CHAPTER 5 Accounting for Merchandising Operations

Transcription

1 CHAPTER 5 Accounting for Merchandising Operations ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises Problems Set A Problems Set B 1. Describe the differences between a service company and a merchandising company. 1, 2, 3, 4, Explain and complete the entries for purchases under a perpetual inventory system. 6, 7 2, 4, 5 1, 3, 4, 5, 6 1, 2, 3, *9. *10 1, 2, 3, *9, *10 3. Explain and complete the entries for sales revenue under a perpetual inventory system. 7, 8, 9 3, 4, 5 2, 3, 4, 5 1, 2, 3, *9, *10 1, 2, 3, *9, *10 4. Explain and perform the steps in the accounting cycle for a merchandising company. 10, 11, 12 6, 7 6, 7 4, 5, *11 4, 5, *11 5. Distinguish between and be able to prepare both a multiple-step and a single-step income statement. 13, 14, 15, 16 8, 9, 10 7, 8, 9, 10 3, 4, 5, 6, 7, *10, *11 3, 4, 5, 6, 7, *10, *11 6. Explain the importance of and be able to calculate gross profit. 7. Calculate the inventory turnover and days sales in inventory ratios. *8. Describe and perform the accounting for sales taxes (Appendix 5A). *9. Prepare a work sheet for a merchandising company (Appendix 5B) , 11 10, , 19, , *21, *22 *12 *12 *9, *10 *9, *10 *23 *13 *13 *11 *11 *Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendices to each chapter. 5-1

2 ASSIGNMENT CHARACTERISTIC TABLE Problem Number Description Difficulty Level Time Allotted (min.) 1A Journalize and post inventory transactions. Moderate A Journalize inventory transactions. Moderate A Journalize, post, and prepare partial income statement and balance sheet. Moderate A Prepare financial statements and closing entries. Moderate A Prepare financial statements, adjusting and closing entries. Moderate A Classify the accounts of a merchandising company. Simple A Prepare correct multiple-step and single-step income statements. Complex A Calculate inventory ratios and comment. Moderate *9A Journalize inventory transactions with sales tax. Moderate *10A Journalize, post, and prepare trial balance and partial income statement, with sales taxes. *11A Complete work sheet, financial statements, adjusting and closing entries, and post-closing trial balance. Moderate Moderate B Journalize and post inventory transactions. Moderate B Journalize inventory transactions. Moderate B 4B Journalize, post, and prepare partial income statement and balance sheet. Prepare financial statements, adjusting entries, and closing entries. Moderate Moderate B Prepare financial statements, adjusting entries and closing entries. Moderate B Classify the accounts of a merchandising company. Simple B Prepare correct multiple-step and single-step income statements. Complex B Calculate inventory ratios and comment. Moderate *9B Journalize inventory transactions, with sales tax. Moderate *10B Journalize, post, and prepare trial balance and partial income statement, with sales taxes. *11B Complete work sheet, financial statements, adjusting and closing entries, and post-closing trial balance. Moderate Moderate

3 BLOOM S TAXONOMY TABLE Correlation Chart between Bloom s Taxonomy, Study Objectives and End-of-Chapter Material Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Describe the differences between a service company and a merchandising company. Q5-1 Q5-2 Q5-3 Q5-4 Q5-5 BE Explain and complete the entries for purchases under a perpetual inventory system. 3. Explain and complete the entries for sales revenue under a perpetual inventory system. 4. Explain and perform the steps in the accounting cycle for a merchandising company. Q5-6 Q5-7 Q5-8 Q5-7 Q5-9 Q5-12 Q5-10 Q5-11 BE5-2 BE5-4 BE5-5 E5-1 E5-3 E5-4 E5-6 P5-1A P5-2A BE5-3 BE5-4 BE5-5 E5-2 E5-3 E5-4 P5-1A P5-2A BE5-6 BE5-7 E5-6 E5-7 P5-4A P5-3A *P5-9A *P5-10A P5-1B P5-2B P5-3B *P5-9B *P5-10B P5-3A *P5-9A *P5-10A P5-1B P5-2B P5-3B *P5-9B *P5-10B P5-5A *P5-11A P5-4B P5-5B *P5-11B E5-5 E Distinguish between and be able to prepare both a multiple-step and a single-step income statement. 6. Explain the importance of and be able to calculate gross profit. Q5-14 P5-6A P5-6B Q5-15 Q5-16 Q5-13 BE5-8 BE5-9 BE5-10 E5-7 E5-9 E-10 P5-3A P5-4A P5-5A Q5-17 BE5-10 P5-7A *P5-10A *P5-11A P5-3B P5-4B P5-5B P5-7B *P5-10B *P5-11B BE5-11 E5-10 E5-8 E5-11 P5-8A P5-8B 7. Calculate the inventory turnover and days sales in inventory ratios. Q5-18 Q5-19 Q5-20 BE5-11 E5-10 E5-11 P5-8A P5-8B *8. Describe and perform the accounting for sales taxes (Appendix 5A). *9. Prepare a work sheet for a merchandising company (Appendix 5B). *Q5-23 *BE5-13 *E5-13 *Q5-21 *Q5-22 *BE5-12 *E5-12 *P5-11A *P5-10B *P5-11B *P5-9A *P5-10A *P5-9B *P5-10B Broadening Your Perspective BYP5-1 BYP 5-2 BYP5-3 BYP5-4 BYP5-5 BYP5-6 BYP

4 ANSWERS TO QUESTIONS 1. The components of revenues and expenses differ as follows: Merchandising Service Revenue Sales Service Revenue, Fees Earned, Rent Revenue, Interest Revenue, Investment Income, Gains Other Revenue Expenses Other Expense Rent Revenue, Interest Revenue, Investment Income, Gains Cost of Goods Sold, Operating Expenses Interest Expense, Losses All expenses 2. The income measurement process in a merchandising company can be summarized as follows: Sales Revenues Less Cost of Goods Sold Equals Gross Profit Less Operating Expenses Equals Net Income 3. The normal operating cycle for a merchandising company is likely to be longer than for a service company because inventory must first be purchased and sold, and then the receivables must be collected. 4. Under a perpetual inventory system, inventory quantities and amounts are updated continually. At any point in time, the Cost of Goods Sold and Inventory accounts represent what has been sold to date, and what remains. Under a periodic inventory system, temporary accounts are used to accumulate purchases of inventory throughout the period. The cost of goods sold and inventory are determined only at the end of the period (annually for example). 5-4

5 Questions Chapter 5 (Continued) 5. Computer technology enables perpetual inventory systems to be used by any company that requires timely information about the quantities of inventory on hand. It is more complex and costly to maintain a perpetual inventory record of costs, so companies with point of sale systems integrated with their inventory systems tend to be larger. 6. The reason for recording the purchase of merchandise for resale in a separate account is to enable a company to determine its gross profit. This information is useful in setting prices. 7. The letters FOB mean free on board. FOB shipping point means that the goods are placed free on board the carrier by the seller, and the buyer pays the freight costs. FOB shipping point will result in a debit to the Inventory account by the buyer. FOB destination means that the goods are placed free on board to the buyer s place of business, and the seller pays the freight. FOB destination will result in a debit to the Freight Out account by the seller. 8. (a) The primary source documents are: (1) Cash sales cash register tapes, (2) Credit sales sales invoices, and (3) Sales returns and allowances credit memoranda. 5-5

6 Questions Chapter 5 (Continued) 8. (b) Seller Debit Credit Cash sales Cash... XXX Sales... XXX Cost of Goods Sold... Merchandise Inventory... XXX XXX Credit sales Accounts Receivable... XXX Sales... XXX Cost of Goods Sold... Merchandise Inventory... XXX XXX Sales returns Sales Returns and Allowances... XXX & allowances Accounts Receivable or Cash XXX Merchandise Inventory... Cost of Goods Sold... XXX XXX Purchaser Cash purchase Merchandise Inventory... XXX Cash... XXX Credit purchase Merchandise Inventory... Accounts Payable... XXX XXX Purchase returns Cash or Accounts Payable... XXX & allowances Merchandise Inventory... XXX 9. Sales returns are not debited directly to the Sales account because this would not provide information on the cost of the goods returned. This information can be useful in making decisions. Debiting returns directly to sales may also cause problems in comparing sales for different periods. 5-6

7 Questions Chapter 5 (Continued) 10. Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service enterprise. 11. A physical count is an important control feature. Using a perpetual inventory system a company knows what should be on hand. Performing a physical counts and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock. 12. Of the merchandising accounts, only Merchandise Inventory (ending) will appear in the post-closing trial balance. 13. Gross profit... $580,000 Less: Net income ,000 Operating expenses... $280, (a) The operating activities part of the income statement has three sections: sales revenues, cost of goods sold, and operating expenses. (b) The non-operating activities part consists of two sections: other revenues and gains, and other expenses and losses. 15. The functional groupings are selling and administrative. The problem with functional groupings is that some expenses may relate to both, and have to be allocated between the functions. 16. The single-step income statement differs from the multiple-step income statement in that (1) all data are classified into two categories: Revenues and expenses; and (2) only one step, subtracting total expenses from total revenues, is required in determining net income (or net loss). 5-7

8 Questions Chapter 5 (Continued) 17. Sales revenues... $100,000 Cost of goods sold... 70,000 Gross profit... 30,000 Operating expenses... 20,000 Net income... $ 10,000 Gross profit margin = $30,000 $100,000 = 30% Profit margin = $10,000 $100,000 = 10% 18. Two ratios that help management determine whether or not there is sufficient inventory on hand are Inventory turnover and days sales in inventory 19. Managing inventory is critical to a company s success. It is often the largest current asset (inventory) and the largest expense (cost of goods sold) on the income statement. Companies must manage the quantity of inventory on hand to avoid excessive cost and to ensure they can meet demand. 20. An increase in days sales in inventory would be viewed as a deterioration because it means there is more inventory on hand in relation to sales. *21. Accounts Receivable... 1,053 Sales GST Payable PST Payable Cost of Goods Sold Merchandise Inventory *22. Office Furniture [$2,000 + (8% x $2,000)]... 2,160 GST Recoverable ($2,000 x 7%) Accounts Payable... 2,300 *23. (a) Merchandise inventory Trial balance debit column; Adjusted trial balance debit column; and Balance sheet debit column (b) Cost of goods sold Trial balance debit column; Adjusted trial balance debit column; and Income statement debit column 5-8

