r ecei ve a hig her mar kup, but the r etailer also sells few er of them. In gener al, retailers adopt either a hig h-v olume–lo w- mar gin appr oach (e.g., W al-Mart ) or a lo w-v olume–hig h-margin appr oach (e.g., Sak s Fifth A venue ). The str ategic choice is oft en rev ealed in diff erences in the companies' gr oss pr oit rat es. DECISION T OOL S The gross pr oit rat e helps companies decide if the prices of their goods ar e in line with changes in the cost of in vent ory. PR OFIT MAR GIN The proit mar gin measur es the per centage of each dollar of sales that r esults in net income. W e comput e this ratio b y di viding net income by net sales (r ev enue) f or the period. Ho w do the gr oss pr oit r at e and pr oit mar gin diff er? The gr oss pr oit r at e measur es the mar gin b y w hich selling price e xceeds cost of goods sold. The pr oit mar gin measur es the e xt ent b y w hich selling pric e co vers all e xpenses (including cost of goods sold). A compan y can impr ove its pr oit mar gin b y either incr easing its gross pr oit rat e and/or by contr olling its operating expenses and other costs. F or e xample, at one time R adio Shack report ed incr eased pr oit mar gins w hich it accomplished b y closing st or es and slashing costs. E ventuall y, ho wev er , it w as for ced to ile for bankrupt cy as sales continued to decline. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 44/101 Proit mar gins vary acr oss industries. Businesses with hig h turno vers, such as gr ocery st or es ( Saf eway and Kr oger ) and discount stores (Tar get and W al-Mart ), gener ally e xperience lo w pr oit mar gins. Lo w-turno ver businesses, such as hig h-end jew elry st or es ( Tiff any and Co. ) or major drug manuf acturers ( Mer ck ), ha ve hig h proit margins. Illustr ation 5-17 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 6 #c0 5- ig-0 017) sho ws proit mar gins from a variety of industries. ILL USTRA TION 5-17 Proit mar gins by industry Pr oit mar gins for REI and Dick's Sporting Goods and the industry a v er age ar e pr esent ed in Illustr ation 5- 18 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 6 #c0 5- ig-0 018) . ILL USTRA TION 5-18 Proit mar gin REI's pr oit mar gin incr eased fr om 0.9% to 2.0% betw een 2013 and 2014. This means that the compan y generated 2.0¢ of pr oit on each dollar of sales. This incr ease occurr ed partl y because the gr oss pr oit r at e incr eased.

A change in the proit mar gin can be caused b y a change in the gr oss pr oit r at e, a change in the amount of oper ating expenses relati ve t o sales, or a change in the amount of other it ems (other r e v enues and g ains, or other expenses and losses) relati ve to sales. From Illustr ation 5-16 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 6 #c0 5- ig-0 016) , w e kno w that REI's gross proit rat e incr eased slig htly. From anal yzing the inf ormation in Illustr ation 5-8 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 008) , we see that oper ating e xpenses as a per centage of sales decr eased fr om 36.6 % ($739,148 ÷$2,017,476 ) in 2013 to 35.1 % ($778,251 ÷$2,217,131 ) in 2014. Ther efor e, in 2014, most of the incr ease in REI's pr oit mar gin occurr ed because of the decline in operating expenses as a per centage of sales. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 45/101 How does REI compar e t o its competit ors? Its pr oit mar gin w as lo wer than Dick's in 2014 and w as less than the industry a ver age. Thus, its pr oit mar gin does not suggest exceptional pr oitability . PEOPLE, PLANET , AND PROFIT INSIGHT PepsiCo Inc. Selling Gr een Her e is a question an e xecuti ve of P epsiCo Inc. w as ask ed: Should P epsiCo mar ket gr een? The executi ve indicat ed that the compan y should, as he believes it's the No. 1 thing consumers all o ver the w or ld car e about . Here are some of his thoug hts on this issue: “Sun Chips are part of the food business I run. It's a ‘health y snack. ’ W e decided that Sun Chips, if it's a health y snack, should be made in facilities that ha ve a net-zer o f ootprint . In other w or ds, I w ant off the electric grid e v eryw here w e mak e Sun Chips. W e did that . Sun Chips should be made in a f acility that puts back mor e w at er than it uses. It does that . And we partner ed with our suppliers and came out with the w or ld's irst compostable chip pack age. Now, ther e was an issue with this pack age: It was louder than the New Y or k sub way, louder than jet engines taking off. What w ould a compan y that's committ ed to gr een do: w alk a w ay or sta y committ ed? If y our people ar e passionat e, the y're going t o ix it for y ou as long as y ou sta y committ ed. Six months later, the compostable bag has half the noise of our curr ent pack age.

So the view t oda y is: w e should mar ket gr een, w e should be pr oud t o do it … it has t o be a 360 pr ocess, both int ernal and ext ernal. And if you do that , you can monetize en vir onmental sustainability for the shar eholders. ” So u rc e : “ F o u r P ro b le m s— and S o lu tio n s,” W all S tr e et J o u rn al ( Mar ch 7 , 2 011), p . R 2. What is meant b y “monetize en vironmental sustainability ” for shar eholders? (Go to Wile yPLUS for this ans wer and additional questions.) KEEPING AN EYE ON CA SH In Chapt er 4 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 04#ch 04) , y ou learned that earnings ha ve hig h quality if the y pr ovide a full and tr anspar ent depiction of ho w a c ompan y performed . In or der to quickl y assess earnings quality , 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 46/101 analysts sometimes emplo y the quality of earnings ratio . It is calculat ed as net cash pr ovided b y oper ating activities divided by net income. In gener al, a measur e signiicantl y less than 1 suggests that a compan y ma y be using mor e aggr essive accounting t echniques in or der to acceler ate income r ecognition (r ecor d income in ear lier periods). A measur e signiicantl y gr eat er than 1 suggests that a compan y is using conserv ative accounting t echniques, w hich cause it to dela y the recognition of income. Measur es that are signiicantl y less than 1 do not pr ovide deiniti ve e vidence of lo w-quality earnings. Lo w measur es do, howev er , indicat e that analysts should in vestig ate the causes of the diff erence betw een net income and net cash pr ovided b y oper ating acti vities. Ex amples of fact ors that would cause diff erences are present ed in Chapt er 4 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 04#ch 04) (page 179) . Her e ar e r ecent quality of earnings r atios for a number of w ell-kno wn companies, all of w hich ha ve measur es in excess of 1. DO IT! 6 Gr oss Pr oit Rate and Pr oit Mar gin Rachel R ose, Inc. report ed the follo wing in its 2017 and 2016 income stat ements. 2017 2016 Net sales $80,000 $120,000 Cost of goods sold 40,000 60,000 Oper ating expenses    14,000 28,000 Income tax expense 8,000 12,000 Net income $18,000 $ 20,000 Det ermine the compan y's gross pr oit rat e and pr oit mar gin. Discuss the cause f or changes in the r atios. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 47/101 Action Plan ✓  T o det ermine gross pr oit rat e, di vide gr oss pr oit by net sales. ✓  T o ind pr oit mar gin, divide net income by net sales. SOL UTION The compan y's gr oss pr oit rat e remained constant . Ho wev er , its pr oit mar gin increased signiicantl y due to a sharp decline in its oper ating costs as a percentage of sales, which declined from 23 % ($28,000 ÷$120,000 ) in 2016 to 17.5 % ($14,000 ÷$80,000 ) in 2017. R elat ed exer cise mat erial: BE5-11, BE5-12, BE5-13, DO IT! 5-6, E5-7, E5-8, E5-9, and E5- 14. DECISION T OOL S The proit mar gin helps companies decide if they are maintaining an adequat e margin betw een sales and expenses. USING DE CISION TOOL S— MOUNT AIN EQUIPMENT COOPERA TIVE Like REI , Mountain E quipment Cooper ative (MEC) is a retailer of out door equipment or ganized as a cooper ative (thoug h MEC onl y sells t o its members, w ho pa y a one-time f ee of $5). Also lik e REI, MEC has a signiicant commitment t o sustainability . Man y of its st or es emplo y stat e-of-the-art building t echniques t o minimize ener gy use, and it pledges 1% of annual sales r ev enue t o en vironmental causes. Since MEC is a Canadian compan y, it f ollo ws Int ernational Financial R eporting Standar ds (IFR S) r ather than U .S. G AAP . The A Look at 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 48/101 IFRS section at the end of each chapt er of this te xt book discusses some of the main accounting diff erences that you w ould need to be a w ar e of t o mak e a thor ough comparison of REI and MEC. Her e is recent data for MEC. Year ended ($ in thousands) 12/28/14 12/29/13 Net income $     60 $    361 Sales r ev enue 336,071 320,871 Cost of goods sold 226,099 215,614 INS TRUCTIONS Using the basic f acts in the table, e v aluat e the f ollo wing components of MEC's pr oitability for the y ears ended December 28, 2014, and December 29, 2013. Pr oit mar gin Gross pr oit rat e Ho w do MEC's pr oit mar gin and gr oss pr oit rat e compar e to those of REI and Dick's Sporting Goods f or 2014? SOL UTION MEC's proit mar gin (income per dollar of sales) r emained constant at 0.0%. This is w ell belo w both REI's (2.0%) and Dick's (5.4%). Thus, MEC is not as eff ecti ve at turning its sales int o net income as these two competit ors. MEC's gross pr oit rat e declined slig htly fr om 32.8% t o 32.7%. This suggests that its ability t o maintain its mar kup abo ve its cost of goods sold declined slig htly during this period. MEC's gr oss pr oit r at e of 32.7% is lo wer than REI's (43.3%) but hig her than Dick's (31.3%). Dick's gr oss pr oit is depr essed b y the fact that it sells man y low-mar gin pr oducts. REI is superior to MEC both in its ability to maintain its mar kup abo ve its costs of goods sold (its gr oss pr oit rat e) and in its ability to contr ol operating costs (its proit mar gin). 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 49/101 LEARNING OBJE CTIVE *7  APPENDIX 5A: Recor d purchases and sales of invent ory under a periodic invent ory syst em.  As described in this chapt er, companies ma y use one of two basic s y st ems of accounting f or in vent ories: (1) the perpetual in vent ory s y st em or (2) the periodic in vent ory s y st em. In the chapt er, w e focused on the char acteristics of the perpetual in vent ory s y st em. In this appendix, w e discuss and illustr ate the periodic in vent ory sy st em . One k ey diff erence betw een the tw o sy st ems is the point at w hich the compan y computes cost of goods sold. F or a visual reminder of this diff erence, y ou ma y w ant to ref er back to Illustr ation 5-4 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 1 #c0 5- ig-0 004) on page 218 . REC ORDING MER CHANDISE TRANS ACTIONS In a periodic in vent ory s y st em , companies r ecor d r e v enues fr om the sale of mer chandise w hen sales ar e made, just as in a perpetual s y st em. Unlik e the perpetual s y st em, ho wev er , companies do not att empt on the dat e of sale to r ec or d the cost of the mer chandise sold . Instead, they take a ph ysical in vent ory count at the end of the period t o det ermine (1) the cost of the mer chandise then on hand and (2) the cost of the goods sold during the period. And, under a periodic sy st em, companies rec or d pur chases of mer chandise in the Pur chases ac count rather than the In vent ory ac count . Pur chase returns and allo wances, pur chase discounts, and freig ht costs on pur chases are recor ded in separ ate accounts. To illustr ate the recor ding of mer chandise tr ansactions under a periodic in vent ory s y st em, w e will use pur chase/sale transactions betw een PW Audio Suppl y, Inc. and Sauk St er eo, as illustr ated f or the perpetual in vent ory syst em in this chapt er. REC ORDING PUR CHASES OF MER CHANDISE On the basis of the sales invoice ( Illustration 5-5 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 2 #c0 5- ig-0 005) , sho wn on page 220 ) and receipt of the mer chandise or der ed fr om PW A udio Suppl y, Sauk St er eo recor ds the $3,800 pur chase as follo ws. Pur chases is a tempor ary account whose normal balance is a debit . FREIGHT COS TS 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 50/101 When the purchaser directl y incurs the freig ht costs, it debits the account F reig ht-In (or T ransportation-In). F or e xample, if Sauk St ereo pa ys Public F reig ht Compan y $150 f or fr eig ht char ges on its pur chase fr om PW A udio Suppl y on May 6, the entry on Sauk Stereo 's book s is as follo ws. Lik e Pur chases, F reig ht-In is a t empor ary account w hose normal balance is a debit . Freig ht-In is part of c ost of goods pur chased. The r eason is that cost of goods pur chased should include an y fr eig ht char ges necessary to bring the goods to the pur chaser . F reig ht costs ar e not subject to a pur chase discount . Purchase discounts appl y on the invoice cost of the mer chandise. Pur chase Returns and Allo wanc es Sauk Stereo returns goods costing $300 t o PW A udio Suppl y and pr epar es the f ollo wing entry t o r ecognize the r eturn. Pur chase Returns and Allo wances is a tempor ary account whose normal balance is a cr edit . Pur chase Disc ounts On May 14, Sauk Stereo pa ys the balance due on account t o PW A udio Suppl y, taking the 2% cash discount allo wed by PW A udio Suppl y for pa yment within 10 days. Sauk St ereo r ecor ds the pa yment and discount as f ollo ws.

