financial accounting tools for business decision making solutions 7e chapter 05

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CHAPTER 5

MERCHANDISING OPERATIONS

LEARNING OBJECTIVES

1 Identify the differences between service and merchandising companies

2 Prepare entries for purchases under a perpetual inventory system

3 Prepare entries for sales under a perpetual inventory system

4 Prepare a single-step and a multiple-step income statement

5 Calculate the gross profit margin and profit margin

6 Account and report inventory in a periodic inventory system (Appendix 5A)

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND

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Legend: The following abbreviations will appear throughout the solutions manual file

Time: Estimated time to prepare in minutes

AACSB Association to Advance Collegiate Schools of Business

Reflec Thinking Reflective Thinking

CPA CM CPA Canada Competency

cpa-e001 Ethics Professional and Ethical Behaviour

cpa-e002 PS and DM Problem-Solving and Decision-Making

cpa-e004 Self-Mgt Self-Management

cpa-e005 Team & Lead Teamwork and Leadership

cpa-t001 Reporting Financial Reporting

cpa-t002 Stat & Gov Strategy and Governance

cpa-t003 Mgt Accounting Management Accounting

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LO 1 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

2 (a) The income measurement process of a merchandising company is the

same as the service company in that net income is arrived at by deducting expenses from revenues

(b) The income measurement process of a merchandising company differs from that of a service company in that its revenue is derived from sales revenue, not service revenue In addition, cost of goods sold is deducted from sales revenue to determine gross profit, before operating and other expenses, similar to both types of companies, are deducted (or other revenues are added)

3 The company needs to compare the cost of the detailed record keeping

required in a perpetual inventory system to the benefits of having the additional information about the inventory One of the benefits of a perpetual inventory system is the ability to answer questions from customers about merchandise availability In a used clothing business, this may not be of much benefit unless each inventory item is unique Another benefit is the monitoring of inventory quantities in order to avoid running out of stock Again, this may not be of benefit since the company does not order recurring or similar merchandise, and may not have a supplier to order from But if the company is selling used clothing on consignment, it will need to track each item in order to determine which consignor to pay when an item is sold

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3 (continued)

The company should carefully determine the cost of the detailed record keeping required, in particular for a new company A perpetual inventory system requires more record keeping and therefore is more expensive to use For example, a perpetual inventory system usually requires an investment in a point-of-sale system that is integrated with the inventory system

4 A physical count is an important control feature By using a perpetual inventory

system, a company knows what should be on hand Performing a physical count and checking it to the perpetual records is necessary to detect any errors

in record keeping and/or shortages in stock

5 The key distinction between a periodic inventory system and a perpetual

inventory system is whether or not information on inventory and cost of goods sold (units and dollars) are always (perpetually) available or only known when inventory counts are conducted (periodically) Because information on the cost

of goods sold is only known after an inventory count has been carried out under the periodic system, no entry is made for the cost of goods sold at the time of each sale Instead, cost of goods sold is a residual number, determined by subtracting ending inventory (as determined by the inventory account) from cost

of goods available for sale This means that any goods not included in ending inventory are assumed to have been sold In order to arrive at the cost of goods available for sale, separate accounts are set up in the general ledger to keep track of the purchases, freight-in, purchase returns and allowances, and purchase discounts Under the periodic inventory system, management is not able to look up in the general ledger accounts for the balance of inventory at a particular point in time In order to arrive at the inventory value, a physical count

of the inventory must be performed

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6 The reason for recording the purchase of merchandise for resale in a separate

account is to enable a company to determine its cost of goods sold and gross profit This information is useful in managing costs and setting prices

7 (a) The value of the purchase discount to Butler’s Roofing is $480 ($48,000 ×

1%)

(b) Failing to take advantage of the discount terms is like paying the supplier

an extra $480 in order to settle a $47,520 invoice 20 days later This works out to 1.01% [$480 ÷ $47,520] every 20 days On an annual basis this amounts to 18.4% [($480 ÷ $47,520 × (365 ÷ 20)] Butler’s should take advantage of the cash discount offered

LO 2 BT: AP Difficulty: M Time: 5 min AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

8 (a) Lebel Ltée should record the sale as revenue in June, when it is sold to a

customer When the merchandise was purchased in April, it should be recorded as an asset, inventory It should be recorded as cost of goods sold (an expense) in June when the inventory is sold and the revenue is recognized This is necessary in order to match the cost with the related revenue

(b) Lebel’s customer should recognize the purchase in June, when the inventory is received