9 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a) Cost of goods sold = $43,500 ($75,000 $31,500) Operating expenses = $20,700 ($31,500 $10,800) (b) Gross profit = $38,000 ($108,000 $70,000) Operating expenses = $8,500 ($38,000 $29,500) (c) Sales = $181,500 ($71,900 + $109,600) Net income = $70,100 ($109,600 $39,500) BRIEF EXERCISE 5-2 Rowen Company (a) March 2 Merchandise Inventory ,000 Accounts Payable ,000 (b) March 6 Accounts Payable ,000 Merchandise Inventory ,000 (c) March 31 Accounts Payable ($900,000 $130,000) ,000 Cash ,

10 BRIEF EXERCISE 5-3 Hunt Company (a) March 2 Accounts Receivable ,000 Sales ,000 Cost of Goods Sold ,000 Merchandise Inventory ,000 (b) March 6 Sales Returns and Allowances ,000 Accounts Receivable ,000 Merchandise Inventory... 90,000 Cost of Goods Sold... 90,000 (c) March 31 Cash ($900,000 $130,000) ,000 Accounts Receivable ,000 BRIEF EXERCISE 5-4 Keo Company Nov. 12 Merchandise Inventory Cash Mayo Company Nov. 12 Cash Sales Cost of Goods Sold Merchandise Inventory

11 BRIEF EXERCISE 5-5 March 3 Merchandise Inventory (20 X $25) Accounts Payable March 6 Accounts Payable Merchandise Inventory (3 X $25) March 21 Accounts Receivable (15 X $45) Sales Cost of Goods Sold (15 x $25) Merchandise Inventory Quantity: = 2 units remaining Cost: $500 - $75 - $375 = $50 Proof: 2 units x $25 = $50 BRIEF EXERCISE 5-6 Aug. 31 Cost of Goods Sold (Inventory shrinkage) Merchandise Inventory ($98,000 $97,100) BRIEF EXERCISE 5-7 July 31 Sales ,000 Prasad, Capital ,000 Prasad, Capital ,000 Sales Returns and Allowances... 2,000 Cost of Goods Sold ,000 Ending capital balance (not required): $150,000 + $180,000 - $102,000 = $228,000 Merchandise Inventory is a balance sheet (permanent) account and is not closed. 5-11

12 BRIEF EXERCISE 5-8 HULDA COMPANY Income Statement (Partial) For the Month Ended October 31, 2003 Sales revenues Sales ($300,000 + $100,000)... $400,000 Less: Sales returns and allowances... 30,000 Net sales... $370,000 BRIEF EXERCISE 5-9 (1) Multiple-Step Income Statement Item Section a. Gain on sale of equipment Other revenues and gains b. Interest expense Other expenses and losses c. d. Cost of goods sold Rent revenue Cost of goods sold Other revenues and gains (2) Single-Step Income Statement Item a. Gain on sale of equipment Revenues b. Interest expense Expenses c. d. Cost of goods sold Rent revenue Expenses Revenues Section 5-12

13 BRIEF EXERCISE 5-10 (a) Net sales = $485,000 ($500,000 $15,000) (b) Gross profit = $145,000 ($485,000 $340,000) (c) Net income = $35,000 ($145,000 - $70,000- $40,000) BRIEF EXERCISE 5-11 (a) Gross profit margin = 45% [($550,000 $300,000) $550,000] (b) Inventory turnover = 12 times ($300,000 $25,000) (c) Days sales in inventory = 30 days (365 12) *BRIEF EXERCISE 5-12 Merchandise Inventory... 8,000 Supplies [$1,000 + ($1,000 X 10%)]... 1,100 GST Recoverable [($8,000 + $1,000) X 7%] Accounts Payable... 9,730 *BRIEF EXERCISE 5-13 (a) Cash: Trial balance debit column; Adjusted trial balance debit column; Balance sheet debit column. (b) Merchandise Inventory: Trial balance debit column; Adjusted trial balance debit column; Balance sheet debit column. (c) Sales: Trial balance credit column; Adjusted trial balance credit column; Income statement credit column. (d) Cost of Goods Sold: Trial balance debit column; Adjusted trial balance debit column; Income statement debit column. 5-13

14 SOLUTIONS TO EXERCISES EXERCISE April 5 Merchandise Inventory... 18,000 Accounts Payable... 18, April 6 Merchandise Inventory Cash April 7 Equipment... 26,000 Accounts Payable... 26, April 8 Accounts Payable... 3,000 Merchandise Inventory , May 2 Accounts Payable ($18,000 $3,000)... 15,000 Cash... 15,

15 EXERCISE 5-2 (a) Pippen Company 1. Dec. 3 Accounts Receivable ,000 Sales ,000 Cost of Goods Sold ,000 Merchandise Inventory , Dec. 8 Sales Returns and Allowances... 20,000 Accounts Receivable... 20, Dec. 13 Cash ($400,000 $20,000) ,000 Accounts Receivable ,000 (b) Thomas Co. 1. Dec. 3 Merchandise Inventory ,000 Accounts Payable , Dec. 8 Accounts Payable... 20,000 Merchandise Inventory... 20, Dec. 13 Accounts Payable ,000 Cash ,

16 EXERCISE 5-3 Sept. 6 Merchandise Inventory (60 X $20)... 1,200 Accounts Payable... 1, Accounts Payable (2 X $20) Merchandise Inventory Accounts Receivable (26 X $30) Sales Cost of Goods Sold (26 X $20) Merchandise Inventory Sales Returns and Allowances Accounts Receivable Merchandise Inventory Cost of Goods Sold Accounts Receivable (30 X $30) Sales Cost of Goods Sold (30 X $20) Merchandise Inventory

17 EXERCISE 5-4 Sept. 2 Merchandise Inventory (90 X $15)... 1,350 Accounts Payable... 1,350 5 Accounts Payable Merchandise Inventory Accounts Receivable... 1,250 Sales (50 x $25)... 1,250 Cost of Goods Sold Merchandise Inventory (50 x $15) Accounts Receivable Sales (30 x $25) Cost of Goods Sold Merchandise Inventory (30 x $15) Merchandise Inventory (15 x $16) Accounts Payable Cost of Goods Sold (Inventory Loss)... 15* Merchandise Inventory = 31 desk sets per records; 30 desk sets per count = 1 missing * Note: We assumed that the missing desk set had a cost of $15. It could also have been assumed to be $16, from the September 20 purchase. 5-17

18 EXERCISE Sales Returns and Allowances Sales Supplies Cash Accounts Payable Merchandise Inventory Sales Merchandise Inventory Cash Merchandise Inventory

19 EXERCISE 5-6 (a) Jun. 10 Merchandise Inventory... 5,000 Accounts Payable... 5, Merchandise Inventory Cash Accounts Payable Merchandise Inventory July 7 Accounts Payable ($5,000 $500)... 4,500 Cash... 4, Cash... 8,500 Sales... 8, Cost of Goods Sold ($5,000 + $300 - $500)... 4,800 Merchandise Inventory... 4,800 (b) July 31 Sales... 8,500 Capital... 8, Capital... 4,800 Cost of Goods Sold... 4,

20 EXERCISE 5-7 (a) CECILIE COMPANY Income Statement (Partial) For the Year Ended October 31, 2003 Sales revenues Sales... $900,000 Less: Sales returns and allowances... 24,000 Net sales... $876,000 Note: Freight Out is a selling expense. (b) Closing entries: Oct. 31 Sales ,000 Capital , Capital... 36,000 Sales Returns and Allowances... 24,000 Freight Out... 12,

21 EXERCISE 5-8 Natural Cosmetics Mattar Grocery Allied Wholesalers Sales $90,000 (c) $100,000 $144,000 Less: Sales returns (a) 16,000 6,000 12,000 Net sales 74,000 94,000 (f) 132,000 Less: Cost of goods sold 64,000 (d) 72,000 (g) 108,000 Gross profit 10,000 22,000 24,000 Less: Operating expenses 6,000 (e) 12,000 18,000 Net income (b) $ 4,000 $ 10,000 (h) $ 6,000 (a) Sales... $90,000 *Sales returns... (16,000) Net sales... $74,000 (b) Gross profit... $10,000 Operating expenses... (6,000) *Net income... $ 4,000 (c) *Sales... $100,000 Sales returns... (6,000) Net sales... $ 94,000 (d) Net sales... $94,000 *Cost of goods sold... (72,000) Gross profit... $22,000 (e) Gross profit... $22,000 *Operating expenses... (12,000) Net income... $10,000 (f) Sales... $144,000 Sales returns... (12,000) *Net sales... $132,000 (g) Net sales... $132,000 *Cost of goods sold... (108,000) Gross profit... $ 24,000 (h) Gross profit... $24,000 Operating expenses... (18,000) *Net income... $ 6,

22 EXERCISE 5-9 (a) CHEVALIER COMPANY Income Statement For the Year Ended December 31, 2002 Net sales... $2,359,000 Cost of goods sold... 00,989,000 Gross profit... 1,370,000 Operating expenses Selling expenses... $690,000 Administrative expenses ,000 Total operating expenses... 1,125,000 Income from operations ,000 Other revenues and gains Interest revenue... $45,000 Other expenses and losses Interest expense... $70,000 Loss on sale of equipment... 10,000 80,000 35,000 Net income... $ 210,000 (b) CHEVALIER COMPANY Income Statement For the Year Ended December 31, 2002 Revenues Net sales... $2,359,000 Interest revenue ,000 Total revenues... 2,404,000 Expenses Cost of goods sold... $989,000 Selling expenses ,000 Administrative expenses ,000 Interest expense... 70,000 Loss on sale of equipment ,000 Total expenses... 2,194,000 Net income... $ 210,

23 EXERCISE 5-10 (a) JETFORM CORPORATION Income Statement For the Year Ended April 30, 2000 (in thousands) Revenues Revenue from products and services... $94,317 Interest revenue... 2,868 Gain on sale of assets... 1,813 Other income Total revenues... $ 99,293 Expenses Cost of products and services... $24,426 Sales and marketing expenses... 45,097 General and administrative expenses... 26,485 Amortization expense... 10,300 Income tax expense... 1,086 Total expenses ,394 Net loss... ($ 8,101) 5-23