Pur chase Discounts is a tempor ary account whose normal balance is a cr edit . REC ORDING SALES OF MER CHANDISE The seller , PW A udio Suppl y, r ecor ds the sale of $3,800 of mer chandise to Sauk St er eo on Ma y 4 (sales in voice No. 731, Illustration 5-5 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 2 #c0 5- ig-0 005) , page 220 ) as follo ws. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 51/101 Sales R eturns and Allo wanc es To r ecor d the returned goods recei ved fr om Sauk St ereo on Ma y 8, PW A udio Suppl y r ecor ds the $300 sales r eturn as f ollo ws. Sales Disc ounts On Ma y 14, PW A udio Suppl y r ecei ves pa yment of $3,430 on account fr om Sauk St er eo. PW A udio Suppl y honors the 2% cash discount and recor ds the payment of Sauk Stereo 's account recei vable in full as f ollo ws. C OMP ARISON OF ENTRIES—PERPETU AL VS. PERIODIC 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 52/101 REVIEW AND PRACTICE LEARNING OBJE CTIVES REVIEW 1. Describe merchandising oper ations and invent ory syst ems. Because of the pr esence of in vent ory, a mer chandising compan y has sales rev enue, cost of goods sold, and gr oss pr oit . To account for in vent ory, a mer chandising compan y must choose between a perpetual invent ory syst em and a periodic in vent ory syst em. 2. Rec or d pur chases under a perpetual invent ory syst em. The In vent ory account is debit ed for all pur chases of mer chandise and for fr eig ht costs, and it is credit ed for pur chase discounts and purchase returns and allo wances. 3. Rec or d sales under a perpetual in vent ory syst em. When in vent ory is sold, Accounts R ecei vable (or Cash) is debit ed and Sales Rev enue is cr edit ed for the selling price of the mer chandise. At the same time, Cost of Goods Sold is debit ed and Invent ory is credit ed for the cost of in vent ory items sold. Separ ate contr a re v enue accounts ar e maintained for Sales R eturns and Allo wances and Sales Discounts. These accounts ar e debit ed as needed to r ecor d returns, allo wances, or discounts relat ed to the sale. 4. Pr epar e a multiple-st ep income stat ement and a compr ehensi ve inc ome stat ement . In a single-step income statement , companies classify all data under two cat egories, rev enues or e xpenses, and net income is det ermined in one step. A multiple-st ep income statement shows numer ous steps in det ermining net income, including results of nonoper ating activities. A compr ehensive income stat ement adds or subtr acts any items of other compr ehensive income t o net income to arri ve at compr ehensive income. 5. Det ermine cost of goods sold under a periodic in vent ory syst em. The periodic sy st em uses multiple accounts to k eep tr ack of transactions that aff ect invent ory. To det ermine cost of goods sold, irst calculat e cost of goods purchased by adjusting pur chases for r eturns, allo wances, discounts, and fr eig ht-in. Then calculat e cost of goods sold by adding cost of goods pur chased to beginning in vent ory and subtr acting ending invent ory. 6. Comput e and analyze gross pr oit rat e and pr oit mar gin. Proitability is affect ed by gr oss pr oit , as measur ed by the gr oss pr oit rat e, and by management's ability to contr ol costs, as measur ed by the pr oit mar gin. 7. Rec or d pur chases and sales of invent ory under a periodic invent ory syst em. To r ecor d purchases, entries are requir ed for (a) cash and cr edit pur chases, (b) purchase returns and allo wances, (c) pur chase discounts, and (d) freig ht costs. To recor d sales, entries are requir ed for (a) cash and cr edit sales, (b) sales returns and allo wances, and (c) sales discounts. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 53/101 GLOSS ARY REVIEW Compr ehensi ve inc ome An income measur e that includes gains and losses that ar e excluded fr om the det ermination of net income. Compr ehensi ve inc ome stat ement A statement that presents items that ar e not included in the det ermination of net income, ref err ed to as other compr ehensive income. C ontr a revenue ac count An account that is off set against a rev enue account on the income stat ement . Cost of goods sold The total cost of mer chandise sold during the period. Gross pr oit rat e Gr oss proit expr essed as a per centage by di viding the amount of gr oss proit by net sales. Gr oss pr oit The excess of net sales o ver the cost of goods sold. Net sales Sales less sales r eturns and allo wances and sales discounts. Periodic in vent ory syst em An in vent ory syst em in w hich a compan y does not maintain detailed recor ds of goods on hand throug hout the period and det ermines the cost of goods sold only at the end of an accounting period. Perpetual in vent ory syst em A detailed in vent ory syst em in w hich a compan y maintains the cost of each invent ory item, and the recor ds continuousl y show the invent ory that should be on hand. Proit mar gin Measur es the percentage of each dollar of sales that results in net income, comput ed by di viding net income by net sales. Pur chase allo wanc e A deduction made to the selling price of mer chandise, grant ed by the seller , so that the buyer will k eep the mer chandise. Purchase disc ount A cash discount claimed by a bu yer f or pr ompt pa yment of a balance due. Pur chase invoic e A document that provides support for each pur chase. Purchase return A return of goods fr om the bu yer t o the seller for cash or cr edit . Quality of earnings ratio A measur e used to indicat e the ext ent to w hich a compan y's earnings provide a full and tr anspar ent depiction of its performance; comput ed as net 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 54/101 cash provided b y oper ating activities divided by net income. Sales disc ount A reduction gi ven b y a seller for pr ompt pa yment of a credit sale. Sales in voic e A document that provides support for each sale. S ales r eturns and allo wanc es Transactions in w hich the seller either accepts goods back from the pur chaser (a return) or gr ants a reduction in the pur chase price (an allo wance) so that the bu yer will k eep the goods. Sales r evenue Primary sour ce of rev enue f or a mer chandising compan y. PRA CTICE MUL TIPLE-CHOICE QUES TIONS (LO 1) 1. Which of the follo wing stat ements about a periodic invent ory syst em is true ? (a) Companies det ermine cost of goods sold only at the end of the accounting period. (b) Companies continuousl y maintain detailed recor ds of the cost of each invent ory pur chase and sale. (c) The periodic syst em pr ovides bett er contr ol over in vent ories than a perpetual sy st em. (d) The incr eased use of comput erized syst ems has incr eased the use of the periodic sy st em. (L O 2) 2. Under a perpetual in vent ory syst em, w hen goods ar e pur chased for r esale b y a compan y: (a) purchases on account are debit ed to In vent ory. (b) pur chases on account are debit ed to Pur chases. (c) purchase returns ar e debit ed to Pur chase Returns and Allo wances. (d) fr eig ht costs are debit ed to F reig ht-Out . (LO 3) 3. Which sales accounts normall y have a debit balance? (a) Sales Discounts. (b) Sales R eturns and Allo wances. (c) Both (a) and (b). (d) Neither (a) nor (b). 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 55/101 (LO 3) 4. A compan y makes a credit sale of $750 on June 13, terms 2/10, n/30, on w hich it gr ants a r eturn of $50 on June 16. What amount is r ecei ved as pa yment in full on June 23? (a) $700. (b) $686. (c) $685. (d) $650. (LO 3) 5. To recor d the sale of goods for cash in a perpetual in vent ory syst em: (a) onl y one journal entry is necessary to r ecor d cost of goods sold and reduction of in vent ory. (b) onl y one journal entry is necessary to r ecor d the receipt of cash and the sales re v enue. (c) tw o journal entries are necessary: one to r ecor d the receipt of cash and sales rev enue, and one t o r ecor d the cost of goods sold and reduction of in vent ory. (d) two journal entries are necessary: one to r ecor d the receipt of cash and reduction of in vent ory, and one to r ecor d the cost of goods sold and sales rev enue. (L O 4) 6. Gr oss proit will result if: (a) oper ating expenses ar e less than net income. (b) net sales are gr eat er than oper ating expenses. (c) net sales ar e gr eat er than cost of goods sold. (d) oper ating expenses ar e gr eat er than cost of goods sold. (LO 4) 7. If net sales ar e $400,000, cost of goods sold is $310,000, and oper ating e xpenses ar e $60,000, w hat is the gr oss pr oit? (a) $30,000. (b) $90,000. (c) $340,000. (d) $400,000. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 56/101 (LO 4) 8. The multiple-st ep income stat ement f or a mer chandising compan y sho ws each of these featur es except : (a) gr oss pr oit . (b) cost of goods sold. (c) a sales section. (d) an investing acti vities section. (LO 5) 9. If beginning in vent ory is $60,000, cost of goods pur chased is $380,000, and ending in vent ory is $50,000, what is cost of goods sold under a periodic syst em? (a) $390,000. (b) $370,000. (c) $330,000. (d) $420,000. (L O 5) 10. Buff ord Corpor ation had r eport ed the f ollo wing amounts at December 31, 2017: sales r e v enue $184,000, ending in vent ory $11,600, beginning in vent ory $17,200, pur chases $60,400, pur chase discounts $3,000, pur chase returns and allo wances $1,100, fr eig ht-in $600, and freig ht-out $900. Calculat e the cost of goods available f or sale. (a) $69,400. (b) $74,100. (c) $56,900. (d) $197,700. (L O 6) 11. Which of the f ollo wing w ould aff ect the gr oss pr oit r at e? (Assume sales r emains constant .) (a) An increase in advertising e xpense. (b) A decr ease in depr eciation expense. (c) An incr ease in cost of goods sold. (d) A decr ease in insur ance expense. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 57/101 (LO 6) 12. The gr oss pr oit rat e is equal to: (a) net income di vided by sales. (b) cost of goods sold di vided by sales. (c) net sales minus cost of goods sold, di vided by net sales. (d) sales minus cost of goods sold, di vided by cost of goods sold. (L O 6) 13. During the y ear ended December 31, 2017, Bjornstad Corpor ation had the follo wing results: net sales $267,000, cost of goods sold $107,000, net income $92,400, oper ating expenses $55,400, and net cash pr ovided b y oper ating acti vities $108,950. What w as the compan y's proit mar gin? (a) 40%. (b) 60%. (c) 20.5%. (d) 34.6%. (LO 6) 14. A quality of earnings ratio: (a) is comput ed as net income divided by net cash pr ovided b y oper ating activities. (b) that is less than 1 indicat es that a compan y might be using aggr essive accounting tactics. (c) that is gr eat er than 1 indicat es that a compan y might be using aggr essive accounting tactics. (d) is comput ed as net cash provided b y oper ating activities divided by total assets. (L O 7) *15. When goods ar e pur chased for r esale b y a compan y using a periodic invent ory syst em: (a) pur chases on account are debit ed to In vent ory. (b) pur chases on account are debit ed to Pur chases. (c) purchase returns ar e debit ed to Pur chase Returns and Allo wances. (d) fr eig ht costs are debit ed to Pur chases. