4.
= $ 5,000 + + +
= $14,000
=–
(33)
32
Less creditors' payment terms
Financing period
Chapter 5, SE 2.
Financial ratios computed
THE OPERATING CYCLE AND
MERCHANDISING OPERATIONS
Chapter 5, SE 1.
Working Capital Current Assets
Current Assets $6,000$2,000 $1,000
CHAPTER 5—Solutions
b
Current Liabilities
252
–=
8/10 970 8/3 105
Bal.** 970 8/10 970 8/3 105 Bal. 105
1,150 1,255
Bal. 105
1,150 8/7 180
1,150 180
970
*
**
Less 40 percent trade discount
1,150
List price
8/7 180
8/2
$1,150 – $180 = $970
The balance of Cash is a credit because there are no data about the beginning
balance and only one entry has been posted to the credit side of the account.
Merchandise Inventory
T accounts set up and entries posted
$2,033.50
$2,075
Payment:
Cash
$41.50
Chapter 5, SE 6.
Accounts Payable Freight-In
Bal.
8/2
Chapter 5, SE 4.
$12,000
4,800
*
253
8/10 970 8/3 105
Bal.** 970 8/10 970 8/3 105
1,150 1,255
Bal. 105
1,150 8/7 180
1,150 Bal. 180
*
**
5/10 1,455 5/3 158
Bal.** 1,455 5/10 1,455 5/3 158 Bal. 158
1,725 1,883
Bal. 158
1,725 5/7 270
1,725 270
1,455
*
**
$1,725 – $270 = $1,455
The balance of Cash is a credit because there are no data about the beginning
Merchandise Inventory
Bal.
5/2
Chapter 5, SE 8.
Accounts Payable Freight-In
T accounts set up and entries posted
Cash 5/7 270 5/2 1,725
Bal.
8/2
The balance of Cash is a credit because there are no data about the beginning
balance and only one entry has been posted to the credit side of the account.
Purchases
T accounts set up and entries posted
Bal.
$1,150 – $180 = $970
Cash
Chapter 5, SE 7.
Accounts Payable Freight-In
Purchases Returns
and Allowances
8/7 8/2 1,150180
105
*
*
Chapter 5, SE 9.
Chapter 5, SE 11.
c
4.
1.
2.
4.
2.
3.
4.
6.
a
Chapter 5, E 1.
dise would be the responsibility of the shipper. If the terms were FOB shipping
257
$ 1,200
10,080
20,800
8,160
20,320
320
$35,560
$5,000
1,500
$3,500
—
$3,500
70
$3,430
Chapter 5, E 6.
List price
Less 30% trade discount
Dealer price
Shipping cost
Cost of pool
Less sales discount ($3,500 × 2%)
Net cost of pool
=Current Ratio ==
Merchandise Inventory
Prepaid Insurance
Current Assets
Cash
Marketable Securities
Notes Receivable (90 days)
Accounts Receivable
1. Working capital computed
Chapter 5, E 4.
Current Liabilities
1.72
Date of purchase:
258
1 2,000 2,000
3 800 800
10 1,176
24 1,200
$2,000 – $800 =
$1,200 × 2% =
$1,200 – $24 =
11 3,200 3,200
31 3,200 3,200
+ $3,200 =
$1,176 $4,376
terms 2/10, n/30, FOB shipping point
Sales
Sold merchandise on credit to Sun Company,
The total amount received from Sun Company (debits to the Cash account):
Receivable: $1,200
$24
Received payment for amount due from Sun
Company for the sale of March 11
sale, less the return and discount Accounts
Received payment from Sun Company for the
$1,176
Discount:
Payment:
credit
Accounts Receivable
Cash
Sales Discounts
Accounts Receivable
Accepted a return from Sun Company for full
Sales Returns and Allowances
Accounts Receivable
Chapter 5, E 7.