24 EXERCISE 5-10 (Continued) (b) JETFORM CORPORATION Income Statement For the Year Ended April 30, 2000 (in thousands) Revenue from products and services... $ 94,317 Cost of products and services... 00, 24,426 Gross profit... 69,891 Operating expenses Sales and marketing expenses... $45,097 General and administrative expenses (including amortization expense) ,785 Total operating expenses... 81,882 Loss from operations... (11,991) Other revenues and gains Interest revenue... $2,868 Gain on sale of assets... 1,813 Other income ,976 Other expenses and losses Income tax expense*... 1,086 3,890 Net loss... ($ 8,101) *Note to Instructor: You may wish to explain that income tax expense is usually presented differently (following an income (or loss) before income taxes caption) in corporate income statements. 5-24

25 EXERCISE 5-10 (Continued) (c) Gross profit margin = 74% ($69,891 $94,317) Profit margin = (8.6%) ($8,101 $94,317) Inventory turnover = 22 times ($24,426 $1,111) Days sales in inventory = 17 days (365 22) These results are misleading and likely overly high. The revenue includes revenue from services, in addition to products. Revenue from services does not have the same level of cost as does revenue from products. In other words, the revenue and costs from services does not have any cost of goods sold nor inventory. No further breakdown is available on Jetform s financial statements. These ratios are still useful in determining trends, when compared against similar calculations for prior years. 5-25

26 EXERCISE 5-11 Inventory turnover 2000 = 7.3 times [$1,298,606 ($193,831 + $160,092) 2] 1999 = 7.5 times [$1,546,723 ($160,092 + $254,690) 2] Days sales in inventory 2000 = 50 days ( ) 1999 = 49 days ( ) Gross profit margin 2000 = 23% [($1,683,142 - $1,298,606) $1,683,142] 1999 = 21% [($1,960,274 - $1,546,723) $1,960,274] The gross profit margin has improved, increasing from 21% in 1999 to 23% in The inventory turnover and days sales in inventory are basically unchanged from one year to the next. 5-26

27 *EXERCISE 5-12 Sept. 2 Merchandise Inventory (90 X $15)... 1, GST Recoverable ($1,350 x 7%) Accounts Payable... 1, Accounts Payable Merchandise Inventory GST Recoverable Accounts Receivable... 1, Sales (50 x $25) GST Payable ($1,250 x 7%) Cost of Goods Sold Merchandise Inventory (50 x $15) Accounts Receivable Sales (30 x $25) GST Payable ($750 x 7%) Cost of Goods Sold Merchandise Inventory (30 x $15) Merchandise Inventory (15 x $16) GST Recoverable ($240 x 7%) Accounts Payable Cost of Goods Sold (Inventory Loss) * Merchandise Inventory = 31 desk sets per records; 30 desk sets per count = 1 missing * Note: We assumed that the missing desk set had a cost of $15. It could also have been assumed to be $16, from the September 20 purchase. There is no GST effect of this loss. 5-27

28 *EXERCISE 5-13 (a) Accounts Cash Merchandise Inven. Sales Sales Returns Cost of Goods Sold Rent Expense Adjusted Trial Balance Income Statement Balance Sheet Debit Credit Debit Credit Debit Credit 9,000 80,000 10, ,000 42, ,000 10, ,000 42, ,000 9,000 80,000 (b) The accounts appearing in the post-closing trial balance are the balance sheet accounts of Cash ($9,000) and Merchandise Inventory ($80,000). 5-28

29 SOLUTIONS TO PROBLEMS (a) PROBLEM 5-1A April 5 Merchandise Inventory Custom Sedans (3 x $24,000)... 72,000 Accounts Payable... 72, Merchandise Inventory Recreation Vehicles (2 x $28,000)... 56,000 Accounts Payable... 56, Accounts Receivable ,000 Sales (4 x $28,500) ,000 Cost of Goods Sold (4 x $24,000)... 96,000 Merchandise Inventory Custom Sedans 96, Merchandise Inventory Convertibles (2 x $26,000)... 52,000 Accounts Payable... 52, Accounts Payable... 26,000 Merchandise Inventory Convertibles... 26, Accounts Receivable ,000 Sales (3 x $34,000) ,000 Cost of Goods Sold (3 x $28,000)... 84,000 Merchandise Inventory Recreation Vehicles 84, Accounts Receivable... 31,000 Sales... 31,000 Cost of Goods Sold... 26,000 Merchandise Inventory Convertibles... 26,

30 PROBLEM 5-1A (Continued) (b) Merchandise Inventory Custom Sedans Merchandise Inventory Convertibles Bal. 96,000 96,000 Bal. 78,000 26,000 72,000 52,000 26,000 72,000 78,000 Merchandise Inventory Recreation Vehicles Cost of Goods Sold Bal. 56,000 84,000 96,000 56,000 84,000 28,000 26, ,

31 PROBLEM 5-2A GENERAL JOURNAL Date Account Titles Ref. Debit Credit July 1 Merchandise Inventory (50 x $30)... Accounts Payable ,500 1,500 3 Accounts Receivable (40 x $50)... Sales ,000 2,000 Cost of Goods Sold (40 x $30)... Merchandise Inventory ,200 1,200 9 Accounts Payable... Cash ,500 1, Cash... Accounts Receivable ,000 2, Accounts Receivable (30 x $50)... Sales ,500 1,500 Cost of Goods Sold (30 x $30)... Merchandise Inventory Merchandise Inventory ($1,700 + $100).. Accounts Payable... Cash ,800 1, Accounts Payable... Merchandise Inventory Cash... Accounts Receivable ,500 1,

32 PROBLEM 5-2A (Continued) Date Account Titles Ref. Debit Credit July 22 Accounts Receivable (40 x $50)... Sales ,000 2,000 Cost of Goods Sold (40 x $30)... Merchandise Inventory ,200 1, Accounts Payable ($1,700 - $300)... Cash ,400 1, Sales Returns and Allowances... Accounts Receivable Merchandise Inventory... Cost of Goods Sold

33 PROBLEM 5-3A (a) GENERAL JOURNAL Date Account Titles Ref. Debit Credit Apr. 2 Merchandise Inventory... 4,900 Accounts Payable ,900 4 Accounts Receivable... Sales ,000 5,000 Cost of Goods Sold... Merchandise Inventory ,000 4,000 5 Freight Out... Cash Accounts Payable... Merchandise Inventory Merchandise Inventory... Cash ,400 4, Cash... Merchandise Inventory Merchandise Inventory... Accounts Payable ,200 4, Merchandise Inventory... Cash Cash... Sales ,400 6,400 Cost of Goods Sold... Merchandise Inventory ,200 5,

34 PROBLEM 5-3A (Continued) (a) (Continued) Date Account Titles Ref. Debit Credit Apr. 26 Merchandise Inventory... 2,300 Cash , Accounts Payable ($4,900 - $300)... Cash Cash... Accounts Receivable Sales Returns and Allowances... Cash... Merchandise Inventory... Cost of Goods Sold Accounts Receivable... Sales... Cost of Goods Sold... Merchandise Inventory ,600 5, ,700 3,000 4,600 5, ,700 3,000 (b) Cash No. 101 Date Explanation Ref. Debit Credit Balance Apr Balance ,400 5, , ,300 4, ,000 8,800 4,400 4,900 4,800 11,200 8,900 4,300 9,300 9,210

35 PROBLEM 5-3A (Continued) (b) (Continued) Accounts Receivable No. 112 Date Explanation Ref. Debit Credit Balance Apr ,000 3,700 5,000 5, ,700 Merchandise Inventory No. Date Explanation Ref. Debit Credit Balance Apr ,900 4,400 4, , , ,200 3,000 4, ,000 4,500 8,700 8,800 3,600 5,900 5,960 2,960 Accounts Payable No. 201 Date Explanation Ref. Debit Credit Balance Apr ,600 4,900 4,200 4,900 4,600 8,800 4,

36 PROBLEM 5-3A (Continued) (b) (Continued) M. Nisson, Capital No. 301 Date Explanation Ref. Debit Credit Balance Apr. 1 Balance 9,000 Sales No. 401 Date Explanation Ref. Debit Credit Balance Apr ,000 6,400 3,700 5,000 11,400 15,100 Sales Returns and Allowances No. 412 Date Explanation Ref. Debit Credit Balance Apr Cost of Goods Sold No. 505 Date Explanation Ref. Debit Credit Balance Apr ,000 5,200 3, ,000 9,200 9,140 12,140 Freight Out No. 644 Date Explanation Ref. Debit Credit Balance Apr

37 PROBLEM 5-3A (Continued) (c) NISSON DISTRIBUTING COMPANY Income Statement (Partial) For the Month Ended April 30, 2003 Sales revenues Sales... $15,100 Less: Sales returns and allowances Net sales... 15,010 Cost of goods sold... 12,140 Gross profit... $ 2,870 (d) NISSON DISTRIBUTING COMPANY Balance Sheet (Partial) April 30, 2003 Assets Current assets Cash... $ 9,210 Accounts receivable... 3,700 Merchandise inventory... 2,960 Total current assets... 15,

38 Adjusting entries not required: PROBLEM 5-4A Dec. 31 Insurance Expense Prepaid Insurance Amortization Expense... 3,000 Accumulated Amortization Store Equipment 3,000 Rent Expense Rent Payable (a) WORLD ENTERPRISES Income Statement For the Year Ended December 31, 2002 Sales revenues Sales... $238,500 Less: Sales returns and allowances ,600 Net sales ,900 Cost of goods sold ,000 Gross profit... 56,900 Operating expenses Salaries expense... $31,600 Amortization expense... 3,000 Rent expense ($6,100 + $500)... 6,600 Insurance expense Total operating expenses ,000 Net income... $14,900 WORLD ENTERPRISES Statement of Owner s Equity For the Year Ended December 31, 2002 R. Roger, Capital, January 1... $50,300 Add: Net income... 14,900 R. Roger, Capital, December $65,

39 PROBLEM 5-4A (Continued) (a) (Continued) WORLD ENTERPRISES Balance Sheet December 31, 2002 Assets Current assets Cash... $ 14,000 Accounts receivable... 30,600 Merchandise inventory... 27,500 Prepaid insurance ($1,800 $800)... 1,000 Total current assets... 73,100 Capital assets Equipment... $42,000 Less: Accumulated amortization Equipment 12,000 30,000 Total assets... $103,100 Liabilities and Owner's Equity Current liabilities Accounts payable ($34,400 + $500)... $ 34,900 Sales taxes payable... 3,000 Total current liabilities... 37,900 Owner's equity R. Roger, Capital... 65,200 Total liabilities and owner's equity... $103,