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 58/101 SOLUTIONS 1. (a) Under the periodic invent ory syst em, cost of goods sold is det ermined onl y at the end of the accounting period. The other choices are incorr ect because (b) detailed recor ds of the cost of each invent ory pur chase and sale are maintained continuousl y when a perpetual, not periodic, syst em is used; (c) the perpetual syst em pr ovides bett er contr ol over in vent ories than a periodic syst em; and (d) the incr eased use of comput erized syst ems has incr eased the use of the perpetual, not periodic, syst em. 2. (a) Under a perpetual in vent ory syst em, w hen a compan y purchases goods for r esale, pur chases on account are debit ed to the In vent ory account , not (b) Purchases or (c) Purchase Returns and Allo wances. Choice (d) is incorr ect because freig ht costs are also debit ed to the In vent ory account , not the Freig ht-Out account . 3. (c) Both Sales Discounts and Sales Returns and Allo wances normall y have a debit balance. Choices (a) and (b) ar e both corr ect, but (c) is the bett er answer . Choice (d) is incorr ect as both (a) and (b) are corr ect. 4. (b) The full amount of $686 is paid within 10 days of the pur chase ($750 −$50 )−[($750 −$50 )×2% ]. The other choices are incorr ect because (a) does not consider the discount of $14; (c) the amount of the discount is based upon the amount after the return is gr ant ed ($700 ×2% ), not the amount bef ore the return of mer chandise ($750 ×2% ); and (d) does not constitut e payment in full on June 23. 5. (c) Two journal entries ar e necessary: one to r ecor d the receipt of cash and sales rev enue, and one t o r ecor d the cost of goods sold and reduction of in vent ory. The other choices are incorr ect because (a) only considers the recognition of the e xpense and ignor es the re v enue, (b) onl y considers the recognition of rev enue and lea ves out the e xpense or cost of mer chandise sold, and (d) the receipt of cash and sales rev enue, not r eduction of in vent ory, are pair ed together , and the cost of goods sold and reduction of in vent ory, not sales re v enue, ar e pair ed together . 6. (c) Gross proit will result if net sales ar e gr eat er than cost of goods sold. The other choices are incorr ect because (a) operating expenses and net income ar e not used in the computation of gr oss pr oit; (b) gross pr oit results w hen net sales ar e gr eat er than cost of goods sold, not oper ating expenses; and (d) gr oss pr oit results w hen net sales, not oper ating expenses, ar e gr eat er than cost of goods sold. 7. (b) Gross pr oit =Net sales ($400,000 )−Cost of goods sold ($310,000 )=$90,000 , not (a) $30,000, (c) $340,000, or (d) $400,000. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 59/101 8. (d) An investing acti vities section appears on the stat ement of cash lows, not on a multiple-st ep income statement . Choices (a) gross proit , (b) cost of goods sold, and (c) a sales section are all featur es of a multiple-st ep income statement . 9. (a) Beginning invent ory ($60,000 )+Cost of goods pur chased ($380,000 )−Ending invent ory ($50,000 )=Cost of goods sold ($390,000 ), not (b) $370,000, (c) $330,000, or (d) $420,000. 10 . (b) Beginning invent ory ($17,200 )+Pur chases ($60,400 )−Purchases discounts ($3,000 )−Purchase returns and allo wances ($1,100 )+Freig ht-in ($600 )=Cost of goods available f or sale ($74,100 ). The other choices ar e ther efor e incorr ect. 11 . (c) Gross pr oit rat e =Gr oss pr oit ÷Net sales . Ther efor e, an y changes in sale rev enue, sales r eturns and allo wances, sales discounts, or cost of goods sold will aff ect the ratio. Changes in (a) ad vertising e xpense, (b) depr eciation expense, or (d) insur ance expense will not aff ect the computation of the gross pr oit rat e. 12 . (c) Gr oss pr oit rat e =Gr oss pr oit (Net sales −Cost of goods sold )÷Net sales . The other choices are ther efor e incorr ect. 13 . (d) Net income ($92,400 )÷Net sales ($267,000 )=Proit mar gin of 34.6 % , not (a) 40%, (b) 60%, or (c) 20.5%. 14 . (b) A quality of earnings ratio that is less than 1 indicat es that a compan y might be using aggr essive accounting tactics. The other choices ar e incorr ect because (a) Quality of earnings =Net cash provided b y oper ating activities ÷Net income ,not vice versa ; (c) a ratio that is signiicantl y great er than 1 suggests that a compan y is using conservative accounting t echniques, and (d) Quality of earnings =Net cash pr ovided b y oper ating activities ÷Net income (not Total assets ). 15 . (b) Pur chases for r esale ar e debit ed to the Pur chases account . The other choices are incorr ect because (a) purchases on account are debit ed to Pur chases, not Invent ory; (c) Pur chase Returns and Allo wances ar e alway s cr edit ed; and (d) freig ht costs are debit ed to Freig ht-In, not Pur chases. PRA CTICE EXER CISES Prepar e purchase and sale s entrie s . (LO 2, 3) 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 60/101 1. On June 10, V ar een Compan y pur chased $8,000 of mer chandise fr om Harr ah Compan y, F OB shipping point , terms 3/10, n/30. V ar een pa ys the fr eig ht costs of $400 on June 11. Damaged goods t otaling $300 ar e returned to Harr ah for cr edit on June 12. The f air v alue of these goods in $70. On June 19, V ar een pa ys Harr ah Compan y in full, less the pur chase discount . Both companies use a perpetual invent ory syst em. INS TRUCTIONS (a) Prepar e separ ate entries for each tr ansaction on the book s of Var een Compan y. (b) Pr epar e separ ate entries for each tr ansaction for Harr ah Compan y. The mer chandise purchased by V ar een on June 10 had cost Harr ah $4,800. Prepar e multiple-st ep and single-step income statements . (L O 4) 2. In its income stat ement for the year ended December 31, 2017, Mart en Compan y report ed the follo wing condensed data. Interest expense $    70,000 Net sales $2,200,000 Oper ating expenses 725,000 Int erest rev enue 25,000 Cost of goods sold 1,300,000 Loss on disposal of plant assets 17,000 Income tax e xpense 10,000 INS TRUCTIONS 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 61/101 (a) Prepar e a multiple-st ep income statement . (b) Prepar e a sing le-step income statement . PRA CTICE PROBLEM Prepar e a multiple-st ep income statement . (L O 4) The adjust ed trial balance f or the y ear ended December 31, 2017, f or Dy kstr a Compan y is sho wn belo w. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 62/101 INSTRUCTIONS Prepar e a multiple-st ep income statement for Dy kstr a Compan y. Assume a tax r at e of 30%. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 63/101 WileyPLUS Brief Ex ercises, DO IT! Ex ercises, Ex ercises, Pr oblems, and man y additional resour ces ar e av ailable for pr actice in Wile yPLUS. NOTE: All ast erisk ed Questions, Exercises, and Pr oblems relat e to mat erial in the appendix to the chapt er. QUES TIONS 1. (a) “The steps in the accounting cy cle for a mer chandising compan y differ from the st eps in the accounting cy cle for a service compan y.” Do y ou agr ee or disagr ee? (b) Is the measur ement of net income in a mer chandising compan y conceptuall y the same as in a service compan y? Explain. 2. How do the components of rev enues and e xpenses diff er betw een a merchandising compan y and a service company? 3. Maria Lopez, CEO of Sales Bin Stores, is considering a recommendation made b y both the compan y's purchasing manager and director of inance that the compan y should invest in a sophisticat ed new perpetual invent ory syst em to r eplace its periodic s yst em. Explain the primary diff erence betw een the two syst ems, and discuss the pot ential beneits of a perpetual invent ory sy st em. 4. (a) Explain the income measur ement process in a mer chandising compan y. (b) Ho w does income measur ement diff er betw een a mer chandising compan y and a service compan y? 5. Waymon Co. has net sales of $100,000, cost of goods sold of $70,000, and oper ating expenses of $18,000. What is its gr oss pr oit? 6. Masie Ascot belie ves r ev enues fr om cr edit sales ma y be recor ded before the y are collect ed in cash. Do you agr ee? Explain. 7. (a) What is the primary sour ce document for r ecor ding (1) cash sales and (2) credit sales? (b) Using XX s for amounts, gi ve the journal entry f or each of the tr ansactions in part (a), assuming perpetual in vent ory. 8. A credit sale is made on Jul y 10 for $900, t erms 1/15, n/30. On Jul y 12, the pur chaser returns $100 of goods for cr edit . Give the journal entry on Jul y 19 to r ecor d the receipt of the balance due within the discount period. 9. As the end of Sm yle Compan y's iscal year appr oached, it became clear that the compan y had consider able excess in vent ory. Marvin Ross, the head of mar keting and sales, or der ed salespeople to “add 20% mor e units to each or der that you ship. The cust omers can alway s ship the e xtr a back next period if the y decide they don 't want it. W e'v e got to do it to meet this y ear's sales goal. ” Discuss the accounting implications of Marvin 's action. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 64/101 10 . To encour age bookstor es to bu y a broader range of book titles and to discour age price discounting, the publishing industry allows book stor es to r eturn unsold book s to the publisher . This results in v ery signiicant returns each y ear . To ensur e proper recognition of rev enues, ho w should publishing companies account for these r eturns? 11 . Goods costing $1,900 ar e pur chased on account on July 15 with credit terms of 2/10, n/30. On Jul y 18, the pur chaser recei ves a $300 cr edit from the supplier for damaged goods. Gi ve the journal entry on Jul y 24 to r ecor d payment of the balance due within the discount period. 12 . Scribe Compan y reports net sales of $800,000, gr oss pr oit of $560,000, and net income of $230,000. What are its oper ating expenses? 13 . Mai Compan y has alway s pr ovided its cust omers with payment terms of 1/10, n/30. Members of its sale for ce ha ve comment ed that competitors are off ering cust omers 2/10, n/45. Explain what these terms mean, and discuss the implications to Mai of s wit ching its payment terms to those of its competit ors. 14 . In its year-end earnings announcement pr ess release, R ansome Corp. announced that its earnings incr eased by $15 million relati ve t o the pr evious y ear . This repr esent ed a 20% increase. Inspection of its income statement rev eals that the compan y report ed a $20 million gain under “Other rev enues and g ains” fr om the sale of one of its fact ories. Discuss the implications of this gain from the perspecti ve of a pot ential invest or. 15 . Identify the distinguishing featur es of an income statement for a mer chandising compan y. 16 . Wh y is the normal oper ating cycle for a mer chandising compan y likely to be longer than for a service compan y? 17 . What title does Apple use for gr oss pr oit? By ho w much did its total gr oss pr oit change, and in what dir ection, in 2014? 18 . What mer chandising account(s) will appear in the post-closing trial balance? 19 . What types of businesses are most lik ely to use a perpetual in vent ory syst em? 20 . Identify the accounts that ar e added to or deduct ed from pur chases to det ermine the cost of goods purchased under a periodic syst em. For each account , indicate (a) whether it is added or deduct ed, and (b) its normal balance. 21 . In the follo wing cases, use a periodic invent ory syst em to identify the it em(s) designat ed by the lett ers X and Y. Pur chases −X−Y=Net pur chases . Cost of goods purchased −Net purchases =X. Beginning invent ory +X=Cost of goods available f or sale . Cost of goods a vailable f or sale −Cost of goods sold =X. 22 . What tw o ratios measur e fact ors that aff ect proitability? 