LO 2,3 BT: C Difficulty: C Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

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9 (a) FOB shipping point means that the goods are placed free on board by the

seller at the point of shipping The buyer pays the freight costs from the point of shipping to the buyer’s destination because title passes at shipping point FOB destination means the goods are delivered by the seller to their destination, where the title passes The seller pays for shipping to the buyer’s destination

(b) FOB shipping point will result in a debit to the Inventory account by the

buyer because title has transferred at shipping point and the inventory is now owned by the buyer FOB destination will result in a debit to Freight Out by the seller because they are paying for the freight

LO 2,3 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

10 In a perpetual inventory system, purchase returns are credited to Inventory

because the items purchased have been returned to the vendor and are no

longer available to be sold to customers Sales returns are not debited directly

to the Sales account because this would not provide information about 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

11 (a) A quantity discount gives a reduction in the price according to the volume

of the purchase A purchase discount is offered by a seller to a buyer for early payment of an invoice When the buyer pays the invoice within the discount period, the amount of the discount decreases the Inventory account A sales discount is the same as a purchase discount but from the seller’s point of view

(b) Quantity discounts are not recorded or accounted for separately but

become part of the recorded sales price Buyers record purchase discounts taken as a credit to Inventory under the perpetual system or to Purchase Discounts when using the periodic system The seller records a sales discount as a debit to the Sales Discounts account, which is a contra revenue account to Sales, when the invoice is paid within the discount period

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12 Contra accounts are used to reduce the account they are contra to, such as

accumulated depreciation reducing equipment A debit (decrease) recorded directly to Sales would make it more difficult for management to determine the percentage of total sales that ends up being lost through sales returns and allowances, so a contra revenue account (sales returns and allowances) is used Another example of a contra revenue account is sales discounts This account keeps track of the costs incurred for discounts taken by customers for paying early, in accordance with the discount terms offered The contra revenue accounts reduce sales to net sales, reported on the income statement

13 If the merchandise is not resaleable, it cannot be included in inventory since it

cannot be resold and it has no value The cost remains in cost of goods sold since it is a cost of doing business If the merchandise is resaleable, it still has value to the company In this case, the cost of the merchandise is debited to inventory again and cost of goods sold is credited

14 The sales taxes are collected on behalf of the federal and provincial

governments, and must be periodically remitted to these authorities Sales taxes that are collected from selling a product or service are not recorded as revenue, instead they are recorded as a liability until they are paid to the government

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15 In a single-step income statement, all data are classified into two categories:

(1) revenues and (2) expenses It is referred to as a single-step income statement because only a single step—subtracting expenses from revenues—

is needed to determine income before income tax A multiple-step income statement requires several steps to determine income before income tax First, cost of goods sold is deducted from net sales to determine gross profit Operating expenses are then deducted to calculate income from operations Finally, other revenues and expenses are added or deducted to determine income before income tax The deduction of income tax to calculate net income (loss) is the same under both formats In addition, both formats produce the same profit amount for the period

16 North West Company uses a multiple-step income statement

LO 4 BT: K Difficulty: S Time: 2 min AACSB: None CPA: cpa-t001 CM: Reporting

17 (a) When classifying expenses by their nature, they are reported in

accordance with their natural classification (for example, salaries, deprecation, and so on) When classifying expenses by their function, they are reported according to the activity (business function) for which they were incurred (for example, cost of goods sold, administrative, selling)

(b) It does not matter whether a single-step or multiple-step income statement

is prepared, expenses must be classified either by nature or by function

18 Because the Overwaitea is a private enterprise, it can follow Accounting

Standards for Private Enterprises (ASPE) Companies following ASPE can classify their expenses in whatever manner is useful to them Loblaws, which follows IFRS, must classify its expenses by their nature or their function

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19 Interest expense is a non-operating expense because it relates to how a

company’s operations are financed, not to the company’s main operations

20 The difference between gross profit margin and profit margin is that the gross

profit margin measures the amount by which the selling price exceeds the cost

of goods sold while the profit margin measures the extent to which sales cover all expenses (including the cost of goods sold)

21 Factors affecting a company’s gross profit margin include the selling price and

the cost of the merchandise Recall that gross profit = net sales  cost of goods sold Selling products with a higher price or “mark-up” or selling products with

a lower cost would result in an increased gross profit margin Selling products with a lower price (perhaps due to increased competition that results in lower selling prices) or selling products with a higher cost (perhaps due to price increases from suppliers and shippers) would result in a lower gross profit margin

such as

Pharmaceutical manufacturers Grocery stores

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*23

*24 Periodic System

Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased

(Purchases – Purchase Discounts – Purchase Returns and Allowances +

Freight In) – Ending Inventory

Ending inventory and cost of goods sold for the period are calculated at the end

of the period

Perpetual System

Cost of Goods Sold = the cost of the item(s) sold

Cost of goods sold is calculated at the time of each sale and recorded as an

increase (debit) to the Cost of Goods Sold account and a decrease (credit) to

the Inventory account

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*25 The calculation of cost of goods sold is shown in detail in the income statement

of a company using the periodic system In a perpetual system, it is one line and amount only