40 PROBLEM 5-4A (Continued) (b) Dec. 31 Sales ,500 R. Roger, Capital , R. Roger, Capital ,600 Sales Returns and Allowances... 4,600 Cost of Goods Sold ,000 Salaries Expense... 31,600 Rent Expense... 6,600 Insurance Expense Amortization Expense... 3,

41 PROBLEM 5-5A (a) DAIGLE DEPARTMENT STORE Income Statement For the Year Ended November 30, 2003 Sales revenues Sales... $850,000 Less: Sales returns and allowances... 10,000 Net sales ,000 Cost of goods sold ,220 Gross profit ,780 Operating expenses Selling expenses Salaries expense ($139,000 X 70%) $97,300 Sales commissions expense... 12,750 Amortization expense building 9,500 Delivery expense... 8,200 Insurance expense ($9,000 x 50%) 4,500 Amortization expense delivery equipment ,000 Total selling expenses... $136,250 Administrative expenses Salaries expense ($139,000 X 30%). $41,700 Utilities expense... 10,600 Insurance expense ($9,000 x 50%).. 4,500 Property tax expense... 3,500 Total administrative expenses. 0 60,300 Total operating expenses.. 196,550 Income from operations... 10,230 Other revenues and gains Interest revenue... $5,000 Other expenses and losses Interest expense... 8, ,000 Net income... $ 7,

42 PROBLEM 5-5A (Continued) (a) (Continued) DAIGLE DEPARTMENT STORE Statement of Owner's Equity For the Year Ended November 30, 2003 B. Daigle, Capital, December 1, $84,200 Add: Net income... 7,230 91,430 Less: Drawings ,000 B. Daigle, Capital, November 30, $79,

43 PROBLEM 5-5A (Continued) (a) (Continued) DAIGLE DEPARTMENT STORE Balance Sheet November 30, 2003 Assets Current assets Cash... $008,000 Accounts receivable... 11,770 Merchandise inventory... 36,200 Prepaid insurance... 4,500 Total current assets... 60,470 Capital assets Land... $50,000 Building... $125,000 Less: Accumulated amortization building ,800 83,200 Delivery equipment... $57,000 Less: Accumulated amortization delivery equipment... 19, ,320 Total capital assets ,520 Total assets... $230,990 Liabilities and Owner's Equity Current liabilities Accounts payable... $ 47,310 Property taxes payable... 3,500 Sales commissions payable... 4,750 Current portion of mortgage... 6,000 Total current liabilities... 61,560 Long-term liabilities Mortgage payable ,000 Total liabilities ,560 Owner's equity B. Daigle, Capital ,430 Total liabilities and owner's equity... $230,

44 PROBLEM 5-5A (Continued) (b) Nov. 30 Amortization Expense Delivery Equip... 4,000 Amortization Expense Building... 9,500 Accum. Amortiz. Delivery... 4,000 Accum. Amortiz. Building... 9, Insurance Expense... 9,000 Prepaid Expense... 9, Property Tax Expense... 3,500 Property Tax Payable... 3, Sales Commissions Expense... 4,750 Sales Commissions Payable... 4,750 (c) Nov. 30 Sales ,000 Interest Revenue... 5,000 B. Daigle, Capital ,000 Nov. 30 B. Daigle, Capital ,770 Sales Returns and Allowances... 10,000 Cost of Goods Sold ,220 Salaries Expense ,000 Amortization Expense Delivery Equipment... 4,000 Delivery Expense... 8,200 Sales Commission Expense... 12,750 Amortization Expense Store Equipment... 9,500 Insurance Expense... 9,000 Property Tax Expense... 3,500 Utilities Expense... 10,600 Interest Expense... 8, B. Daigle, Capital... 12,000 B. Daigle, Drawings... 12,

45 PROBLEM 5-6A Account Statement Classification Accounts Payable Balance Sheet Current Liabilities Accounts Receivable Balance Sheet Current Assets Accumulated Amortization Office Building Accumulated Amortization Store Equipment Balance Sheet Balance Sheet Capital Assets (Contra Account) Capital Assets (Contra Account) Advertising Expense Income Statement Selling Expenses Amortization Expense Office Building Amortization Expense Store Equipment Income Statement Income Statement Administrative Expenses Selling Expenses Cash Balance Sheet Current Assets Swirsky, Capital Balance Sheet Owner s Equity Freight Out Income Statement Selling Expenses Swirsky, Drawings Statement of Owner s Equity Drawings Income Tax Expense Income Statement Other Expenses Income Tax Payable Insurance Expense Balance Sheet Income Statement Current Liabilities Administrative Expenses Interest Expense Income Statement Other Expenses Interest Payable Balance Sheet Current Liabilities 5-45

46 Account Statement Classification Land Balance Sheet Capital Assets Merchandise Inventory Balance Sheet Current Assets Mortgage Payable Balance Sheet Long-Term Liability Office Building Balance Sheet Capital Assets Prepaid Insurance Balance Sheet Current Assets Salaries Expense Office Staff Salaries Expense Store Staff Income Statement Income Statement Administrative Expenses Selling Expenses Salaries Payable Balance Sheet Current Liabilities Sales Returns and Allowances Income Statement Contra Revenue Store Equipment Balance Sheet Capital Assets Utilities Expense Office Income Statement Administrative Expenses Utilities Expense Store Income Statement Selling Expenses Wages Payable Balance Sheet Current Liabilities 5-46

47 PROBLEM 5-7A (a) MCGRATH COMPANY Income Statement For the Year Ended December 31, 2002 Sales revenues Sales... $800,000 Less: Sales returns and allowances... 30,000 Net sales ,000 Cost of goods sold ,000 Gross profit ,000 Operating expenses Selling expenses Sales salaries expense ($80,000 + $16,000)... $96,000 Delivery expense... 30,000 Advertising expense... 10,000 Sales commissions expense... 6,000 $142,000 Administrative expenses Office salaries expense... $27,000 Rent expense... 24,000 Utilities expense... 12,000 Amortization expense office equip. 8,000 71,000 Total operating expenses ,000 Income from operations... 2,000 Other revenues and gains Rent revenue... $40,000 Other expenses and losses Interest expense... 2,000 38,000 Net income... $ 40,

48 PROBLEM 5-7A (Continued) (b) MCGRATH COMPANY Income Statement For the Year Ended December 31, 2002 Revenues Net sales... $770,000 Rent revenue... 40,000 $810,000 Expenses Cost of sales... $555,000 Selling expenses ($80,000 + $16,000 + $30,000 + $10,000 + $6,000) 142,000 Administrative ($27,000 + $24,000 + $12,000 + $8,000)... 71,000 Interest expense... 2, ,000 Net income... $ 40,

49 PROBLEM 5-8A (a) Gross profit margin 19.5% ($949,263 - $764,198) $949, % ($808,251 $615,827) $808,251 Inventory turnover 3.5 times $764,198 [($225,958 + $212,382) 2] 3.3 times $615,827 [($212,382 + $164,557) 2] Days sales in inventory days 365 days 3.5 times days 365 days 3.3 times (b) IPSCO s gross profit margin declined in However, its management of its inventories improved. It s inventory turned over (sold) faster in 2000 and the number of days sales in inventory declined from days to days. This means that IPSCO is not holding its inventory for as long in 2000, as it did in The faster you sell your inventory, the faster the company will collect cash/receivables, the lower its carrying costs, and the reduced risk of inventory obsolescence. 5-49

50 *PROBLEM 5-9A GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit Sept. 2 GST Recoverable... Merchandise Inventory... Accounts Payable... 4 Merchandise Inventory... Cash... 5 Accounts Payable... Merchandise Inventory... GST Recoverable... 6 Accounts Receivable... Sales... GST Payable... PST Payable... Cost of Goods Sold... Merchandise Inventory GST Recoverable... Supplies [$4,000 + (5% x $4,000)]... Cash GST Recoverable... Merchandise Inventory... Cash Accounts Receivable... Sales... GST Payable (7% x $28,000)... PST Payable (5% x $28,000)... Cost of Goods Sold... Merchandise Inventory ,200 60,000 02,000 07,490 23,520 15, , ,000 31,360 20,000 64,200 02,000 07, ,000 1,470 1,050 15,000 04,480 06,420 28,000 1,960 1,400 20,000

51 *PROBLEM 5-9A (Continued) Date Account Titles and Explanation Ref. Debit Credit Sept. 27 Delivery Equipment [$30,000 + (5% x $30,000)]... GST Recoverable (7% x $30,000)... Accounts Payable... 31,500 2,100 33, Accounts Payable ($64,200 $7,490)... Cash Cash... Accounts Receivable... 56, ,710 23,520 00, 23,

52 (a) *PROBLEM 5-10A GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit April 4 GST Recoverable... Merchandise Inventory... Accounts Payable Merchandise Inventory... Cash Accounts Receivable... Sales... GST Payable... PST Payable , Cost of Goods Sold... Merchandise Inventory Accounts Payable... Merchandise Inventory... GST Recoverable ($40 X 7%) GST Recoverable... Merchandise Inventory... Cash GST Recoverable... Merchandise Inventory... Accounts Payable Cash... Merchandise Inventory... GST Recoverable Merchandise Inventory... Cash

53 *PROBLEM 5-10A (Continued) (a) (Continued) Date Account Titles and Explanation Ref. Debit Credit April 18 Accounts Receivable... Sales... GST Payable... PST Payable Cost of Goods Sold... Merchandise Inventory Cash... Accounts Receivable GST Payable... PST Payable... Sales Returns and Allowances... Accounts Receivable Merchandise Inventory... Cost of Goods Sold Accounts Payable... Cash Accounts Receivable... Sales... GST Payable... PST Payable , , Cost of Goods Sold... Merchandise Inventory Cash... Accounts Receivable , ,

54 *PROBLEM 5-10A (Continued) (b) Cash No. 101 Date Explanation Ref. Debit Credit Balance Apr Balance , , , , , , , , , Accounts Receivable No. 112 Apr Explanation Ref. Debit Credit Balance 1, , , , , , , , , GST Recoverable No. 114 Date Explanation Ref. Debit Credit Balance Apr