Sold merchandise on credit to Sun Company,
terms 2/10, n/30, FOB shipping point
Cash
Accounts Receivable
Mar. Accounts Receivable
Sales
259
2 2,000 2,000
6 250 250
11 1,750 1,750
$2,000 – $250 =
14 2,250 2,250
31 2,250 2,250
+ $2,250 =
Merchandise Inventory
Accounts Payable
Accounts Payable
for full credit
Merchandise Inventory
Purchased merchandise on credit from Lucas
Company, terms n/20, FOB destination, invoice
Paid Lucas Company for purchase of July 2 less
$1,750
Accounts Payable
Accounts Payable:
Cash
July
dated July 1
Returned some merchandise to Lucas Company
Chapter 5, E 8.
return
$4,000
Purchased merchandise on credit from Lucas
Company, terms n/20, FOB destination, invoice
dated July 12
The total amount paid to Lucas Company (credits to the Cash account):
Paid amount owed Lucas Company for purchase
Accounts Payable
of July 14
Cash
$1,750
Merchandise Inventory
Accounts Payable
260
$249,000
11,750
$237,250
149,350
$ 87,900
$21,500
43,500 65,000
$ 22,900
6,000
$ 16,900
+ $7,350 =
*Cost of goods sold includes freight-in:
Gross margin
Income Statement
Selling expenses
Net sales
Less sales returns and allowances
For the Year Ended December 31, 2011
$142,000 $149,350
Net sales
Sales
Cost of goods sold*
Operating expenses
General and administrative expenses
Total operating expenses
Income before income taxes
Income taxes
Net income
Chapter 5, E 9.
Parties, Etc.
261
e. 1,000 a. 5,000 b. 270
d. 400
g. 5,200 d. 5,200 Bal. 670
h. 1,800
Bal.** 13,000 13,000
Bal. —
5,000
2,800
4,800
12,600
12,270
270
5,000
5,200
1,800
Merchandise Inventory
e.
5,000
h.*
b.
g.
d. 1,000
1,000
2,800c.
T accounts set up and entries posted
Cash
f. f.
c.
a.
Chapter 5, E 10.
Accounts Payable Freight-In
Chapter 5, E 11.
Chapter 5, E 12.
Chapter 5, E 13.
Chapter 5, E 14.
Chapter 5, E 15.
1.
2.
3.
4.
5. g
end probably means that to meet sales goals, the sales staff inflated the pre-
Chapter 5, E 16.
roll (after accounting for the raises). It is possible that the branch office mana-
268
127,400
$192,600
Leonid's Delivery, Inc.
Income Statement
For the Year Ended August 31, 2011
$338,000
18,000
$320,000
$65,650
48,200
5,360
2,500
Less sales returns and allowances
Net sales
Store salaries expense
Depreciation expense—store equipment
Selling expenses
Net sales
Sales
Advertising expense
Store supplies expense
Cost of goods sold*
Gross margin
Operating expenses
Multistep income statement prepared1.
Chapter 5, P 1.
Chapter 5, P 1. (Continued)
(3) in relation to other information.
net sales of $320,000. This is a profit margin of 8.4 percent.
are $161,730, or 50.5 percent of net sales. Net income can be improved by increas-
User Insight: Income statement discussed
First, overall, the statement shows net income of $26,870, which was earned on
ing the gross margin and/or by decreasing the operating expenses.
2.
Second, the components of gross margin and operating expenses can be examined.
The gross margin is $192,600, or 60.2 percent of net sales; the operating expenses
1 1,050 1,050
1 630 630
3 1,900 1,900
5 145 145
8 1,700
100 1,800
12 300 300
15 600 600
1. Transactions recorded
Company, terms n/30, FOB shipping point
Merchandise Inventory
FOB shipping point
Sold merchandise to Tina Lands, terms n/30,
Accounts Receivable
Merchandise Inventory
from Livomax Company
Returned some of merchandise purchased
Company, terms n/30, FOB shipping point;
freight paid by supplier
Freight-In
Accounts Payable
Merchandise Inventory
Accounts Payable
Purchased merchandise from Arbor Supply
Paid shipping charges to Team Freight
Cash
Accounts Payable
Purchased merchandise from Livomax
Freight-In
Sales
Cost of Goods Sold
Merchandise Inventory
2011
July
Chapter 5, P 2.