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 65/101 23 . What fact ors aff ect a compan y's gross pr oit rat e—that is, w hat can cause the gr oss pr oit rat e to incr ease and what can cause it to decr ease? 24 . Earl Masse y, dir ector of mar keting, w ants to r educe the selling price of his compan y's products by 15% to incr ease mar ket shar e. He says, “I kno w this will reduce our gr oss pr oit rat e, but the incr eased number of units sold will mak e up for the lost mar gin.” Bef ore this action is tak en, what other fact ors does the compan y need to consider? 25 . Mar k Cone y is considering investing in Wigg les Pet Food Compan y. Wigg les' net income increased consider ably during the most recent y ear even thoug h many other companies in the same industry report ed disappointing earnings. Mark wants to kno w whether the compan y's earnings provide a reasonable depiction of its r esults. What initial st ep can Mar k take to help det ermine whether he needs to in vestig ate further? 26 . On Jul y 15, a compan y purchases on account goods costing $1,900, with credit terms of 2/10, n/30. On Jul y 18, the compan y recei ves a $400 cr edit memo from the supplier for damaged goods. Gi ve the journal entry on Jul y 24 to r ecor d payment of the balance due within the discount period assuming a periodic invent ory syst em. BRIEF EXER CISES Comput e missing amounts in determining net income . (LO 1, 4), AP BE5-1 Pr esent ed her e ar e the components in Salas Compan y's income stat ement . Det ermine the missing amounts. S ales R evenue C ost of Goods S old Gr oss Pr oit Oper ating Expenses Net Income $ 71,200 (b) $?30,000 (d) $12,100 $108,000 $70,000 (c) (e) $29,500 (a) $71,900 $109,600 $46,200 (f) Journaliz e perpetual invent ory entrie s . (LO 2, 3), AP BE5-2 Rita Compan y bu ys mer chandise on account fr om Linus Compan y. The selling price of the goods is $900 and the cost of the goods sold is $590. Both companies use perpetual in vent ory s y st ems. Journalize 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 66/101 the transactions on the book s of both companies. Journaliz e sales transactions . (LO 3), AP BE5-3 Pr epar e the journal entries t o r ecor d the f ollo wing tr ansactions on Borst Compan y's book s using a perpetual in vent ory syst em. (a) On Mar ch 2, Borst Compan y sold $800,000 of merchandise to McLeena Compan y, t erms 2/10, n/30. The cost of the mer chandise sold was $540,000. (b) On Mar ch 6, McLeena Compan y returned $140,000 of the mer chandise purchased on Mar ch 2. The cost of the mer chandise returned w as $94,000. (c) On Mar ch 12, Borst Compan y recei ved the balance due fr om McLeena Compan y. Journaliz e purchase tr ansactions . (LO 2), AP BE5-4 From the inf ormation in BE5-3, prepar e the journal entries t o r ecor d these tr ansactions on McLeena Compan y's books under a perpetual invent ory syst em. Pr epar e sales section of income statement . (L O 4), AP BE5-5 Bart o Compan y pr ovides this inf ormation for the month ended Oct ober 31, 2017: sales on cr edit $300,000, cash sales $150,000, sales discounts $5,000, and sales r eturns and allo wances $19,000. Pr epar e the sales section of the income statement based on this information. Identif y placement of items on a multiple-st ep income statement . (L O 4), AP 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 67/101 BE5-6 Explain w her e each of these it ems w ould appear on a multiple-st ep income stat ement: g ain on disposal of plant assets, cost of goods sold, depr eciation expense, and sales returns and allo wances. Pr epar e a compr ehensi ve inc ome statement . (L O 4), AP BE5-7 The follo wing information relat es to Kar en Weigel Inc. for the y ear 2017. Retained earnings, January 1, 2017 $48,000 A dvertising e xpense $  1,800 Di vidends during 2017 5,000 Rent e xpense 10,400 Service rev enue 62,500 Utilities e xpense 3,100 Salaries and w ages expense 28,000 Other compr ehensive income (net of tax) 400 Aft er anal yzing the data, (a) comput e net income and (b) pr epar e a compr ehensi ve income stat ement for the y ear ending December 31, 2017. Det ermine cost of g oods sold using basic periodic formula . (L O 5), AP BE5-8 Silas Compan y sold goods with a t otal selling price of $800,000 during the y ear . It pur chased goods f or $380,000 and had beginning in vent ory of $67,000. A count of its ending in vent ory det ermined that goods on hand w as $50,000. What was its cost of goods sold? Comput e net purchase s and cost of g oods pur chased . (L O 5), AP BE5-9 Assume that Space y Compan y uses a periodic in vent ory s y st em and has these account balances: Pur chases $404,000, Pur chase Returns and Allo wances $13,000, Pur chase Discounts $9,000, and F reig ht-In $16,000. Det ermine net pur chases and cost of goods purchased. Comput e cost of g oods sold and gr oss pr oit . (LO 5), AP 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 68/101 BE5-10 Assume the same inf ormation as in BE5-9 and also that Space y Compan y has beginning in vent ory of $60,000, ending invent ory of $90,000, and net sales of $612,000. Det ermine the amounts t o be r eport ed for cost of goods sold and gr oss pr oit . Calculat e proit abilit y ratios . (L O 6), AP BE5-11 Dublin Corpor ation report ed net sales of $250,000, cost of goods sold of $150,000, oper ating expenses of $50,000, net income of $32,500, beginning t otal assets of $520,000, and ending t otal assets of $600,000. Calculat e each of the follo wing v alues and e xplain w hat the y mean: (a) pr oit mar gin and (b) gr oss pr oit rat e. Calculat e proit abilit y ratios . (L O 6), AP BE5-12 Gart en Corpor ation r eport ed net sales $800,000, cost of goods sold $520,000, oper ating e xpenses $210,000, and net income $68,000. Calculat e the follo wing v alues and e xplain w hat the y mean: (a) pr oit mar gin and (b) gross pr oit rat e. Ev aluat e qualit y of earnings . (LO 6), C BE5-13 Cabo Corpor ation r eport ed net income of $346,000, cash of $67,800, and net cash pr ovided b y oper ating activities of $221,200. What does this suggest about the quality of the compan y's earnings? What further st eps should be tak en? Journaliz e purchase tr ansactions . (LO 7), AP 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 69/101 *BE5-14 Pr epar e the journal entries to recor d these tr ansactions on Kimble Compan y's book s using a periodic in vent ory syst em. (a) On Mar ch 2, Kimble Compan y purchased $800,000 of mer chandise from Poe Compan y, t erms 2/10, n/30. (b) On Mar ch 6, Kimble Compan y returned $95,000 of the mer chandise purchased on Mar ch 2. (c) On March 12, Kimble Compan y paid the balance due to P oe Compan y. DO IT! EXER CISES Answ er gener al questions about mer chandisers . (L O 1), C Do IT! 5-1 Indicat e whether the follo wing stat ements are true or false. 1. A mer chandising compan y reports gr oss pr oit but a service compan y does not. 2. Under a periodic invent ory syst em, a compan y determines the cost of goods sold each time a sale occurs. 3. A service compan y is likely to use accounts r ecei vable but a mer chandising compan y is not likely to do so. 4. Under a periodic in vent ory syst em, the cost of goods on hand at the beginning of the accounting period plus the cost of goods pur chased less the cost of goods on hand at the end of the accounting period equals cost of goods sold. Rec or d tr ansactions of pur chasing c ompan y . (LO 2), AP Do IT! 5-2 On Oct ober 5, Iv erson Compan y bu ys mer chandise on account fr om Lasse Compan y. The selling price of the goods is $5,000, and the cost t o Lasse Compan y is $3,000. On Oct ober 8, Iverson returns def ective goods with a selling price of $640 and a scr ap v alue of $240. R ecor d the transactions of Iv erson Compan y, assuming a perpetual appr oach. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 70/101 Rec or d tr ansactions of se lling compan y . (LO 3), AP Do IT! 5-3 Assume inf ormation similar to that in DO IT! 5-2. That is: On Oct ober 5, Iv erson Compan y buys mer chandise on account from Lasse Compan y. The selling price of the goods is $5,000, and the cost t o Lasse Compan y is $3,000. On Oct ober 8, Iv erson r eturns def ecti ve goods with a selling price of $640 and a scr ap value of $240. R ecor d the tr ansactions on the book s of Lasse Compan y, assuming a perpetual appr oach. Prepar e multiple-st ep income statement and c ompr ehensi ve inc ome stat ement . (L O 4), AP Do IT! 5-4 The follo wing inf ormation is av ailable for Ber lin Corp. for the y ear ended December 31, 2017: Other r ev enues and g ains $  12,700 Sales rev enue $592,000 Other e xpenses and losses 13,300 Oper ating expenses 186,000 Cost of goods sold 156,000 Sales returns and allo wances 40,000 Other compr ehensive income 5,400 Pr epar e a multiple-st ep income stat ement for Ber lin Corp. and compr ehensi ve income stat ement . The compan y has a tax rat e of 30%. This rat e also applies to the other compr ehensi ve income. Det ermine cost of g oods sold using periodic sy stem . (L O 5), AP Do IT! 5-5 Clean Lak e Corpor ation's accounting r ecor ds sho w the follo wing at y ear-end December 31, 2017: Pur chase Discounts $  5,900 Beginning Invent ory $31,720 Freig ht-In 8,400 Ending Invent ory 27,950 Freig ht-Out 11,100 Pur chase Returns and Allo wances 3,600 Pur chases 162,500 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 71/101 Assuming that Clean Lake Corpor ation uses the periodic s y st em, comput e (a) cost of goods pur chased and (b) cost of goods sold. Comput e and analyze pr oit abilit y ratios . (L O 6), AN Do IT! 5-6 Ow en Wise, Inc. report ed the follo wing in its 2017 and 2016 income stat ements. 2017 2016 Net sales $150,000 $120,000 Cost of goods sold 90,000 72,000 Oper ating expenses 32,000 16,000 Income tax expense 18,000 10,000 Net income $ 10,000 $ 22,000 Det ermine the compan y's gr oss pr oit r at e and pr oit mar gin for both y ears. Discuss the cause f or changes in the r atios. EXER CISES Journaliz e purchase tr ansactions . (LO 2), AP E5-1 This inf ormation relat es to Rice Co. 1. On April 5, pur chased mer chandise from Jax Compan y for $28,000, t erms 2/10, n/30. 2. On April 6, paid fr eig ht costs of $700 on mer chandise purchased from Jax. 3. On April 7, pur chased equipment on account for $30,000. 4. On April 8, r eturned $3,600 of April 5 mer chandise to Jax Compan y. 5. On April 15, paid the amount due t o Jax Compan y in full. Instructions 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 72/101 (a) Prepar e the journal entries to r ecor d the transactions list ed abo ve on Rice Co. 's book s. Rice Co. uses a perpetual invent ory syst em. (b) Assume that Rice Co. paid the balance due to Jax Compan y on May 4 inst ead of April 15. Prepar e the journal entry to r ecor d this payment . Journaliz e perpetual invent ory entrie s . (LO 2, 3), AP E5-2 Assume that on Sept ember 1, Ofice Depot had an in vent ory that included a v ariety of calculat ors. The compan y uses a perpetual invent ory syst em. During Sept ember , these transactions occurr ed. Sept. 6 Purchased calculat ors from Dr agoo Co. at a total cost of $1,650, terms n/30. 9 Paid fr eig ht of $50 on calculat ors purchased from Dr agoo Co. 10 Returned calculat ors to Dr agoo Co. for $66 cr edit because the y did not meet speciications. 12 Sold calculat ors costing $520 for $690 t o F ry er Book St ore, terms n/30. 