55 *PROBLEM 5-10A (Continued) (b) (Continued) Merchandise Inventory No. Date Explanation Ref. Debit Credit Balance Apr Balance , , , , , , , , , , , , Accounts Payable No. 201 Date Explanation Ref. Debit Credit Balance Apr , GST Payable No. 214 Date Explanation Ref. Debit Credit Balance Apr

56 *PROBLEM 5-10A (Continued) (b) (Continued) PST Payable No. 215 Date Explanation Ref. Debit Credit Balance Apr B. J. Evert, Capital No. 301 Date Explanation Ref. Debit Credit Balance Apr. 1 Balance 6, Sales No. 401 Date Explanation Ref. Debit Credit Balance Apr , , , , Sales Returns and Allowances No. 412 Date Explanation Ref. Debit Credit Balance Apr , Cost of Goods Sold No. 505 Date Explanation Ref. Debit Credit Balance Apr , , , ,

57 *PROBLEM 5-10A (Continued) (c) B. J.'S TENNIS SHOP Trial Balance April 30, 2003 Cash... Accounts Receivable... GST Recoverable... Merchandise Inventory... Accounts Payable... GST Payable... PST Payable... B. J. Evert, Capital... Sales... Sales Returns and Allowances... Cost of Goods Sold... Debit $3, , , , $9, Credit $ , , $9, (d) B. J.'S TENNIS SHOP Income Statement (Partial) For the Month Ended April 30, 2003 Sales revenues Sales... $2,700 Less: Sales returns and allowances Net sales... 2,670 Cost of goods sold... 1,895 Gross profit

58 (a) *PROBLEM 5-11A Account Titles Trial Balance Adjustments Cash Accounts Receivable Merchandise Inventory Land Buildings Accum. Amortization Equipment Accum. Amortization Notes Payable Accounts Payable G. Metis, Capital G. Metis, Drawings Sales Cost of Goods Sold Salaries Expense Utilities Expense Repair Expense Gas and Oil Expense Insurance Expense Totals Amort. Expense Bldings Amort. Expense Equip. Interest Expense Interest Payable Totals Net Income Totals METIS WHOLESALE COMPANY Work Sheet For the Year Ended December 31, 2002 Adjusted Trial Balance Income Statement Balance Sheet Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 33,400 37,600 92,400 92, ,000 83,500 10, ,100 69,800 9,400 5,900 7,200 0,00 3,500 1,353,800 54,000 42,400 50,000 37, , , ,353,800 (3) 2,400 (1) 10,000 (1) 9,000 (2) 4, ,400 (3) 2,400 (1) 10,000 (1) 9,000 (2) 04,000 25,400 33,400 37,600 90,000 92, ,000 83,500 10, ,500 69,800 9,400 5,900 7,200 3,500 10,000 9,000 4, ,376,800 64,000 51,400 50,000 37, , ,100 0,004,000 1,376, ,500 69,800 9,400 5,900 7,200 3,500 10,000 9,000 4, , , , , , ,100 33,400 37,600 90,000 92, ,000 83,500 10, , ,500 64,000 51,400 50,000 37, , , , , ,500 Key: (1) Amortization expense buildings, (1) Amortization expense equipment, (2) Interest payable., (3) Inventory adjustment. 5-58

59 *PROBLEM 5-11A (Continued) (b) METIS WHOLESALE COMPANY Income Statement For the Year Ended December 31, 2002 Sales... $902,100 Cost of goods sold ,500 Gross profit ,600 Operating expenses Selling expenses Salaries expense ($69,800 X 80%)... $55,840 Gas and oil expense ,200 Total selling expenses... $63,040 Administrative expenses Salaries expense ($69,800 X 20%)... $13,960 Amortization expense buildings... 10,000 Utilities expense... 9,400 Amortization expense equipment... 9,000 Repair expense... 5,900 Insurance expense... 3,500 Total administrative expenses ,760 Total operating expenses ,800 Income from operations... 72,800 Other expenses and losses Interest expense ,000 Net income... $ 68,800 METIS WHOLESALE COMPANY Statement of Owner s Equity For the Year Ended December 31, 2002 G. Metis, Capital January 1... $267,800 Add: Net income... 68, ,600 Less: Drawings... 10,000 G. Metis, Capital December $326,

60 *PROBLEM 5-11A (Continued) (b) (Continued) METIS WHOLESALE COMPANY Balance Sheet December 31, 2002 Assets Current assets Cash... $ 33,400 Accounts receivable... 37,600 Merchandise inventory... 90,000 Total current assets ,000 Capital assets Land... $ 92,000 Buildings... $197,000 Less: Accumulated amortization... (64,000) 133,000 Equipment... 83,500 Less: Accumulated amortization... (51,400) 32, ,100 Total assets... $418,100 Liabilities and Owner s Equity Current liabilities Notes payable... $ 50,000 Accounts payable... 37,500 Interest payable... 4,000 Total liabilities... 91,500 Owner s Equity G. Metis Capital ,600 Total liabilities and owner s equity... $418,

61 *PROBLEM 5-11A (Continued) (c) Dec. 31 Amortization Expense Building... 10,000 Accum. Amortiz. Building... 10,000 Amortization Expense Equipment... 9,000 Accum. Amortiz. Equipment... 9,000 Interest Expense... 4,000 Interest payable... 4,000 Cost of Goods Sold... 2,400 Merchandise Inventory... 2,400 (d) Dec. 31 Sales ,100 G. Methis, Capital ,100 G. Metis, Capital ,300 Cost of Goods Sold ,500 Salaries Expense... 69,800 Utilities Expense... 9,400 Repair Expense... 5,900 Gas and Oil Expense... 7,200 Insurance Expense... 3,500 Amortization Expense Buildings 10,000 Amortization Expense Equipment 9,000 Interest Expense... 4,000 G. Metis, Capital... 10,000 G. Metis, Drawings... 10,

62 *PROBLEM 5-11A (Continued) (e) METIS WHOLESALE COMPANY Post-Closing Trial Balance December 31, 2002 Debit Credit Cash... $ 33,400 Accounts Receivable... 37,600 Merchandise Inventory... 90,000 Land... 92,000 Buildings ,000 Accumulated Amortization Buildings... $ 64,000 Equipment... 83,500 Accumulated Amortization Equipment... 51,400 Notes Payable... 50,000 Accounts Payable... 37,500 Interest Payable... 4,000 G. Metis, Capital ,600 Totals $533,500 $533,

63 (a) PROBLEM 5-1B June 5 Merchandise Inventory Jet Runners (2 x $22,000)... 44,000 Accounts Payable... 44, Merchandise Inventory Skiffs (2 x $25,000)... 50,000 Accounts Payable... 50, Accounts Receivable (4 x $26,500) ,000 Sales ,000 Cost of Goods Sold (4 x $22,000)... 88,000 Merchandise Inventory Jet Runners.. 88, Merchandise Inventory Skiffs (2 x $26,000)... 52,000 Accounts Payable... 52, Accounts Payable... 26,000 Merchandise Inventory Skiffs... 26, Accounts Receivable (2 x $33,000)... 66,000 Sales... 66,000 Cost of Goods Sold (2 x $27,000)... 54,000 Merchandise Inventory Power... 54, Accounts Receivable (3 x $29,000)... 87,000 Sales... 87,000 Cost of Goods Sold (3 x $24,000)... 72,000 Merchandise Inventory Skiffs... 72,

64 PROBLEM 5-1B (Continued) (b) Merchandise Inventory Jet Runners Merchandise Inventory Skiffs Bal. 88,000 88,000 Bal. 72,000 26,000 44,000 50,000 72,000 44,000 52,000 76,000 Merchandise Inventory Power Cost of Goods Sold Bal. 54,000 54,000 88, ,000 72, ,

65 PROBLEM 5-2B GENERALJOURNAL Date Account Titles Ref. Debit Credit June 1 Merchandise Inventory (130 x $5)... Accounts Payable... Merchandise Inventory... Cash... 3 Accounts Receivable (140 x $10)... Sales... Cost of Goods Sold (140 x $6)... Merchandise Inventory... 6 Accounts Payable... Merchandise Inventory... 9 Accounts Payable... Cash Cash... Accounts Receivable Accounts Receivable ( x $10)... Sales... Cost of Goods Sold... Merchandise Inventory Merchandise Inventory ( x $5)... Accounts Payable Cash... Accounts Receivable , ,400 1, , , ,400 1, ,

66 PROBLEM 5-2B (Continued) Date Account Titles Ref. Debit Credit June 26 Accounts Payable... Cash Accounts Receivable (110 x $10)... Sales ,100 1,100 Cost of Goods Sold... Merchandise Inventory Sales Returns and Allowances... Accounts Receivable Merchandise Inventory... Cost of Goods Sold

67 PROBLEM 5-3B (a) GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit May 1 Merchandise Inventory... Accounts Payable ,000 5,000 2 Accounts Receivable... Sales ,000 4,000 Cost of Goods Sold... Merchandise Inventory ,000 3,000 5 Accounts Payable... Merchandise Inventory ,200 0,200 7 Freight Out... Cash Supplies... Cash ,900 0, Merchandise Inventory... Cash ,400 2, Cash... Merchandise Inventory ,230 0, Merchandise Inventory... Accounts Payable ,900 1, Merchandise Inventory... Cash ,250 0,

68 PROBLEM 5-3B (Continued) (a) (Continued) Date Account Titles and Explanation Ref. Debit Credit May 24 Cash... Sales ,200 6,200 Cost of Goods Sold... Merchandise Inventory ,340 4, Merchandise Inventory... Accounts Payable ,000 1, Cash... Accounts Receivable ,000 0,0 4, Sales Returns and Allowances... Cash ,100 0,100 Merchandise Inventory... Cost of Goods Sold Accounts Payable ($5,000 $200)... Cash ,800 4, Accounts Receivable... Sales ,600 1,600 Cost of Goods Sold... Merchandise Inventory ,000 1,

69 PROBLEM 5-3B (Continued) (b) Cash No. 101 Date Explanation Ref. Debit Credit Balance May Balance 230 6,200 4, , ,800 5,000 4,800 3,900 1,500 1,730 1,480 7,680 11,680 11,580 6,780 Accounts Receivable No. 112 Date Explanation Ref. Debit Credit Balance May ,000 1,600 4,000 04,000 00,000 01,600 Merchandise Inventory No. Date Explanation Ref. Debit Credit Balance May ,000 2,400 1, , , ,340 1,000 5,000 2,000 1,800 4,200 3,970 5,870 6, 1,780 2,780 2,850 1,