Periodic System

Cost of Goods Sold =

1 Add the cost of goods purchased (where the cost of goods purchased is equal to purchases less purchases discounts, and purchases returns and allowances plus freight in) to the cost of goods on hand at the beginning of the period (beginning inventory) The result is the cost of goods available for sale

2 Subtract the cost of goods on hand at the end of the period (ending inventory) from the cost of goods available for sale The result is the cost of goods sold

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1

(a) The company with the most efficient operating cycle is Company A as it uses

the fewest number of days in its cycle to obtain cash

(b) The company which is most likely a service company is Company A as it does

not have to manufacture or deliver inventory and consequently takes the fewest number of days to obtain cash Company C, with the highest number of days in its operating cycle, is likely the manufacturing company, and the merchandising company would be in the middle (Company B), with neither the highest nor the lowest number of days in its operating cycle

BRIEF EXERCISE 5-2

(a) [1] Income before tax = $100 – $65 = $35

[2] Net income = $35 (from [1]) – $9 = $26

[3] Cost of goods sold = $100 – $60 = $40

[4] Operating expenses = $60 – $35 = $25

[5] Income tax expense = $35 – $26 = $9

(b) Company A is the service company, since it has no cost of goods sold

Company B is the merchandising company, since it has cost of goods sold

LO 1 BT: AN Difficulty: M Time: 10 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Inventory Beginning Balance 55,000

26,000 Purchase returns 9,700 Purchase discounts

218,000 Cost of goods sold

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Pocras Corporation (Buyer):

Aug 24 Inventory 32,000

Accounts Payable 32,000

Wydell Inc (Seller):

Aug 24 Accounts Receivable 32,000

LO 2 BT: AP Difficulty: S Time: 10 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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LO 3 BT: AP Difficulty: M Time: 20 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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(d) Income from operations $142,000

Add: Other revenues $26,000

Less: Other expenses (35,000)_ (9,000) Income before income tax $133,000

(e) Income before income tax $133,000

Less: Income tax expense 27,000 Net income $106,000

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As the name suggests, numerous steps are required in determining net income in a multiple-step statement

Depreciation expense Expenses Operating expenses

Cost of goods sold Expenses Cost of goods sold

Income tax expense Income tax expense Income tax expense

Sales returns and allowances Revenues Sales revenue

(a) The company is using a multiple-step form of income statement

(b) The company is classifying its expenses by their function They are reported

according to the activity (business function) for which they were incurred (for example, cost of goods sold, administrative, selling)

LO 4 BT: C Difficulty: M Time: 5 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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(c) Modder Corporation’s gross profit margin increased in 2018 indicating an

increase in the percentage mark-up, or a reduction in the cost of goods sold, or both On the other hand, in 2018, the company’s profit margin dropped The decrease in profit margin is caused by the other revenues in 2017 that were not available in 2018 Operating expenses were 20% of sales in both years

LO 4,5 BT: AN Difficulty: M Time: 20 min AACSB: Analytic CPA: cpa-t001 and : cpa-t005CM: Reporting and

Finance

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(b) Canadian Tire Corporation’s gross profit margin increased in 2015 Although

sales dropped 1.5%, [($12,279.6 - $12,462.9) ÷ $12,462.9] cost of goods sold dropped 3.6% [($7,747.1 - $8,033.2) ÷ $8,033.2] which lead to the increased gross profit margin The profit margin also increased in 2015, but not as much Operating expenses or interest or income tax expense must have increased as

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*BRIEF EXERCISE 5-14

(a) Sales $1,860,000

Less: Sales returns and allowances $124,000

Sales discounts 28,000 152,000 Net Sales $1,708,000

(b) Purchases $880,000

Less: Purchase returns and allowances $13,000

Purchase discounts 14,000 27,000 Net purchases $853,000

(c) Net purchases $853,000

Add: Freight in 16,000 Cost of goods purchased $869,000

(d) Beginning inventory $ 96,000

Add: Cost of goods purchased 869,000 Cost of goods available for sale 965,000 Less: Ending inventory 82,000 Cost of goods sold $883,000