14 Gr ant ed credit of $45 to F ry er Book St ore for the r eturn of one calculat or that was not or der ed. The calculat or cost $34. 20 Sold calculators costing $570 for $760 t o Heasle y Card Shop, terms n/30. Instructions Journalize the Sept ember transactions. Journaliz e sales transactions . (LO 3), AP E5-3 The follo wing transactions ar e for Alonzo Compan y. 1. On December 3, Alonzo Compan y sold $500,000 of merchandise to Art e Co., terms 1/10, n/30. The cost of the mer chandise sold was $330,000. 2. On December 8, Art e Co. was gr ant ed an allo wance of $25,000 for mer chandise purchased on December 3. 3. On December 13, Alonzo Compan y recei ved the balance due fr om Art e Co. Instructions 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 73/101 (a) Prepar e the journal entries to r ecor d these transactions on the book s of Alonzo Compan y. Alonzo uses a perpetual in vent ory syst em. (b) Assume that Alonzo Compan y recei ved the balance due fr om Art e Co. on January 2 of the follo wing year inst ead of December 13. Prepar e the journal entry to r ecor d the receipt of pa yment on January 2. Journaliz e perpetual invent ory entrie s . (LO 2, 3), AP E5-4 On June 10, P ais Compan y pur chased $9,000 of mer chandise fr om McGi ver Compan y, terms 3/10, n/30. P ais pa ys the fr eig ht costs of $400 on June 11. Goods t otaling $600 ar e r eturned t o McGi ver f or cr edit on June 12. On June 19, P ais Compan y pa ys McGi ver Compan y in full, less the pur chase discount . Both companies use a perpetual in vent ory syst em. Instructions (a) Pr epar e separ ate entries for each tr ansaction on the book s of Pais Compan y. (b) Pr epar e separ ate entries for each tr ansaction for McGi ver Compan y. The mer chandise purchased by P ais on June 10 cost McGi ver $5,000, and the goods r eturned cost McGi ver $310. Pr epar e sales section of income statement . (L O 4), AP E5-5 The adjust ed trial balance of Doqe Compan y sho ws these data pertaining to sales at the end of its iscal y ear , Oct ober 31, 2017: Sales R ev enue $900,000, F reig ht-Out $14,000, Sales R eturns and Allo wances $22,000, and Sales Discounts $13,500. Instructions Pr epar e the sales section of the income statement . Prepar e an income statement , a compr ehensi ve inc ome statement , and c alculat e proit abilit y ratios . (L O 4, 6), AP E5-6 Pr esent ed below is information for Lieu Co. for the month of January 2017. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 74/101 Cost of goods sold $212,000 Rent e xpense $ 32,000 Freig ht-out 7,000 Sales discounts 8,000 Insur ance expense 12,000 Sales returns and allo wances 20,000 Salaries and w ages expense 60,000 Sales rev enue 370,000 Income tax e xpense 5,000 Other compr ehensive income (net of $400 tax) 2,000 Instructions (a) Pr epar e an income statement using the format pr esent ed in Illustr ation 5-11 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 05lo 4 #c0 5- ig-0 011) . (b) Pr epar e a compr ehensive income stat ement . (c) Calculat e the proit mar gin and the gross pr oit rat e. Comput e missing amounts and calculat e proit abilit y ratios . (L O 4, 6), AP E5-7 Financial inf ormation is present ed here for tw o companies. Yost e Compan y Noone Compan y Sales rev enue $90,000 ? Sales r eturns and allo wances ? $  5,000 Net sales  84,000  100,000 Cost of goods sold  58,000 ? Gr oss pr oit ?   40,000 Oper ating expenses  14,380 ? Net income ?   17,000 Instructions (a) Fill in the missing amounts. Sho w all computations. (b) Calculat e the proit mar gin and the gross pr oit rat e for each compan y. (c) Discuss y our indings in part (b). Pr epar e multiple-st ep income statement and calculat e proit abilit y ratios . (L O 4, 6), AP 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 75/101 E5-8 In its income stat ement for the y ear ended December 31, 2017, Darr en Compan y report ed the follo wing condensed data. Salaries and wages expense $465,000 Loss on disposal of plant assets $   83,500 Cost of goods sold 987,000 Sales rev enue 2,210,000 Int erest expense 71,000 Income tax expense 25,000 Int erest rev enue 65,000 Sales discounts 160,000 Depr eciation expense 310,000 Utilities expense 110,000 Instructions (a) Pr epar e a multiple-st ep income statement . (b) Calculat e the proit mar gin and gross pr oit rat e. (c) In 2016, Darr en had a proit mar gin of 5%. Is the decline in 2017 a cause for concern? (Ignor e income tax effects.) Prepar e multiple-st ep income statement and calculat e proit abilit y ratios . (L O 4, 6), AP E5-9 Suppose in its income stat ement f or the y ear ended June 30, 2017, The Clor ox Compan y r eport ed the f ollo wing condensed data (dollars in millions). Salaries and wages expense $  460 Resear ch and development e xpense $  114 Depr eciation expense 90 Sales rev enue 5,730 Income tax e xpense 276 Int erest expense 161 Loss on disposal of plant assets 46 Advertising e xpense 499 Cost of goods sold 3,104 Sales returns and allo wances 280 Rent e xpense 105 Utilities expense 60 Instructions (a) Pr epar e a multiple-st ep income statement . (b) Calculat e the gross pr oit rat e and the pr oit mar gin and explain w hat each means. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 76/101 (c) Assume the marketing department has pr esent ed a plan to incr ease advertising e xpenses b y $340 million. It expects this plan to r esult in an incr ease in both net sales and cost of goods sold of 25%. (Hint: Increase both sales rev enue and sales r eturns and allo wances by 25%.) R edo parts (a) and (b) and discuss w hether this plan has merit . (Assume a tax rat e of 34%, and round all amounts to w hole dollars.) Prepar e an income statement and compr ehensi ve inc ome statement . (L O 4), AP E5-10 In its income stat ement for the y ear ended December 31, 2017, Laine Inc. r eport ed the follo wing condensed data. Oper ating expenses $  725,000 Int erest rev enue $   33,000 Cost of goods sold 1,256,000 Loss on disposal of plant assets 17,000 Int erest expense 70,000 Net sales 2,200,000 Income tax expense 47,000 Other compr ehensive income (net of $1,200 tax) 8,300 Instructions (a) Pr epar e an income statement . (b) Prepar e a compr ehensive income stat ement . Prepar e a multiple-st ep income statement . (L O 4), AP E5-11 The follo wing select ed accounts fr om the Blue Door Corpor ation's gener al ledger ar e pr esent ed below for the y ear ended December 31, 2017: Advertising e xpense $  55,000 Int erest rev enue $  30,000 Common st ock 250,000 Invent ory 67,000 Cost of goods sold 1,085,000 Rent r ev enue 24,000 Depr eciation expense 125,000 Retained earnings 535,000 Di vidends 150,000 Salaries and w ages expense 675,000 Freig ht-out 25,000 Sales discounts 8,500 Income tax expense 70,000 Sales returns and allo wances 41,000 Insur ance expense 15,000 Int erest expense 70,000 Sales rev enue 2,400,000 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 77/101 Instructions Prepar e a multiple-st ep income statement . Prepar e cost of g oods sold section using periodic sy stem . (L O 5), AP E5-12 The trial balance of Mendez Compan y at the end of its iscal y ear , A ugust 31, 2017, includes these accounts: Beginning In vent ory $18,700, Pur chases $154,000, Sales R ev enue $190,000, F reig ht-In $8,000, Sales R eturns and Allo wances $3,000, F reig ht-Out $1,000, and Pur chase R eturns and Allo wances $5,000. The ending in vent ory is $21,000. Instructions Prepar e a cost of goods sold section (periodic syst em) for the y ear ending A ugust 31, 2017. Pr epar e cost of g oods sold section using periodic sy stem . (L O 5), AP E5-13 Belo w is a series of cost of goods sold sections for companies B, M, O , and S. B M O S Beginning in vent ory $   250 $   120 $   700 $     ( j) Purchases 1,500 1,080 (g) 43,590 Pur chase returns and allo wances 80 (d) 290 (k) Net pur chases (a) 1,040 7,410 42,290 Freig ht-in 130 (e) (h) 2,240 Cost of goods pur chased (b) 1,230 8,050 (l) Cost of goods available f or sale 1,800 1,350 (i) 49,530 Ending in vent ory 310 (f) 1,150 6,230 Cost of goods sold (c) 1,230 7,600 43,300 Instructions Fill in the lett ered blank s to complet e the cost of goods sold sections. Evaluat e qualit y of earnings . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 78/101 (LO 6), C E5-14 Dorsett Corpor ation report ed sales rev enue of $257,000, net income of $45,300, cash of $9,300, and net cash pr ovided b y oper ating acti vities of $23,200. A ccounts r ecei vable ha ve incr eased at thr ee times the r at e of sales during the last 3 years. Instructions (a) Explain w hat is meant by hig h quality of earnings. (b) Evaluat e the quality of the compan y's earnings. Discuss your indings. (c) What fact ors mig ht have contribut ed to the compan y's quality of earnings? Journaliz e purchase tr ansactions . (LO 7), AP *E5-15 This inf ormation relat es to Alie Co. 1. On April 5, pur chased mer chandise from Bach Compan y for $27,000, t erms 2/10, n/30. 2. On April 6, paid fr eig ht costs of $1,200 on mer chandise purchased from Bach Compan y. 3. On April 7, pur chased equipment on account for $30,000. 4. On April 8, r eturned some of the April 5 mer chandise to Bach Compan y, w hich cost $3,600. 5. On April 15, paid the amount due to Bach Compan y in full. Instructions (a) Prepar e the journal entries to r ecor d these transactions on the book s of Alie Co. using a periodic invent ory syst em. (b) Assume that Alie Co. paid the balance due to Bach Compan y on May 4 inst ead of April 15. Prepar e the journal entry to r ecor d this payment . EXER CISES: SET B AND CHALLENGE EXER CISES Visit the book's companion websit e, at www.wiley.c om/c ollege/kimmel (h ttp ://www .wile y.c om /c olle ge /k im mel) , and choose the Student Companion sit e to access Ex ercises: Set B and Challenge Ex ercises. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 79/101 PROBLEMS: SET A Journaliz e, post, and prepar e partial income statement , and calculat e ratios . (L O 2, 3, 4, 6), AP P5-1A Wint ers Har dw ar e St or e complet ed the f ollo wing mer chandising tr ansactions in the month of Ma y. A t the beginning of Ma y, Wint ers' ledger showed Cash of $8,000 and Common St ock of $8,000. Ma y 1 Pur chased mer chandise on account from Black Wholesale Suppl y for $8,000, t erms 1/10, n/30. 2 Sold mer chandise on account for $4,400, t erms 2/10, n/30. The cost of the mer chandise sold was $3,300. 5 Recei ved cr edit from Black Wholesale Suppl y for mer chandise returned $200. 9 Recei ved collections in full, less discounts, fr om cust omers billed on May 2. 10 Paid Black Wholesale Suppl y in full, less discount . 11 Purchased supplies for cash $900. 12 Pur chased mer chandise for cash $3,100. 15 R ecei ved $230 r efund for r eturn of poor-quality mer chandise from supplier on cash pur chase. 17 Purchased mer chandise from Wilhelm Distribut ors for $2,500, t erms 2/10, n/30. 19 Paid fr eig ht on Ma y 17 pur chase $250. 24 Sold mer chandise for cash $5,500. The cost of the mer chandise sold was $4,100. 25 Pur chased mer chandise from Clasps Inc. for $800, t erms 3/10, n/30. 27 Paid Wilhelm Distribut ors in full, less discount. 29 Made refunds to cash cust omers for r eturned mer chandise $124. The returned mer chandise had cost $90. 31 Sold merchandise on account for $1,280, t erms n/30. The cost of the mer chandise sold was $830. Wint ers Har dw ar e's chart of accounts includes Cash, A ccounts R ecei vable, In vent ory, Supplies, A ccounts Pay able, Common St ock, Sales R ev enue, Sales R eturns and Allo wances, Sales Discounts, and Cost of Goods Sold.