70 PROBLEM 5-3B (Continued) (b) (Continued) Supplies No. 126 Date Explanation Ref. Debit Credit Balance May 11 0,900 00,900 Accounts Payable No. 201 Date Explanation Ref. Debit Credit Balance May ,200 4,800 5,000 1,900 1,000 05,000 04,800 6,700 7,700 2,900 S. Eagle, Capital No. 301 Date Explanation Ref. Debit Credit Balance May 1 Balance 05,000 Sales No. 401 Date Explanation Ref. Debit Credit Balance May ,000 6,200 1,600 04,000 10,200 11,800 Sales Returns and Allowances No. 412 Date Explanation Ref. Debit Credit Balance May 29 0,100 00,

71 PROBLEM 5-3B (Continued) (b) (Continued) Cost of Goods Sold No. 505 Date Explanation Ref. Debit Credit Balance May ,000 4,340 1, ,000 07,340 07,270 8,270 Freight Out No. 644 Date Explanation Ref. Debit Credit Balance May 7 0,200 00,200 (c) EAGLE HARDWARE STORE Income Statement (Partial) For the Month Ended May 31, 2003 Sales revenues Sales... $11,800 Less: Sales returns and allowances Net sales... 11,700 Cost of goods sold... 8,270 Gross profit... 3,430 (d) EAGLE HARDWARE STORE Balance Sheet (Partial) May 31, 2003 Assets Current assets Cash... $ 6,780 Accounts receivable... 1,600 Merchandise inventory... 1,850 Supplies Total current assets... $11,

72 Adjusting entries not required: PROBLEM 5-4B Dec. 31 Cost of Goods Sold (Inventory Loss) Merchandise Inventory Insurance Expense Prepaid Insurance Amortization Expense... 4,000 Accumulated Amortization Building... 4,000 Amortization Expense... 2,850 Accumulated Amortization Store Equipment 2,850 Property Tax Expense... 6,000 Property Tax Payable... 6,000 (a) GLOBAL ENTERPRISES Income Statement For the Year Ended December 31, 2002 Sales revenues Sales... $243,700 Less: Sales returns and allowances ,800 Net sales ,900 Cost of goods sold ($180,300 + $100) ,400 Gross profit... 58,500 Operating expenses Salaries expense... $31,600 Utilities expense... 5,100 Amortization expense ($4,000 + $2,850) 6,850 Property tax expense... 6,000 Insurance expense Total operating expenses... 50,450 Net income... $ 8,

73 PROBLEM 5-4B (Continued) (a) (Continued) GLOBAL ENTERPRISES Statement of Owner s Equity For the Year Ended December 31, 2002 T. Brown, Capital, January 1... $50,000 Add: Net income... 8,050 T. Brown, Capital, December $58,

74 PROBLEM 5-4B (Continued) (a) (Continued) GLOBAL ENTERPRISES Balance Sheet December 31, 2002 Assets Current assets Cash... $ 13,000 Accounts receivable... 31,700 Merchandise inventory... 28,000 Prepaid insurance ($1,900 $900)... 1,000 Total current assets... 73,700 Capital assets Land... $ 30,000 Building... $150,000 Less: Accumulated amortization Building ($18,750 + $4,000)... 22, ,250 Store equipment... $45,000 Less: Accumulated amortization Store Equipment ($9,100 + $2,850)... 11,950 33, ,300 Total assets... $264,000 Liabilities and Owner's Equity Current liabilities Accounts payable... $ 34,700 Sales taxes payable... 4,000 Property tax payable... 6,000 Current portion of mortgage payable... 5,000 Total current liabilities... 49,700 Long-term liabilities Mortgage payable ,250 Total liabilities ,950 Owner's equity T. Brown, Capital... 58,050 Total liabilities and owner's equity... $264,

75 PROBLEM 5-4B (Continued) (b) Dec. 31 Sales ,700 T. Brown, Capital , T. Brown, Capital ,650 Sales Returns and Allowances... 4,800 Cost of Goods Sold ,400 Salaries Expense... 31,600 Utilities Expense... 5,100 Insurance Expense Property Tax Expense... 6,000 Amortization Expense... 6,

76 PROBLEM 5-5B (a) VEITCH DEPARTMENT STORE Income Statement For the Year Ended December 31, 2002 Sales revenues Sales... $624,000 Less: Sales returns and allowances... 8,000 Net sales ,000 Cost of goods sold ,200 Gross profit ,800 Operating expenses Selling expenses Sales salaries expense... $76,000 Sales commissions expense... 15,500 Amortization expense equipment 13,300 Utilities expense ($11,000 X 60%)... 6,600 Insurance expense ($7,200 X 60%) ,320 Total selling expenses... $115,720 Administrative expenses Office salaries expense... $32,000 Amortization expense building... 10,400 Property taxes expense... 4,800 Utilities expense ($11,000 X 40%)... 4,400 Insurance expense ($7,200 X 40%) ,880 Total administrative expenses 0054,480 Total operating expenses 0 170,200 Income from operations... 18,600 Other revenues and gains Interest revenue... $ 4,000 Other expenses and losses Interest expense... 11, ,000 Net income... $ 11,

77 PROBLEM 5-5B (Continued) (a) (Continued) VEITCH DEPARTMENT STORE Statement of Owner's Equity For the Year Ended December 31, 2002 S. Veitch, Capital, January 1... $226,600 Add: Net income , ,200 Less: Drawings ,000 S. Veitch, Capital, December $210,

78 PROBLEM 5-5B (Continued) (a) (Continued) VEITCH DEPARTMENT STORE Balance Sheet December 31, 2002 Assets Current assets Cash... $023,000 Accounts receivable... 50,300 Merchandise inventory... 72,500 Prepaid insurance ,400 Total current assets ,200 Capital assets Land... $ 50,000 Building... $190,000 Less: Accum. amortization building... 52, ,500 Equipment... $110,000 Less: Accum. amortization equipment 42, , ,600 Total assets... $402,800 Liabilities and Owner's Equity Current liabilities Accounts payable... $089,300 Mortgage payable due next year... 20,000 Property taxes payable... 4,800 Sales commissions payable... 4,500 Interest payable ,000 Sales taxes payable ,000 Total current liabilities ,600 Long-term liabilities Mortgage payable (less current portion) ,000 Total liabilities ,600 Owner's equity S. Veitch, Capital ,200 Total liabilities and owner's equity... $402,

79 PROBLEM 5-5B (Continued) (b) Dec. 31 Amortization Expense Building... 10,400 Accumulated Amortization Building... 10, Amortization Expense Equipment... 13,300 Accumulated Amortization Equipment. 13, Insurance Expense... 7,200 Prepaid Insurance... 7, Interest Expense... 8,000 Interest Payable... 8, Property Taxes Expense... 4,800 Property Taxes Payable... 4, Sales Commissions Expense... 4,500 Sales Commissions Payable... 4, Cost of Goods Sold (Inventory Loss)... 2,500 Merchandise Inventory... 2,

80 PROBLEM 5-5B (Continued) (c) Dec. 31 Sales ,000 Interest Revenue... 4,000 S. Veitch, Capital , S. Veitch, Capital ,400 Cost of Goods Sold ,200 Sales Returns and Allowances... 8,000 Office Salaries Expense... 32,000 Sales Salaries Expense... 76,000 Sales Commissions Expense... 15,500 Property Taxes Expense... 4,800 Utilities Expense... 11,000 Amortization Expense Building... 10,400 Amortization Expense Equipment... 13,300 Insurance Expense... 7,200 Interest Expense... 11, S. Veitch, Capital... 28,000 S. Veitch, Drawings... 28,

81 PROBLEM 5-6B Account Statement Classification Accumulated Depreciation Balance Sheet Capital Assets (Contra Account) Cash and Time Deposits Balance Sheet Current Assets Cost of Sales Income Statement Cost of Goods Sold Depreciation Expense Income Statement Operating Expenses (Administrative Expenses) Income Taxes Expense Income Statement Other Expenses (or Income Tax Expense) Interest Expense Income Statement Other Expenses Inventories Aluminum Balance Sheet Current Assets Inventories Other Supplies Balance Sheet Current Assets Inventories Raw Materials Balance Sheet Current Assets Operating Income Income Statement Operating Income Other Expenses Income Statement Other Expenses Payables Balance Sheet Current Liabilities Property, Plant, and Equipment Balance Sheet Capital Assets Receivables Balance Sheet Current Assets Sales Income Statement Revenue Selling, Administrative and General Expenses Income Statement 5-81 Operating Expenses

82 (a) PROBLEM 5-7B TAO COMPANY Income Statement For the Year Ended December 31, 2002 Sales revenues Sales ($702,000 - $10,000)... $692,000 Less: Sales returns and allowances... 4,100 Net sales ,900 Cost of goods sold ,000 Gross profit ,900 Operating expenses Selling expenses Sales salaries expense... $76,000 Freight out... 17,200 Advertising expense... 10,000 Amortization expense store equip. 7,500 Sales commissions expense ($6,500 + $1,000)... 7,500 $118,200 Administrative expenses Office salaries expense... $19,000 Rent expense ($16,000 - $1,250)... 14,750 Utilities expense... 8,000 Insurance expense ($7,000 - $1,200) 5,800 47,550 Total operating expenses ,750 Income from operations... 52,150 Other revenues and gains Interest revenue... $5,300 Other expenses and losses Interest expense... 4,000 1,300 Net income... $ 53,450 Reconciliation Net Income as prepared by bookkeeper... $50,000 Sales revenue unearned... (10,000) Insurance expense applicable to ,200 Rent expense applicable to ,250 Sales commission expense applicable to (1,000) Drawings... 12,000 As adjusted... $53,