(e) Net sales $1,708,000

Less: Cost of goods sold 883,000 Gross profit $825,000

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Add: Freight In 5,250

Cost of goods purchased 173,250

Cost of goods available for sale 278,250

Ending inventory 120,000

Cost of goods sold $158,250

(b) There would be no difference in the remainder of the income statement for

Halifax Limited whether the periodic or perpetual inventory systems were used

Purchases – Purchase returns and allowances – Purchase discounts + Freight-in =

Cost of goods purchased

(Beginning inventory+ Cost of goods purchased – Ending inventory = Cost of goods

sold)

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*BRIEF EXERCISE 5-16

Dec 31 Inventory (ending) 68,000

Cost of Goods Sold 401,000*

Purchase Discounts 6,000 Inventory (beginning) 75,000 Purchases 388,000 Freight In 12,000

* Cost of goods sold = Beginning inventory + Purchases  Purchase discounts  Purchase returns and allowances + Freight in – Ending inventory

Cost of goods sold = $75,000 + $388,000  $6,000 + $12,000 –

$68,000 = $401,000

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SOLUTIONS TO EXERCISES EXERCISE 5-1

(a) Toys “R” Us, Inc is a merchandiser (retailer), Fasken Martineau LLP is a

service company, and Atlantic Grocery Distributors Ltd is a merchandiser (wholesaler)

(b) The operating cycle of these three businesses will be different The longest

operating cycle will be experienced by the retailer, as the sales of merchandise will be the slowest The organization with the shortest operating cycle will be the service firm that does not sell inventory The third company, the distributing wholesaler, will have an operating cycle between that of the retailer and the law firm because its inventory is more likely to sell faster and the law firm has no inventory to sell

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EXERCISE 5-2

–$3,430 –$70

6 Asset

Expense

Accounts Receivable

Cost of Goods Sold

–$1,000 –$400

Receivable

–$6,000

LO 2,3 BT: AN Difficulty: M Time: 20 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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EXERCISE 5-3 (CONTINUED)

(b)

Inventory Sept 1 Bal 2,000 Sept.10 200

Number of calculators at September 30: 100 + 750 – 10 – 260 + 10 – 300 = 290

Cost of calculators at September 30: 290 × $20 = $5,800

Cost of Goods Sold:

Number of calculators sold in September: 260 – 10 + 300 = 550

Cost of calculators sold in September: 550 x $20 = $11,000

LO 2,3 BT: AP Difficulty: M Time: 30 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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30 Cash 24,500

Accounts Receivable ($28,000 – $3,500) 24,500

(b) April 12 Cash ($28,000  $3,500 – $245) 24,255

Sales Discounts [($28,000 – $3,500) × 1%] 245 Accounts Receivable ($28,000 – $3,500) 24,500

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EXERCISE 5-6

Boyle should choose to borrow cash at 8% 10 days from the date of the invoice The amount borrowed could be as little as the amount of the invoice less the purchase discount This is the amount needed to settle the payment 10 days from the date of the invoice and earn the purchase discount of 1% The loan can then be repaid after

20 days, which would be the date the invoice would have been paid if the loan had not been obtained The relevant period is 20 days because this is the amount of time a loan would be outstanding in order to make the choice to pay within the discount period

Converting a 1% discount for 20 days equals an annualized interest rate of 18.25% calculated as follows (1% × 365 ÷ 20) = 18.25% Paying 8% to the bank to receive 18.25% from the supplier is the more favourable procedure to follow

LO 2 BT: AP Difficulty: C Time: 15 min AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and

Finance

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11 Cash ($65,900 – $1,318) 64,582 Sales Discounts [($68,000 – $2,100) × 2%] 1,318 Accounts Receivable ($68,000 – $2,100) 65,900

(b) Dec 3 Inventory 68,000

Accounts Payable 68,000

7 Inventory 900 Cash 900

8 Accounts Payable 2,100 Inventory 2,100

11 Accounts Payable ($68,000 – $2,100) 65,900 Inventory [($68,000 - $2,100) × 2%] 1,318 Cash ($65,900 – $1,318) 64,582

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(c) Sales $68,000

Less: Sales returns and allowances $2,100

Sales discounts 1,318 3,418 Net sales 64,582 Cost of goods sold ($36,000 – $1,150) 34,850 Gross profit $29,732

LO 2,3,5 BT: AP Difficulty: M Time: 20 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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EXERCISE 5-8

Accounts payable Statement of financial position Current liabilities

Accounts receivable Statement of financial position Current assets

Accumulated depreciation Statement of financial position Property, plant, and

equipment (contra account)