Accounts Receivable
To transfer cost of merchandise sold to
Cost of Goods Sold account
Sales
Sold merchandise to John Nuzzo, terms n/30,
2. User Insight: Net sales discussed
Net sales reflects gross sales adjusted for any sales discounts, sales returns, or
allowances granted the buyer. When companies simply show "sales," it may mean
Chapter 5, P 2. (Continued)
$220,456
9,125
$211,331
$ 40,611
$110,593
15,119
$ 95,474
5,039 100,513
$141,124
38,332 102,792
$108,539
September 30, 2011
September 30, 2010
Merchandise inventory,
Less merchandise inventory,
Purchases
Less purchases returns and allowances
Net purchases
Chapter 5, P 3.
1. Income statement prepared
Gross margin
Cost of goods sold
Cost of goods sold
Net sales
Hill Sporting Equipment, Inc.
Less sales returns and allowances
Income Statement
Sales
Net sales For the Year Ended September 30, 2011
Freight-in
Net cost of purchases
Operating expenses
Cost of goods available for sale
Chapter 5, P 3. (Continued)
First, the statement shows the net income of Hill Sporting Equipment, Inc. The
increasing the gross margin and/or by decreasing the operating expenses.
Second, the components of gross margin and operating expenses can be exam-
penses are $96,569, or 45.7 percent of net sales. Net income can be improved by
ined. The gross margin is $108,539, or 51.4 percent of net sales; the operating ex-
shop earned $9,470 on net sales of $211,331. This is a profit margin of 4.5 percent.
(1) as a whole, (2) in components, and (3) in relation to other information.
1 1,050 1,050
3 1,900 1,900
5 145 145
8 1,700
100 1,800
12 300 300
1. Transactions recorded
Purchased merchandise from Arbor Supply
Returned some of merchandise purchased
Purchase Returns and Allowances
Accounts Payable
Purchases
Accounts Payable
Freight-In
Cash
Chapter 5, P 4.
Accounts Payable
Accounts Receivable
Sold merchandise to Tina Lands, terms
Sales
Paid shipping charges to Team Freight
Company, terms n/30, FOB shipping point
n/30, FOB shipping point
July
Freight-In
Purchases
Purchased merchandise from Livomax
2011
Company, terms n/30, FOB shipping point;
freight paid by supplier
Chapter 5, P 4. (Continued)
Net sales reflects gross sales adjusted for any sales discounts, sales returns, or
allowances granted the buyer. When companies simply show "sales," it may mean
2. User Insight: Net sales discussed
clerk authorizes purchases of supplies based on purchase requisitions received
from the supplies clerk. This is an improvement over the old system in that all
releases of supplies and purchases of supplies have appropriate approval. Su-
lowest price for supplies.
Periodic independent verification This control procedure is accomplished by
supplies storeroom. This new and essential control procedure protects the sup-
supplies clerk, purchase orders by the purchasing clerk, and receiving reports
by the supplies clerk are new documents that establish controls over supplies.
plies from waste and theft and means that the supplies clerk can be held account-
able for the inventory of supplies.
Physical controls Physical controls are established through the designation of a
tem. First, the supplies clerk is routinely authorized to release a predetermined
amount of supplies to each supervisor based on the job. Second, the purchasing
Recording transactions There is no major difference between the old and new
These documents are an improvement over the old system in that forms now
document the responsibilities of each individual. New inventory records are
kept by the accounting department. With these records, the inventory on hand
systems regarding the recording of transactions. In both cases, the accounting
department records the purchase of supplies. Additional inventory records are
pervisors are discouraged from wasting supplies, and the company is paying the
Documents and records Several new documents and records were established
by the new system. Requisitions by supervisors, purchase requisitions by the
using too many supplies or stealing them.
can be verified by taking a physical inventory. This discourages employees from
Chapter 5, P 5.
maintained, however, as explained in the next section.
Authorization Two major points of authorization have been put into the new sys-
2. User Insight: New control activities explained
Chapter 5, P 5. (Continued)
$870,824
25,500
$845,324
462,526
$382,798
$216,700
36,400
3,328
3,600
Chapter 5, P 6.
Cost of goods sold*
Sales
Joseph's Video Store, Inc.