83 PROBLEM 5-7B (Continued) (b) TAO COMPANY Income Statement For the Year Ended December 31, 2002 Revenues Net sales... $687,900 Interest revenue... 5,300 Total revenue... $693,200 Expenses Cost of goods sold... $470,000 Selling expenses (1) ,200 Administrative expenses (2)... 47,550 Interest expense... 4,000 Total expenses ,750 Net income... $ 53,450 (1) Selling expenses Sales salaries expense... $ 76,000 Freight out... 17,200 Advertising expense... 10,000 Amortization expense store equipment... 7,500 Sales commissions expense ($6,500 + $1,000) 7,500 Total... $118,200 (2) Administrative expenses Office salaries expense... $19,000 Rent expense ($16,000 - $1,250)... 14,750 Utilities expense... 8,000 Insurance expense ($7,000 - $1,200)... 5,800 Total... $47,550 Reconciliation Net income as prepared by bookkeeper... $50,000 Sales revenue unearned... (10,000) Insurance expense applicable to ,200 Rent expense applicable to ,250 Sales commission expense applicable to (1,000) Drawings... 12,000 As adjusted... $53,

84 PROBLEM 5-8B (a) 8 Months Ended December 31, 1999 Year Ended April Gross profit margin 85.3% ($74,314 $10,931) $74, % ($1,472 $631) $1,472 Inventory turnover 1.64 times $10,931 [($4,966 + $8,330) 2] 0.25 times $631 [($4,966 + $0) 2] Days sales in inventory 148 days 365 days x 8/ times 1,460 days 365 days 0.25 times Current ratio 1.42:1 $1,973,457 $1,390, :1 $298,499 $259,851 (b) SAM s current ratio of more than 1 to 1 indicates that SAM does not have a liquidity problem. Its current assets are more than its current liabilities. It appears to managing inventory better in its second year of operations, with a substantial reduction of days sales in inventory. The inventory ratios for the year ended April 1999 are probably reflective of the start up phase of the company. 5-84

85 *PROBLEM 5-9B GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit Oct. 1 GST Recoverable... Merchandise Inventory... Accounts Payable... 5,250 75,000 80,250 3 Merchandise Inventory... Cash... 01,800 01,800 5 Accounts Payable... Merchandise Inventory... GST Recoverable... 06,420 06, Accounts Receivable... Sales... GST Payable... PST Payable... 24,640 22,000 1,540 1,100 Cost of Goods Sold... Merchandise Inventory... 16,000 16, GST Recoverable... Supplies ($5,000 + $250)... Cash ,250 05, GST Recoverable... Merchandise Inventory... Cash ,000 05, Accounts Receivable... Sales... GST Payable (7% x $ 30,000)... PST Payable (5% x $ 30,000)... 33,600 30,000 2,100 1,500 Cost of Goods Sold... Merchandise Inventory... 23,000 23,

86 *PROBLEM 5-9B (Continued) Date Account Titles and Explanation Ref. Debit Credit Oct. 20 Delivery Equipment [$44,000 + (5% x $ 44,000)]... GST Recoverable (7% x $44,000)... Accounts Payable... 46,200 3, , Accounts Payable ($80,250 $6,420)... Cash Cash... Accounts Receivable... 73, ,830 24,640 00, 24,

87 (a) *PROBLEM 5-10B GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit May 4 GST Recoverable... Merchandise Inventory... Accounts Payable Merchandise Inventory... Cash Accounts Receivable... Sales... GST Payable... PST Payable Cost of Goods Sold... Merchandise Inventory Accounts Payable... Merchandise Inventory... GST Recoverable ($45 X 7%) GST Recoverable ($400 x 7%)... Merchandise Inventory... Cash GST Recoverable... Merchandise Inventory... Accounts Payable Merchandise Inventory... Cash Cash... Merchandise Inventory... GST Recoverable

88 *PROBLEM 5-10B (Continued) (a) (Continued) Date Account Titles and Explanation Ref. Debit Credit May 23 Cash... Sales... GST Payable... PST Payable , Cost of Goods Sold... Merchandise Inventory Cash... Accounts Receivable GST Payable... PST Payable... Sales Returns and Allowances... Accounts Receivable Merchandise Inventory... Cost of Goods Sold Accounts Payable ($ $ 48.15)... Cash Accounts Receivable... Sales... GST Payable... PST Payable... Cost of Goods Sold... Merchandise Inventory Cash... Accounts Receivable , , , ,

89 *PROBLEM 5-10B (Continued) (b) Cash No. 101 Date Explanation Ref. Debit Credit Balance May Balance , , , , , , ,553,85 3, , , Accounts Receivable No. 112 Date Explanation Ref. Debit Credit Balance May , , , GST Recoverable No. 114 Date Explanation Ref. Debit Credit Balance May

90 *PROBLEM 5-10B (Continued) (b) (Continued) Merchandise Inventory No. Date Explanation Ref. Debit Credit Balance May Balance , , , , , , , , , , , , , Accounts Payable No. 201 Date Explanation Ref. Debit Credit Balance May , GST Payable No. 214 Date Explanation Ref. Debit Credit Balance May

91 *PROBLEM 5-10B (Continued) (b) (Continued) PST Payable No. 215 Date Explanation Ref. Debit Credit Balance May J. Nejedly, Capital No. 301 Date Explanation Ref. Debit Credit Balance May 1 Balance 4, Sales No. 401 Date Explanation Ref. Debit Credit Balance May , , , Sales Returns and Allowances No. 412 Date Explanation Ref. Debit Credit Balance May , Cost of Goods Sold No. 505 Date Explanation Ref. Debit Credit Balance May , , , , ,

92 *PROBLEM 5-10B (Continued) (c) JANA'S TENNIS SHOP Trial Balance May 31, 2003 Cash... Accounts Receivable... GST Recoverable... Merchandise Inventory... Accounts Payable... GST Payable... PST Payable... J. Nejedly, Capital... Sales... Sales Returns and Allowances... Cost of Goods Sold... Debit $4, , , , $9, Credit $ , , $9, (d) JANA'S TENNIS SHOP Income Statement (Partial) For the Month Ended May 31, 2003 Sales revenues Sales... $3,200 Less: Sales returns and allowances Net sales... 3,165 Cost of goods sold... 2,375 Gross profit

93 *PROBLEM 5-11B (a) BRENNAN FASHION CENTRE Work Sheet For the Year Ended November 30, 2003 Account Titles Trial Balance Adjustments Adj. Trial Balance Income Statement Balance Sheet Cash Accounts Receivable Merchandise Inventory Store Supplies Land Building Accumulated Amortization Delivery Equipment Accumulated Amortization Mortgage Payable Accounts Payable Sales Taxes Payable L. Brennan, Capital L. Brennan, Drawings Sales Sales Returns and Allow. Cost of Goods Sold Salaries Expense Advertising Expense Utilities Expense Repair Expense Delivery Expense Rent Expense Totals Supplies Expense Amort. Expense Bldg. Amort. Expense Equip. Interest Expense Interest Payable Property Tax Expense Property Tax Payable Totals Net Loss Totals 16,700 40,700 48,000 5,500 60,000 85,000 48,000 12,000 4, , ,000 26,400 14,000 12,100 16,700 24,000 1,050,800 Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 17,000 16,000 51,000 48,500 7, , , ,01,050,800 (4) 3,000 (1) 2,000 (2) 4,250 (2) 8,000 (3) 4,000 (5) 5, ,250 (4) 3,000 (1) 2,000 (2) 4,250 (2) 8,000 (3) 4,000 (5) 05,000 26, ,700 40,700 45,000 3,500 60,000 85,000 48,000 12,000 4, , ,000 26,400 14,000 12,100 16,700 24,000 2,000 4,250 8,000 4,000 0, 5, ,072,050 21,250 24,000 51,000 48,500 7, , ,300 4,000 0,005,000 1,072,050 4, , ,000 26,400 14,000 12,100 16,700 24,000 2,000 4,250 8,000 4,000 5, , , , , , ,150 16,700 40,700 45,000 3,500 60,000 85,000 48,000 12, , , ,750 21,250 24,000 51,000 48,500 7, ,000 4, , , ,750

94 *PROBLEM 5-11B (Continued) Key: (1) Supplies expense; (2) Amortization expense building & equipment; (3) Interest payable; (4) Inventory adjustment; (5) Property tax payable 5-94

95 *PROBLEM 5-11B (Continued) (b) BRENNAN FASHION CENTRE Income Statement For the Year Ended November 30, 2003 Sales revenues Sales... $750,300 Less: Sales returns and allowances... 4,200 Net sales ,100 Cost of goods sold ,500 Gross profit ,600 Operating expenses Selling expenses Salaries expense ($140,000 X 70%) $98,000 Advertising expense... 26,400 Rent expense ($24,000 x 80%)... 19,200 Store supplies expense... 2,000 Delivery expense ,700 Utilities expense ($14,000 x 80%)... 11,200 Total selling expenses... $173,500 Administrative expenses Salaries expense ($140,000 X 30%).. $42,000 Repair expense... 12,100 Amortization expense equipment.. 8,000 Property tax expense... 5,000 Rent expense ($24,000 x 20%) ,800 Amortization expense building... 4,250 Utilities expense ($14,000 x 20%)... 2,800 Total administrative expenses 78,950 Total operating expenses 0 252,450 Loss from operations... 6,850 Other expenses and losses Interest expense ,000 Net loss... $ 10,

96 *PROBLEM 5-11B (Continued) (b) (Continued) BRENNAN FASHION CENTRE Statement of Owner s Equity For the Year Ended November 30, 2003 L. Brennan, Capital, December 1... $161,000 Less: Net loss... $10,850 Drawings... 12,000 22,850 L. Brennan, Capital, November $138,

97 *PROBLEM 5-11B (Continued) (b) (Continued) BRENNAN FASHION CENTRE Balance Sheet November 30, 2003 Assets Current assets Cash... $ 16,700 Accounts receivable... 40,700 Store supplies... 3,500 Merchandise inventory... 45,000 Total current assets ,900 Capital assets Land... $60,000 Building... $85,000 Less: Accumulated amortization... 21,250 63,750 Equipment... $48,000 Less: Accumulated amortization... 24,000 24, ,750 Total assets... $253,650 Liabilities and Owner s Equity Current liabilities Accounts payable... $ 48,500 Sales taxes payable... 7,000 Property tax payable... 5,000 Interest payable... 4,000 Current portion of mortgage payable... 30,000 Total current liabilities... 94,500 Long-term liabilities Mortgage payable... 21,000 Total liabilities ,500 Owner s Equity L. Brennan, Capital ,150 Total liabilities and owner s equity... $253,