Instructions (a) Journalize the tr ansactions using a perpetual in vent ory syst em. (b) P ost the tr ansactions to T -accounts. Be sur e to ent er the beginning cash and common stock balances. (c) Gr oss proit $2,828 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 80/101 (c) Prepar e an income statement throug h gross pr oit for the month of Ma y 2017. (d) Calculat e the proit mar gin and the gross pr oit rat e. (Assume oper ating expenses w ere $1,400.) Journaliz e purchase and sale tr ansactions under a perpetual sy stem . (L O 2, 3), AP P5-2A P ow ell W ar ehouse distribut es har dback book s to retail st or es and e xt ends cr edit terms of 2/10, n/30 t o all of its cust omers. During the month of June, the follo wing mer chandising transactions occurr ed. June 1 Purchased book s on account for $1,040 (including fr eig ht) from Catlin Publishers, terms 2/10, n/30. 3 Sold book s on account to Garfunk el Bookstor e for $1,200. The cost of the mer chandise sold was $720. 6 Recei ved $40 cr edit for book s returned to Catlin Publishers. 9 Paid Catlin Publishers in full. 15 R ecei ved pa yment in full from Garfunk el Bookstor e. 17 Sold book s on account to Bell T ow er for $1,200. The cost of the mer chandise sold was $730. 20 Pur chased book s on account for $720 fr om Priceless Book Publishers, terms 1/15, n/30. 24 R ecei ved pa yment in full from Bell Tow er . 26 Paid Priceless Book Publishers in full. 28 Sold book s on account to Gener al Bookstor e for $1,300. The cost of the mer chandise sold was $780. 30 Gr ant ed Gener al Bookstor e $130 cr edit for book s returned costing $80. Instructions Journalize the tr ansactions for the month of June for P ow ell W arehouse, using a perpetual in vent ory syst em. Journaliz e, post, and prepar e trial balanc e and partial income statement . (L O 2, 3, 4), AP P5-3A At the beginning of the curr ent season on April 1, the ledger of Gr anit e Hills Pr o Shop sho wed Cash $2,500, In vent ory $3,500, and Common St ock $6,000. The follo wing tr ansactions w er e complet ed during April 2017. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 81/101 Apr. 5 Pur chased golf bags, clubs, and balls on account from Arnie Co. $1,500, terms 3/10, n/60. 7 Paid fr eig ht on Arnie pur chase $80. 9 Recei ved cr edit from Arnie Co. for mer chandise returned $200. 10 Sold mer chandise on account to members $1,340, terms n/30. The mer chandise sold had a cost of $820. 12 Purchased golf shoes, sw eat ers, and other accessories on account from W oods Sports wear $830, terms 1/10, n/30. 14 P aid Arnie Co. in full. 17 R ecei ved cr edit from W oods Sports wear for mer chandise returned $30. 20 Made sales on account to members $810, terms n/30. The cost of the mer chandise sold was $550. 21 Paid W oods Sports wear in full. 27 Gr ant ed an allo wance to members for clothing that did not it pr oper ly $80. 30 R ecei ved pa yments on account from members $1,220. The chart of accounts for the pr o shop includes Cash, A ccounts R ecei vable, In vent ory, A ccounts P ay able, Common St ock, Sales Rev enue, Sales R eturns and Allo wances, and Cost of Goods Sold. Instructions (a) Journalize the April tr ansactions using a perpetual in vent ory syst em. (b) Using T-accounts, ent er the beginning balances in the ledger accounts and post the April transactions. (c) Tot . trial balanc e $8,150 (c) Prepar e a trial balance on April 30, 2017. (d) Gross proit $ 700 (d) Prepar e an income statement throug h gross pr oit for the month of April 2017. Pr epar e inancial statements and calculat e proit abilit y ratios . (L O 4, 6), AP P5-4A W olf ord Department St or e is locat ed in midt own Metr opolis. During the past se ver al y ears, net income has been declining because subur ban shopping cent ers ha ve been attr acting business a w ay fr om city ar eas. A t the end of the compan y's iscal y ear on No vember 30, 2017, these accounts appear ed in its adjust ed trial balance. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 82/101 Accounts P ay able $ 26,800 A ccounts R ecei vable 17,200 A ccumulat ed Depreciation—E quipment 68,000 Cash 8,000 Common Stock 35,000 Cost of Goods Sold 614,300 Freig ht-Out 6,200 Equipment 157,000 Depr eciation Expense 13,500 Dividends 12,000 Gain on Disposal of Plant Assets 2,000 Income Tax Expense 10,000 Insur ance Expense 9,000 Interest Expense 5,000 Invent ory 26,200 Not es Pay able 43,500 Pr epaid Insur ance 6,000 Advertising Expense $ 33,500 R ent Expense 34,000 Retained Earnings 14,200 Salaries and W ages Expense 117,000 Salaries and Wages Pay able 6,000 Sales R eturns and Allo wances 20,000 Sales R ev enue 904,000 Utilities Expense 10,600 A dditional data: Not es payable ar e due in 2021. Instructions (a) Pr epar e a multiple-st ep income statement , a retained earnings stat ement , and a classiied balance sheet. (a) Net income $ 32,900 Tot . assets $146,400 (b) Calculat e the proit mar gin and the gross pr oit rat e. (c) The vice pr esident of mar keting and the dir ector of human resour ces have de veloped a pr oposal wher eby the compan y would compensat e the sales for ce on a strictl y commission basis. Given the incr eased incenti ve, the y expect net sales to incr ease by 15%. As a result , they estimat e that gross pr oit will incr ease by $40,443 and expenses b y $58,600. Comput e the expect ed new net income. (Hint: You do not need to pr epar e an income statement .) Then, comput e the revised pr oit mar gin and gross pr oit 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 83/101 rat e. Comment on the eff ect that this plan would ha ve on net income and on the r atios, and e valuat e the merit of this proposal. (Ignor e income tax effects.) Prepar e a corr ect multiple-st ep income statement . (L O 4), AP P5-5A An ine xperienced accountant pr epar ed this condensed income stat ement for Simon Compan y, a retail irm that has been in business f or a number of y ears. SIMON C OMP ANY Income Stat ement For the Y ear Ended Dec ember 31, 2017 Rev enues Net sales $850,000 Other r ev enues 22,000 872,000 Cost of goods sold 555,000 Gr oss pr oit 317,000 Oper ating expenses Selling expenses 109,000 Administr ative e xpenses 103,000 212,000 Net earnings $105,000 As an experienced, kno wledgeable accountant , you review the stat ement and determine the follo wing facts. 1. Net sales consist of sales $911,000, less fr eig ht-out on mer chandise sold $33,000, and sales returns and allo wances $28,000. 2. Other rev enues consist of sales discounts $18,000 and r ent rev enue $4,000. 3. Selling e xpenses consist of salespersons' salaries $80,000, depr eciation on equipment $10,000, advertising $13,000, and sales commissions $6,000. The commissions r epr esent commissions paid. At December 31, $3,000 of commissions ha ve been earned b y salespersons but ha ve not been paid. All compensation should be r ecor ded as Salaries and Wages Expense. 4. Administr ative e xpenses consist of ofice salaries $47,000, di vidends $18,000, utilities $12,000, int erest expense $2,000, and rent e xpense $24,000, w hich includes pr epa yments totaling $6,000 for the irst quart er of 2018. Instructions 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 84/101 Prepar e a corr ect detailed multiple-st ep income statement . Assume a 25% tax rat e. Net inc ome $67,500 Journaliz e, post, and prepar e adjust ed trial balanc e and inancial statements . (L O 4), AP P5-6A The trial balance of People 's Choice Wholesale Compan y contained the f ollo wing accounts sho wn at December 31, the end of the compan y's iscal year . PEOPLE'S CHOICE WHOLES ALE COMP ANY Trial Balanc e December 31, 2017 Debit Credit Cash $    31,400 Accounts R ecei vable 37,600 In vent ory 70,000 Land 92,000 Buildings 200,000 Accumulat ed Depreciation—Buildings $    60,000 Equipment 83,500 A ccumulat ed Depreciation—E quipment 40,500 Notes Pay able 54,700 A ccounts P ay able 17,500 Common St ock 160,000 Retained Earnings 67,200 Di vidends 10,000 Sales Rev enue 922,100 Sales Discounts 6,000 Cost of Goods Sold 709,900 Salaries and W ages Expense 51,300 Utilities Expense 11,400 Maint enance and Repairs Expense 8,900 Advertising Expense 5,200 Insur ance Expense 4,800 $1,322,000 $1,322,000 Adjustment data: 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 85/101 1. Depreciation is $8,000 on buildings and $7,000 on equipment . (Both are oper ating expenses.) 2. Int erest of $4,500 is due and unpaid on not es payable at December 31. 3. Income tax due and unpaid at December 31 is $24,000. Other data: $15,000 of the not es payable ar e pa yable ne xt year . Instructions (a) Journalize the adjusting entries. (b) Creat e T-accounts for all accounts used in part (a). Ent er the trial balance amounts into the T-accounts and post the adjusting entries. (c) T ot . trial balanc e $1,365,500 (c) Prepar e an adjust ed trial balance. (d) Net income $  81,100 Tot . assets $ 399,000 (d) Pr epar e a multiple-st ep income statement and a retained earnings stat ement for the y ear , and a classiied balance sheet at December 31, 2017. Det ermine cost of g oods sold and gr oss pr oit under a periodic system . (L O 4, 5), AP P5-7A At the end of Oat es Department St or e's iscal y ear on No vember 30, 2017, these accounts appear ed in its adjusted trial balance. Freig ht-In $   5,060 Invent ory (beginning) 41,300 Pur chases 613,000 Purchase Discounts 7,000 Purchase Returns and Allo wances 6,760 Sales R ev enue 902,000 Sales R eturns and Allo wances 20,000 Additional facts: 1. In vent ory on No vember 30, 2017, is $36,200. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 86/101 2. Note that Oat es Department Store uses a periodic syst em. Instructions Pr epar e an income statement throug h gross pr oit for the y ear ended No vember 30, 2017. Gr oss pr oit $272,600 Calculat e missing amounts and assess proit abilit y . (LO 4, 5, 6), AN P5-8A Zhou Inc. oper ates a r etail oper ation that pur chases and sells sno wmobiles, among other out door products. The compan y pur chases all in vent ory on cr edit and uses a periodic in vent ory sy st em. The A ccounts P ay able account is used for r ecor ding in vent ory pur chases onl y; all other curr ent liabilities ar e accrued in separ ate accounts. Y ou ar e pr ovided with the f ollo wing select ed inf ormation f or the iscal y ears 2015 thr oug h 2018, inclusi ve. Instructions (a) Calculat e the missing amounts. (b) The vice presidents of sales, mar keting, pr oduction, and inance are discussing the compan y's results with the CEO . They note that sales declined over the 3-y ear iscal period, 2016−2018. Does that mean that proitability necessaril y also declined? Explain, computing the gross pr oit rat e and the pr oit mar gin for each iscal y ear to help support y our ans wer . 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 87/101 Journalize, post , and pr epar e trial balanc e and partial inc ome st at ement under a periodic sy stem . (L O 5, 7), AP P5-9A At the beginning of the curr ent season on April 1, the ledger of Gr anit e Hills Pr o Shop sho wed Cash $2,500, In vent ory $3,500, and Common St ock $6,000. The follo wing tr ansactions occurr ed during April 2017.

Apr . 5 Pur chased golf bags, clubs, and balls on account from Arnie Co. $1,500, terms 3/10, n/60. 7 Paid fr eig ht on Arnie Co. pur chases $80. 9 Recei ved cr edit from Arnie Co. for mer chandise returned $200. 10 Sold mer chandise on account to members $1,340, terms n/30. 12 Pur chased golf shoes, sw eat ers, and other accessories on account from W oods Sports wear $830, terms 1/10, n/30. 14 P aid Arnie Co. in full. 17 R ecei ved cr edit from W oods Sports wear for mer chandise returned $30. 20 Made sales on account to members $810, terms n/30. 21 Paid W oods Sports wear in full. 27 Gr ant ed credit to members for clothing that did not it pr oper ly $80. 30 R ecei ved pa yments on account from members $1,220. The chart of accounts for the pr o shop includes Cash, A ccounts R ecei vable, In vent ory, A ccounts P ay able, Common St ock, Sales Rev enue, Sales R eturns and Allo wances, Pur chases, Purchase Returns and Allo wances, Pur chase Discounts, and Freig ht-In. Instructions (a) Journalize the April transactions using a periodic in vent ory syst em. (b) Using T-accounts, ent er the beginning balances in the ledger accounts and post the April transactions. (c) Tot . trial balanc e $8,427 (c) Prepar e a trial balance on April 30, 2017. (d) Gross proit $ 700 (d) Prepar e an income statement throug h gross pr oit , assuming invent ory on hand at April 30 is $4,263. PR OBLEMS: SET B AND SET C 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 88/101 Visit the book's companion websit e, at www.wiley.c om/c ollege/kimmel (h ttp ://www .wile y.c om /c olle ge /k im mel) , and choose the Student Companion sit e to access Pr oblems: Set B and Set C. C ONTINUING PR OBLEM Cookie Cr eations (Not e: This is a continuation of the Cookie Cr eations pr oblem from Chapt ers 1 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 01#ch 01) thr oug h 4 (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/ch 04#ch 04) .) C C5 Because Natalie has had such a successful irst few months, she is considering other opportunities t o de velop her business. One opportunity is t o become the e xclusi ve distribut or of a line of ine Eur opean mix ers. Natalie comes t o y ou f or ad vice on ho w t o account f or these mix ers.