Administrative expenses Income statement Operating expenses

Buildings Statement of financial position Property, plant, and

equipment Cash Statement of financial position Current assets

Common shares Statement of financial position Shareholders’ equity

Equipment Statement of financial position Property, plant, and

equipment Income tax expense Income statement Income tax expenses

expenses Interest payable Statement of financial position Current liabilities

Inventory Statement of financial position Current assets

Land Statement of financial position Property, plant, and

equipment Mortgage payable Statement of financial position Non-current liabilities

Prepaid insurance Statement of financial position Current assets

Property tax payable Statement of financial position Current liabilities

Salaries payable Statement of financial position Current liabilities

account) Sales returns and allowances Income statement Revenue (contra

account) Unearned revenue Statement of financial position Current liabilities

LO 4 BT: C Difficulty: S Time: 20 min AACSB: Analytic CPA:cpa-t001 CM: Reporting

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EXERCISE 5-9

(a)

BLUE DOOR CORPORATION Income Statement (Single-Step) Year Ended December 31, 2018

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(b)

BLUE DOOR CORPORATION Income Statement (Multiple-Step) Year Ended December 31, 2018

Sales $2,650,000 Less: Sales returns and allowances $41,000

Sales discounts 19,500 60,500 Net sales 2,589,500 Cost of goods sold 1,172,000 Gross profit 1,417,500 Operating expenses

Interest revenue $30,000

Rent revenue 24,000

Interest expense (62,000) (8,000) Income before income tax 476,500 Income tax expense 70,000 Net income $ 406,500

(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from

operations)

(c) Blue Door Corporation is classifying its expenses by nature, such as salaries,

depreciation, and advertising There is no classification of expenses into administrative or selling as would be the case if classifying expenses by functional areas For smaller companies such as this one, the difference between classification of items on the income statement by function or nature

is not significant

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*Gross profit [2] $30,250

Gross profit $30,250 Less: Operating expenses 19,500

*Income from operations [3] $10,750

Income from operations $10,750 Add: Other revenues 750

*Income before income tax [4] $11,500

Income before income tax $11,500 Less: Income tax expense 2,300

*Net income [5] $ 9,200

Rioux Ltée

*Sales [6] $105,000 Less: Sales returns and allowances 5,000 Net sales $100,000

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(a) (continued)

Income from operations $18,000 Less: Other expenses 2,000

Income before income tax $16,000

*Less: Income tax expense [10] 3,200 Net income $12,800

* Indicates missing amount

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EXERCISE 5-11

(a) Marchant Ltd

Sales $1,460,000 Less: Sales returns and allowances 28,000

*Net sales [1] $1,432,000

Net sales $1,432,000 Less: Cost of goods sold 657,000

*Gross profit [2] $ 775,000

Gross profit $775,000 Less: Operating expenses 580,000

*Income from operations [3] $195,000

Income from operations $195,000 Add: Other revenues 3,600

Income before income tax $198,600 Less: Income tax expense 38 600

*Net income [5] $160,000

Dueck Ltd

*Sales [6] $2,178,000 Less: Sales returns and allowances 48,000 Net sales $2,130,000

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(a) (continued)

Income from operations $310,000 Less: Other expenses _ 4,100

Income before income tax $305,900

*Less: Income tax expense [10] 55,000 Net income $250,900

* Indicates missing amount

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EXERCISE 5-12

(a)

MONTMORENCY LTÉE Income Statement (Multiple-step) Year Ended August 31, 2018

Sales $7,200,000

Less: Sales discounts 110,000

Net sales $7,090,000 Cost of goods sold 4,030,000 Gross profit 3,060,000 Operating expenses

Administrative expenses $670,000

Selling expenses 260,000

Total operating expenses 930,000 Income from operations 2,130,000 Other revenues and expenses

Interest expense 270,000 Income before income tax 1,860,000 Income tax expense 560,000 Net income $1,300,000

(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from

operations)

(b) Expenses are classified by function (cost of goods sold, administrative, selling)

(c) Gross profit margin $3,060,000 ÷ $7,090,000 = 43.2%

Profit margin $1,300,000 ÷ $7,090,000 = 18.3%

LO 4,6 BT: AN Difficulty: M Time: 20 min AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and

Finance

Tiêu đề	Merchandising Operations
Tác giả	Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Trường học	John Wiley & Sons Canada, Ltd.
Thể loại	solutions manual
Năm xuất bản	2017
Thành phố	Canada

Định dạng
Số trang	156
Dung lượng	1,57 MB