98 *PROBLEM 5-11B (Continued) (c) Nov. 30 Store Supplies Expense... 2,000 Store Supplies... 2,000 Amortization Expense Building... 4,250 Accum. Amortiz. Building... 4,250 Amortization Expense Equipment.. 8,000 Accum. Amortiz. Equipment... 8,000 Cost of Goods Sold... 3,000 Inventory... 3,000 Interest Expense... 4,000 Interest payable... 4,000 Property Tax Expense... 5,000 Property Tax Payable... 5,000 (d) Nov. 30 Sales ,300 L. Brennan, Capital ,300 L. Brennan, Capital ,150 Cost of Goods Sold ,500 Salaries Expense ,000 Advertising Expense... 26,400 Utilities Expense... 14,000 Repair Expense... 12,100 Delivery Expense... 16,700 Rent Expense... 24,000 Amortization Expense Building 4,250 Amortization Expense Equipment 8,000 Interest Expense... 4,000 Property Tax Expense... 5,000 Supplies Expense... 2,000 Sales Returns and Allowances 4,200 L. Brennan, Capital... 12,000 L. Brennan, Drawings... 12,

99 *PROBLEM 5-11B (Continued) (e) BRENNAN FASHION CENTRE Post-Closing Trial Balance November 30, 2003 Debit Credit Cash... $ 16,700 Accounts Receivable... 40,700 Merchandise Inventory... 45,000 Store Supplies... 3,500 Land... 60,000 Building... 85,000 Accumulated Amortization Building... $ 21,250 Equipment... 48,000 Accumulated Amortization Equipment... 24,000 Mortgage Payable... 51,000 Accounts Payable... 48,500 Property Tax Payable... 5,000 Sales Taxes Payable... 7,000 Interest Payable... 4,000 L. Brennan, Capital ,150 Totals $298,900 $298,

100 BYP 5-1 FINANCIAL REPORTING PROBLEM (a) The Second Cup is involved in merchandising selling at the retail level through its corporate-owned stores, and at the wholesale level to its franchise operators and third parties (other companies). It is also involved in the production (roasting and blending) of coffees, and is therefore to some extent a manufacturer. (b) Systemwide sales include retail sales of all corporate-owned and franchised stores (based on sales information reported by store operators) and product sales to third parties. Total revenues include revenues from sales in corporate stores, franchise revenues (fees and royalties) from store operators, and product sales to third parties (refer to Note 2). (c) 100% of revenue in 2000 was generated by operations in Canada. (d) No information is provided on the cost of goods sold, gross profit, or regular operating expenses. After reporting Total Revenue, the next item reported on the income statement is "Earnings before Interest, Taxes, Depreciation, Amortization, and Unusual Items". The missing information would contain the Cost of Goods Sold, Gross Profit, and Operating Expenses. (e) For competitive reasons, The Second Cup does not want to disclose detailed information regarding its operations such as that referred to in part (d) above. Additionally, the company feels that this information is not very meaningful when presented on a consolidated (combined) basis with the results of other companies

101 BYP 5-2 FINANCIAL REPORTING PROBLEM (a) 1. Sales returns and allowances...sales 2. Freight out...front-line expenses (b) Gross profit margin 2000 = 41% ($127,824 $314,547) 1999 = 40% ($114,238 $283,401) Inventory turnover 2000 = 2.4 times [$186,723 ($76,982 + $81,468) 2] 1999 = 2.5 times [$169,163 ($60,108 + $76,982) 2] Days sales in inventory 2000 = 152 days (365 days 2.4) 1999 = 146 days (365 days 2.5) Mark s Work Wearhouse s gross margin is slightly below its forecast in both years 2000 (41% compared to a forecasted range of 41.1% %) and in 1999 (40% compared to a forecasted range of 40.6% %). This, however, is an insignificant difference. It s inventory turnover is slightly better than that forecasted in 1999 and is on target as forecasted in 2000 (forecasted goal of times over the two years). Even though it s inventory turnover (and days sales in inventory) are within forecast, the company s sales, gross margin, and net earnings are still slightly below that forecasted. The difference is not substantial, though, and not likely to be of significant concern

102 (a) BYP 5-3 GLOBAL FOCUS Carrefour (in billions of euros) Wal-Mart (in billions of US dollars) Gross profit margin ( ) 51.9 = 21.4% ($ $129.7) $165.0 = 21.4% Inventory turnover =8.9 times $129.7 $18.4 = 7.0 times Days sales in inventory 365 days 8.9 = 41 days 365 days 7.0 = 52 days Based on these ratios, it would appear the companies achieve the same markup from the gross profit margin. However, Carrefour appears to be more efficient in controlling its inventory. It is selling its inventory more often than Wal-Mart (its inventory turns over 8.9 times a year compared to Wal-Mart s 7 times a year) and correspondingly has less stock on hand (41 days compared to Wal-Mart s 52 days). In spite of less stock on hand, it is able to maintain the same gross profit margin of Wal-Mart, which means its operating costs are likely lower because of reduced carrying costs. (b) Current ratio = 1.22:1 $24.4 $25.8 = 0.95:1 Both companies report low current ratios. This is not surprising since in recent years most large companies have tried to reduce costs and limit the amount of current assets that they hold. (c) Ratios improve our ability to compare these two companies that report financial information using different currencies. However, other factors can still reduce our ability to compare them. The two companies might classify items quite differently. Also, different accounting standards in the two countries might result in dramatically different results under the same circumstances

103 BYP 5-4 ACCOUNTING ON THE WEB Due to the frequency of change with regard to information available on the world wide web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found on-line in the Instructor Resources section of our home page [

104 BYP 5-5 COLLABORATIVE LEARNING ACTIVITY (a) 1. FEDCO DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2003 Net sales [$700,000 + ($700,000 X 6%)]... $742,000 Cost of goods sold ($742,000 X 75%)* ,500 Gross profit ($742,000 X 25%)** ,500 Operating expenses Selling expenses... $100,000 Administrative expenses... 25,000 Total operating expenses ,000 Net income... $ 60,500 **Alternatively: Net sales, $742,000 Gross profit, $185,500 **25% = ($154,000 $700,000) + 3% 2. FEDCO DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2003 Net sales... $700,000 Cost of goods sold ,000 Gross profit ,000 Operating expenses Selling expenses... $72,000* Administrative expenses... 25,000* 97,000 Net income... $ 57,000 *$100,000 $30,000 ($30,000 X 40%) + ($700,000 X 2%) = $72,

105 BYP 5-5 (Continued) (b) Kathy s proposed changes will increase net income by $31,500. John s proposed changes will reduce operating expenses by $28,000 and result in a corresponding increase in net income. Thus, if the choice is between Kathy s plan and John s plan, Kathy s plan should be adopted. While John s plan will increase net income, it may also have an adverse effect on sales personnel. Under John s plan, sales personnel will be taking a cut of $16,000 in compensation [$60,000 ($30,000 + $14,000)]. (c) FEDCO DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2003 Net sales... $742,000 Cost of goods sold ,500 Gross profit ,500 Operating expenses Selling expenses... $72,840* Administrative expenses... 25,000* Total operating expenses... 97,840 Net income... $ 87,660 *$72, % X ($742,000 $700,000) = $72,840 If both plans are implemented, net income will be $58,660 ($87,660 $29,000) higher than the 2001 results. This is an increase of over 200%. Given the size of the increase, John s plan to compensate sales personnel might be modified so that they would not have to take a pay cut. For example, if sales commissions were 3%, the compensation cut would be reduced to $7,740 [$60,000 ($30,000 ($742,000 X 3%))]

106 BYP 5-6 COMMUNICATION ACTIVITY MEMORANDUM TO: PRESIDENT, THE GREAT CANADIAN SNOWBOARD COMPANY FROM: SUBJECT: REVENUE RECOGNITION DATE: As you know, the financial statements for The Great Canadian Snowboarding Company are prepared in accordance with generally accepted accounting principles. One of these principles is the revenue recognition principle, which provides that revenues should be recognized when they are earned. Typically, sales revenues are earned when the goods are transferred from the buyer to the seller. At this point, the sales transaction is completed and the sales price is established. Thus, in the typical situation, revenue on the snowboard ordered by Dexter is earned at event No. 7, when Dexter picks up the snowboard. The circumstances pertaining to this sale may seem to you to be atypical because Dexter has ordered a specific kind of snowboard. From an accounting standpoint, this would be true only if you could not reasonably expect to sell this snowboard to another customer. In such case, it would be proper under generally accepted accounting principles to recognize sales revenue when you have completed the snowboard for Dexter. Whether Dexter makes a down payment with the purchase order is irrelevant in recognizing sales revenue because at this time, you have not done anything to earn the revenue. A down payment may be an indication of Dexter s good faith. However, its effect on your financial statements is limited entirely to recognizing the down payment as unearned revenue. If you have further questions about the accounting for this sale, please let me know

107 BYP 5-7 ETHICS CASE (a) Rita Pelzer, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue delaying payments to creditors. Delaying payment is not an unethical practice. Companies can pay their bills late, but they do risk incurring interest charges or impairing their credit ratings. What is unethical is lying and blaming the late payment on the mail room or post office in order to avoid interest charges or affecting the company s credit rating. Rita s dilemma is to decide whether to (1) delay payments and place inappropriate blame for these late payments on the mail room and / or post office, or (2) risk offending her boss and possibly lose the job she just assumed. (b) The stakeholders (affected parties) are: Rita Pelzer, the assistant controller. Jamie Caterino, the controller. Yorkshire Stores, the company. Creditors of Yorkshire Stores (suppliers). Mail room / post office employees (those assigned the blame). (c) Rita s alternatives: 1. Tell the controller (her boss) that she will prepare and mail creditors cheques to take advantage of the full credit period but will not delay mailing the cheques beyond their due dates. This may offend her boss and may jeopardize her continued employment. 2. Tell the controller (her boss) that she will be happy to delay the payment four days but will not blame others for this delay when asked. This is contrary to current practice and may also offend her boss and jeopardize her continued employment. 3. Join the team and continue the practice of delaying payments and lay blame on others for the delay

108 BYP 5-7 (Continued) (c) (Continued) 4. Go over her boss s head and take the chance of receiving just and reasonable treatment from an officer superior to Jamie. The company may not condone this practice. Rita definitely has a choice, but probably not without consequence. To continue the practice of lying is definitely unethical. If Rita submits to this request, she may be asked to perform other unethical tasks. If Rita stands her ground and refuses to participate in this unethical practice, she probably won t be asked to do other unethical things if she isn t fired. Maybe nobody has ever challenged Jamie s unethical behaviour and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job