Go to the book's companion websit e, at www.wiley.c om/c ollege/kimmel (h ttp ://www .wile y.c om /c olle ge /k im mel) , to see the c ompletion of this pr oblem . COMPREHENSIVE A CCOUNTING CY CLE | REVIEW ACR5-1 On December 1, 2017, De vine Distributing Compan y had the follo wing account balances. Debit Credit Cash $  7,200 Accumulat ed Depreciation—E quipment $  2,200 Accounts R ecei vable 4,600 In vent ory 12,000 Accounts P ay able 4,500 Supplies 1,200 Salaries and W ages Pay able 1,000 E quipment 22,000 Common St ock 15,000 $47,000 Retained Earnings 24,300 $47,000 During December , the company complet ed the follo wing summary transactions. Dec. 6 Paid $1,600 for salaries due emplo yees, of w hich $600 is for December and $1,000 is for No vember salaries pa yable. 8 R ecei ved $1,900 cash fr om cust omers in payment of account (no discount allo wed). 10 Sold mer chandise for cash $6,300. The cost of the mer chandise sold was $4,100. 13 Pur chased mer chandise on account from Hecht Co. $9,000, terms 2/10, n/30. 15 Pur chased supplies for cash $2,000. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 89/101 18 Sold merchandise on account $12,000, terms 3/10, n/30. The cost of the mer chandise sold was $8,000. 20 Paid salaries $1,800. 23 Paid Hecht Co. in full, less discount . 27 Recei ved collections in full, less discounts, fr om cust omers billed on December 18. Adjustment data: 1. Accrued salaries pa yable $800. 2. Depr eciation $200 per month. 3. Supplies on hand $1,500. 4. Income tax due and unpaid at December 31 is $200. Instructions (a) Journalize the December transactions using a perpetual in vent ory syst em. (b) Ent er the December 1 balances in the ledger T-accounts and post the December tr ansactions. Use Cost of Goods Sold, Depr eciation Expense, Salaries and Wages Expense, Sales Rev enue, Sales Discounts, Supplies Expense, Income T ax Expense, and Income Tax es Pay able. (c) Journalize and post adjusting entries. (d) T otals $65,500 (d) Pr epar e an adjust ed trial balance. (e) Net income $540 Prepar e an income stat ement and a r etained earnings stat ement for December and a classiied balance sheet at December 31. A CR5-2 On No vember 1, 2017, IK onk, Inc. had the follo wing account balances. The compan y uses the perpetual in vent ory method. Debit Credit Cash $   9,000 Accumulat ed Depreciation—E quipment $  1,000 Accounts R ecei vable 2,240 Supplies 860 A ccounts P ay able 3,400 E quipment 25,000 Unearned Service R ev enue 4,000 $37,100 Salaries and W ages Pay able 1,700 Common St ock 20,000 Retained Earnings 7,000 $37,100 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 90/101 During November , the follo wing summary transactions w ere complet ed. Nov. 8 P aid $3,550 for salaries due emplo yees, of w hich $1,850 is for No vember and $1,700 is for Oct ober . 10 Recei ved $1,900 cash fr om cust omers in payment of account . 11 Purchased mer chandise on account from Dimas Discount Suppl y for $8,000, t erms 2/10, n/30. 12 Sold mer chandise on account for $5,500, t erms 2/10, n/30. The cost of the mer chandise sold was $4,000. 15 Recei ved cr edit from Dimas Discount Suppl y for mer chandise returned $300. 19 Recei ved collections in full, less discounts, fr om cust omers billed on sales of $5,500 on November 12. 20 P aid Dimas Discount Suppl y in full, less discount . 22 Recei ved $2,300 cash f or services perf ormed in November . 25 Purchased equipment on account $5,000. 27 Purchased supplies on account $1,700. 28 Paid cr edit ors $3,000 of accounts payable due. 29 P aid No vember r ent $375. 29 Paid salaries $1,300. 29 P erf ormed services on account and billed cust omers $700 for those services. 29 R ecei ved $675 fr om cust omers for services t o be perf ormed in the futur e. Adjustment data: 1. Supplies on hand ar e valued at $1,600. 2. Accrued salaries pa yable ar e $500. 3. Depr eciation for the month is $250. 4. $650 of services r elat ed to the unearned service r ev enue has not been perf ormed by month-end. Instructions (a) Ent er the November 1 balances in ledger T -accounts. (b) Journalize the No vember tr ansactions. (c) Post to the ledger accounts. Y ou will need to add some accounts. (d) Journalize and post adjusting entries. (e) Pr epar e an unadjust ed trial balance at November 30. (f ) Pr epar e a multiple-st ep income statement and a retained earnings stat ement for No vember and a classiied balance sheet at No vember 30. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 91/101 (g) Journalize and post closing entries. EXP AND YOUR | CRITICAL THINKING FIN ANCIAL REPOR TING PROBLEM: Apple Inc. E CT5-1 The inancial stat ements for Apple Inc. appear in Appendix A (h ttp ://c on te n t.t hu ze le a rn in g.c om /b oo k s/K im mel.2 745.1 7.1 /se ctio n s/a 01#a 01) at the end of this text book. Instructions Ans wer these questions using the Consolidat ed Income Statement . (a) What was the per centage change in total r ev enue and in net income fr om 2013 to 2014? (b) What w as the pr oit mar gin in each of the 3 years? (Use “T otal Rev enue. ”) Comment on the trend. (c) What w as Apple 's gross pr oit rat e in each of the 3 years? (Use “Net Sales” amounts.) Comment on the tr end. COMP ARATIVE ANALYSIS PR OBLEM: Columbia Sports wear Compan y vs. VF Corpor ation E CT5-2 The inancial stat ements of Columbia Sports wear Compan y are present ed in Appendix B (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/a 02#a 02) . Financial stat ements of VF Corporation are present ed in Appendix C (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/a 03#a 03) . Instructions (a) Based on the inf ormation contained in these inancial stat ements, determine the follo wing values f or each compan y. 1. Pr oit mar gin for 2014. (F or VF , use “Total Rev enues. ”) 2. Gross pr oit for 2014. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 92/101 3. Gross pr oit rat e for 2014. 4. Oper ating income for 2014. 5. P er centage change in oper ating Income from 2014 to 2013. (F or Columbia, use Income from oper ations.) (b) What conclusions concerning the relati ve pr oitability of the tw o companies can be drawn fr om these data? C OMP ARATIVE ANALYSIS PR OBLEM: Amazon.com, Inc. vs. W al-Mart Stor es, Inc. E CT5-3 The inancial stat ements of Amazon.com, Inc. ar e pr esent ed in Appendix D (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/a 04#a 04) . Financial stat ements of Wal-Mart Stor es, Inc. are present ed in Appendix E (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/a 05#a 05) . Instructions (a) Based on the inf ormation contained in these inancial stat ements, determine the follo wing values f or each compan y. 1. Pr oit mar gin for 2014. (F or Amazon, use “T otal net sales. ”) 2. Gross pr oit for 2014. 3. Gr oss pr oit rat e for 2014. 4. Oper ating income for 2014. 5. P er centage change in oper ating income from 2014 to 2013. (b) What conclusions concerning the r elati ve pr oitability of the tw o companies can be drawn fr om these data? INTERPRETING FIN ANCIAL STA TEMENTS E CT5-4 R ecentl y, it w as announced that tw o giant F rench r etailers, Carr efour S A and Pr omodes SA , w ould mer ge. A headline in the W all Str eet Journal blar ed, “F rench R etailers Cr eat e New W al- Mart Ri val. ” While Wal-Mart 's total sales w ould still exceed those of the combined compan y, W al- Mart's int ernational sales ar e far less than those of the combined compan y. This is a serious concern f or W al-Mart , since its primary opportunity f or futur e gr owth lies outside of the Unit ed States. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 93/101 Below ar e basic inancial data for the combined corpor ation (in eur os) and W al-Mart (in U .S. dollars). E ven thoug h their r esults ar e pr esent ed in diff erent curr encies, b y emplo ying r atios w e can mak e some basic comparisons. Carrefour (in millions) Wal-Mart (in millions) Sales rev enue €70,486    $256,329    Cost of goods sold 54,630    198,747    Net income 1,738    9,054    T otal assets 39,063    104,912    C urr ent assets 14,521    34,421    Curr ent liabilities 13,660    37,418    Total liabilities 29,434    61,289    Instructions Compar e the two companies by ans wering the follo wing. (a) Calculat e the gross pr oit rat e for each of the companies, and discuss their r elati ve abilities t o contr ol cost of goods sold. (b) Calculat e the proit mar gin, and discuss the companies' relati ve pr oitability . (c) Calculate the current ratio and debt to assets r atio for each of the tw o companies, and discuss their relati ve liquidity and sol vency . (d) What concerns might you ha ve in r el ying on this comparison? RE AL- WORLD FOCUS E CT5-5 Purpose: No inancial decision-mak er should ever r el y solel y on the inancial inf ormation report ed in the annual report to mak e decisions. It is important to k eep abr east of inancial new s. This activity demonstr ates ho w to sear ch for inancial new s on the Internet . Addr ess: http://biz.y ahoo.com/i (h ttp ://b iz .y ah oo.c om /i) , or go to www .wiley.c om/c ollege/kimmel ( h ttp ://www .wile y.c om /c olle ge /k im mel) S teps 1. T ype in either W al-Mart , Tar get Corp., or Kmart . 2. Choose News . 3. Select an article that sounds int eresting to y ou and that w ould be rele vant t o an in vest or in these companies. Instructions 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 94/101 (a) What was the sour ce of the article (e.g., Reut ers, Business wire, Prnew swir e)? (b) Assume that you ar e a personal inancial planner and that one of your clients o wns st ock in the compan y. W rite a brief memo to y our client summarizing the article and explaining the implications of the article for their in vestment . DECISION-MAKING ACR OSS THE OR GANIZA TION CT5-6 Thr ee y ears ago, Kar en Suez and her br other-in-la w Reece Jones opened Gig asales Department St or e. F or the irst 2 y ears, business w as good, but the f ollo wing condensed income stat ement results for 2017 w ere disappointing. E GIG ASALES DEP ARTMENT ST ORE Inc ome Stat ement For the Y ear Ended Dec ember 31, 2017 Net sales $700,000 Cost of goods sold 560,000 Gross pr oit 140,000 Oper ating expenses Selling expenses $100,000 Administr ative e xpenses 20,000 120,000 Net income $ 20,000 Kar en belie ves the pr oblem lies in the r elati vel y lo w gr oss pr oit r at e of 20%. R eece belie ves the pr oblem is that oper ating e xpenses ar e too hig h. Kar en think s the gr oss pr oit rat e can be impr oved b y making tw o changes. (1) Incr ease a v er age selling prices b y 15%; this incr ease is e xpect ed to lo wer sales v olume so that total sales dollars will incr ease onl y 4%. (2) Bu y mer chandise in larger quantities and tak e all pur chase discounts. These changes selling price and to pur chasing practices are expect ed to incr ease the gross pr oit rat e fr om its curr ent rat e of 20% t o a new rat e of 25%. Kar en does not anticipat e that these changes will ha ve an y eff ect on oper ating expenses. Reece think s e xpenses can be cut b y making these tw o changes. (1) C ut 2018 sales salaries of $60,000 in half and gi ve sales personnel a commission of 2% of net sales. (2) R educe st or e deli veries t o one da y per w eek r ather than twice a w eek; this change will r educe 2018 deli very expenses of $40,000 b y 40%. R eece feels that these changes will not ha ve an y eff ect on net sales. Kar en and Reece come to y ou for help in deciding the best w ay t o impr ove net income. Instructions With the class di vided int o groups, ans wer the follo wing. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 95/101 (a) Prepar e a condensed income statement for 2018 assuming (1) Kar en's changes ar e implement ed and (2) Reece 's ideas are adopt ed. (b) What is your recommendation to Kar en and Reece? (c) Pr epar e a condensed income statement for 2018 assuming both sets of pr oposed changes are made. (d) Discuss the impact that other fact ors mig ht have. F or example, w ould incr easing the quantity of invent ory incr ease costs? Would a salary cut aff ect emplo yee mor ale? Would decr eased morale affect sales? Would decr eased store deli veries decr ease customer satisf action? What other suggestions might be consider ed? COMM UNICA TION ACTIVITY E CT5-7 The follo wing situation is present ed in chronological order . 1. Aik an decides to bu y a surboar d. 2. He calls Suring Hawaii Co. to inquir e about their surboar ds. 3. Tw o da ys lat er, he requests Suring Ha waii Co. to mak e him a surboar d. 4. Three days lat er, Suring Ha waii Co. sends him a pur chase order to ill out . 5. He sends back the pur chase order . 6. Suring Ha waii Co. recei ves the complet ed purchase order . 7. Suring Ha waii Co. complet es the surboar d. 8. Aikan pick s up the surboar d. 9. Suring Hawaii Co. bills Aik an. 10 . Suring Hawaii Co. recei ves pa yment from Aik an. Instructions In a memo to the pr esident of Suring Ha waii Co., ans wer the follo wing questions. (a) When should Suring Hawaii Co. recor d the sale? (b) Suppose that with his purchase order , Aik an is requir ed to mak e a down payment . Would that change your ans wer to part (a)? ETHIC S CASE E 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 96/101 CT5-8 T abitha Andes w as just hir ed as the assistant tr easur er of Southside St or es, a specialty chain st or e compan y that has nine r etail st or es concentr ated in one metr opolitan ar ea. Among other things, the pa yment of all in voices is centr alized in one of the departments T abitha will manage. Her primary r esponsibility is to maintain the compan y's hig h cr edit r ating b y pa ying all bills w hen due and to tak e advantage of all cash discounts. P et e Wilson, the former assistant tr easur er w ho has been pr omot ed to tr easur er, is tr aining Tabitha in her new duties. He instructs T abitha that she is t o continue the pr actice of pr eparing all check s “net of discount” and dating the check s the last da y of the discount period. “But ,” P et e continues, “w e alway s hold the check s at least 4 da ys be yond the discount period bef ore mailing them. That w ay w e get another 4 da ys of int erest on our mone y. Most of our cr edit ors need our business and don 't complain. And, if the y scr eam about our missing the discount period, w e blame it on the mailr oom or the post ofice. We'v e onl y lost one discount out of every hundr ed we tak e that way. I think e very bod y does it. By the w ay, w elcome to our team!” Instructions (a) What ar e the ethical consider ations in this case? (b) What stakeholders are harmed or beneit ed? (c) Should Tabitha continue the pr actice start ed by P et e? Does she ha ve an y choice? ALL ABOUT YOU E CT5-9 Ther e are man y situations in business wher e it is dificult t o det ermine the pr oper period in w hich to r ecor d rev enue. Suppose that aft er graduation with a degr ee in inance, you tak e a job as a manager at a consumer electr onics st or e called F arW est Electr onics. The compan y has e xpanded r apidl y in order to compet e with Best Buy . FarW est has also begun selling gift cards. The cards ar e a v ailable in an y dollar amount and allo w the holder of the card to pur chase an it em f or up t o 2 y ears fr om the time the car d is pur chased. If the car d is not used during those 2 years, it expir es. Instructions Answer the follo wing questions. At w hat point should the re v enue fr om the gift car ds be recognized? Should the re v enue be recognized at the time the car d is sold, or should it be r ecor ded w hen the car d is redeemed? Explain the r easoning to support y our ans wers. FA SB C ODIFICA TION ACTIVITY E CT5-10 If your school has a subscription to the FA SB Codiication, go to http://aaahg .org/ascLogin.cfm ( h ttp ://a aah g.o rg/a scLogi n.cf m) to log in and pr epar e r esponses to the f ollo wing. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 97/101 (a)Access the glossary (“Mast er Glossary ”) to ans wer the follo wing. 1. What is the deinition provided for in vent ory? 2. What is a cust omer? (b) What guidance does the Codiication provide concerning r eporting in vent ories abo ve cost? 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 98/101 LEARNING OBJE CTIVE 8 Compar e the accounting for mer chandising under GAAP and IFR S.  The basic accounting entries for mer chandising ar e the same under both G AAP and IFR S. The income stat ement is a r equir ed stat ement under both sets of standar ds. The basic f ormat is similar althoug h some diff erences do exist . KEY POINT S Follo wing are the key similarities and diff erences betw een GAAP and IFR S relat ed to in vent ories. Similarities Under both GAAP and IFR S, a compan y can choose to use either a perpetual or a periodic in vent ory sy st em.

The deinition of in vent ories is basicall y the same under GAAP and IFR S. As indicat ed above, the basic accounting entries f or mer chandising are the same under both GAAP and IFR S. Both GAAP and IFR S requir e that income statement information be present ed for multiple y ears. For e xample, IFR S requir es that 2 years of income stat ement information be present ed, wher eas GAAP r equir es 3 years. Differ ences Under GAAP , companies gener ally classify income stat ement items by function. Classiication by function leads to descriptions lik e administr ation, distribution, and manufacturing. Under IFRS, companies must classify expenses either b y natur e or by function. Classiication by natur e leads to descriptions such as the follo wing: salaries, depr eciation expense, and utilities expense. If a compan y uses the functional-e xpense method on the income statement , disclosur e by natur e is requir ed in the notes to the inancial stat ements. Presentation of the income stat ement under GAAP follo ws either a sing le-step or multiple-st ep format . IFRS does not mention a sing le-step or multiple-st ep approach. Under IFRS, rev aluation of land, buildings, and intangible assets is permitt ed. The initial gains and losses resulting fr om this rev aluation ar e report ed as adjustments to equity , often ref err ed to as 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch05 … 99/101 other compr ehensi ve inc ome . The effect of this diff erence is that the use of IFR S result in mor e transactions aff ecting equity (other compr ehensive income) but not net income. L OOKING T O THE FUTURE The IA SB and F A SB ar e w or king on a pr oject that w ould rew ork the structur e of inancial stat ements. Speciicall y, this pr oject will addr ess the issue of ho w t o classify v arious it ems in the income stat ement . A main goal of this new appr oach is to pr ovide inf ormation that bett er r epr esents ho w businesses ar e run. In addition, this appr oach dr aw s att ention a w ay fr om just one number—net income. It will adopt major gr oupings similar to those curr ently used by the stat ement of cash lo ws (oper ating, in vesting, and inancing), so that numbers can be mor e readil y tr aced acr oss stat ements. F or e xample, the amount of income that is gener ated by oper ations would be tr aceable t o the assets and liabilities used t o gener ate the income. Finall y, this appr oach w ould also pr ovide detail, be yond that curr ently seen in most stat ements (either G AAP or IFR S), b y r equiring that line it ems be pr esent ed both b y function and b y natur e. The new inancial stat ement format w as hea vily inluenced by suggestions fr om inancial stat ement anal ysts. IFR S Practic e IFRS SELF -TES T QUES TIONS 1. Which of the follo wing would not be included in the deinition of in vent ory under IFR S? (a) Phot ocopy paper held for sale b y an ofice-suppl y store. (b) St ereo equipment held for sale b y an electr onics store. (c) Used ofice equipment held for sale b y the human relations department of a plastics compan y. (d) All of the abo ve w ould meet the deinition. 2. Which of the follo wing would not be a line item of a compan y reporting costs b y natur e? (a) Depreciation expense. (b) Salaries expense. (c) Int erest expense. (d) Manuf acturing expense. 3. Which of the follo wing would not be a line item of a compan y reporting costs b y function? (a) A dministr ation. (b) Manufacturing. (c) Utilities expense. (d) Distribution. 4. Which of the follo wing stat ements is false ? (a) IFRS speciicall y requir es use of a multiple-st ep income statement . (b) Under IFRS, companies can use either a perpetual or periodic syst em. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch0 … 100 /101 (c) The proposed new format for inancial stat ements was hea vily inluenced by the suggestions of inancial stat ement anal ysts. (d) The new income stat ement format will try t o de-emphasize the focus on the “net income” line it em. IFR S EXER CISES IFRS5-1 Explain the diff erence betw een the “natur e-of-expense” and “function-of-e xpense” classiications. IFRS5-2 F or each of the follo wing income stat ement line it ems, stat e w hether the it em is a “b y natur e” expense it em or a “b y function ” expense it em. ________ Cost of goods sold. ________ Depr eciation expense. ________ Salaries and w ages expense. ________ Selling expenses. ________ Utilities expense. ________ Deli very e xpense. ________ Gener al and administr ative e xpenses. IFR S5-3 Matilda Compan y report ed the follo wing amounts (in eur os) in 2017: Net income, €150,000; Unr ealized gain relat ed to r ev aluation of buildings, €10,000; and Unr ealized loss on non-tr ading securities, €(35,000). Det ermine Matilda 's total compr ehensive income f or 2017. INTERN ATION AL FINANCIAL REP ORTING PR OBLEM: Louis Vuitt on IFRS5-4 The inancial stat ements of Louis Vuitt on are present ed in Appendix F (h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/a 06#a 06) . Instructions for accessing and using the compan y's complet e annual report , including the not es to its inancial stat ements, ar e also pr ovided in A ppendix F ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 745.1 7.1 /se ctio n s/a 06#a 06) . Instructions Use Louis V uitt on's annual report to ans wer the follo wing questions. (a) Does Louis Vuitt on use a multiple-st ep or a single-step income statement format? Explain ho w you made your det ermination. (b) Inst ead of “interest expense, ” what label does Louis Vuitt on use for int erest costs that it incurs? (c) Using the not es to the compan y's inancial statements, determine the follo wing: 1. Composition of the invent ory. 4/8/2019 Print https://content.ashford.edu/print/Kimmel.2745.17.1?sections=cover,ch01lo1,ch05,ch05lo1,ch05lo2,ch05lo3,ch05lo4,ch05lo5,ch05lo6,ch05lo7,ch0 … 101 /101 2. Amount of invent ory (gr oss) bef ore impairment . Answers to IFR S Self- Test Questions 1. c 2. d 3. c 4. a 1 ( h ttp ://c on te n t.t hu ze le a rn in g.c om /b ook s/K im mel.2 74 5.1 7.1 /se ctio n s/ch 05lo 3 #c0 5-n ote -0 006a) T he “ A nat om y o f a F rau d” st orie s i n t hi s t e xt book ar e ad ap te d fr om F rau d C ase book: L esso ns fr om t he B ad S id e o f B usi ness, e d it e d b y J o se ph T . W ells ( H ob oken , N J: J o hn W ile y & S o n s, I n c., 2 007). U se d b y p erm issi on . T he n am es o f so me o f t he p eo p le an d org an iz at io n s i n t he st orie s ar e i ctit io u s, b u t t he f ac ts i n t he st orie s ar e t r u e.