For the Year Ended June 30, 2011
Net sales
1. Income statement prepared
Operating expenses
Selling expenses
Store supplies expense
Depreciation expense—store equipment
Gross margin
Advertising expense
Net sales
Store salaries expense
Income Statement
Less sales returns and allowances
Chapter 5, P 6. (Continued)
penses are $372,276, or 44.0 percent of net sales. Net income can be improved by
2. User Insight: Income statement discussed
and (3) in relation to other information.
First, overall, the statement shows net income of $5,522, which was earned on net
increasing the gross margin and/or by decreasing the operating expenses.
Second, the components of gross margin and operating expenses can be exam-
ined. The gross margin is $382,798, or 45.3 percent of net sales. The operating ex-
sales of $845,324. This is a profit margin of only 0.7 percent.
7 3,000 3,000
7 1,800 1,800
8 6,000 6,000
9 254 254
10 9,000
600 9,600
14 2,400 2,400
14 1,440 1,440
1. Transactions recorded
point; freight paid by supplier
point
Freight-In
n/30, FOB shipping point
Accounts Receivable
Company, terms n/30, FOB shipping
Purchased merchandise from Maria's
Cost of Goods Sold account
Freight-In
Chapter 5, P 7.
Oct.
2011
Cost of Goods Sold
Merchandise Inventory
n/30, FOB shipping point
Accounts Payable
Accounts Receivable
Sold merchandise to Ron Moore, terms
Sales
To transfer cost of merchandise sold to
Paid shipping charges to Warta Company
for October 8 purchase
Accounts Payable
Merchandise Inventory
Cash
Purchased merchandise from Lima
Company, terms n/30, FOB shipping
Merchandise Inventory
Sales
Sold merchandise to Kate Lang, terms
Cost of Goods Sold
Cost of Goods Sold account
Merchandise Inventory
To transfer cost of merchandise sold to
Cash rebates should not be recorded as revenue because doing so overstates rev-
enues. (Some companies have gotten into trouble for following this practice.) Cash
2. User Insight: Cash rebates discussed
Chapter 5, P 7. (Continued)
$168,700
5,700
$163,000
$ 38,200
$70,200
2,600
$67,600
2,300 69,900
$108,100
29,400 78,700
$ 84,300
Cost of goods sold
Cost of goods sold
Net sales
Robert's Shop, Inc.
Less sales returns and allowances
Sales
Net sales
Gross margin
Income Statement
Chapter 5, P 8.
1.
For the Year Ended March 31, 2011
Freight-in
Net cost of purchases
Operating expenses
Cost of goods available for sale
Merchandise inventory, March 31, 2010
Less merchandise inventory, March 31, 2011
Purchases
Less purchases returns and allowances
Net purchases
Selling expenses
Chapter 5, P 8. (Continued)
Second, the components of gross margin and operating expenses can be ex-
by increasing the gross margin and/or by decreasing the operating expenses.
expenses are $80,865, or 49.6 percent of net sales. Net income can be improved
amined. The gross margin is $84,300, or 51.7 percent of net sales; the operating
First, the statement shows net income of $2,435, which was earned on net sales
of $163,000. This is a profit margin of only 1.5 percent.
(1) as a whole, (2) in components, and (3) in relation to other information.
7 3,000 3,000
8 6,000 6,000
9 254 254
10 9,000
600 9,600
14 2,400 2,400
Sold merchandise to Kate Lang, terms n/30,
FOB shipping point
freight paid by supplier
Sales
Accounts Receivable
Chapter 5, P 9.
Purchases
Accounts Payable
2011 Accounts Receivable
n/30, FOB shipping point
Sold merchandise to Ron Moore, terms
Paid freight charges to Warta Company
Sales
Oct.
Freight-In
Freight-In
Cash
Accounts Payable
Purchased merchandise from Maria's
Company, terms n/30, FOB shipping point;
1. Transactions recorded
Purchases
Company, terms n/30, FOB shipping point
Purchased merchandise from Lima
Chapter 5, P 9. (Continued)
enues. (Some companies have gotten into trouble for following this practice.) Cash
2. User Insight: Cash rebates discussed
Cash rebates should not be recorded as revenue because doing so overstates rev-
2. Recommended changes that would improve the system
ence of the cashier. Another person, such as the manager, should remove the tape
One way of overcoming the internal control weakness over cash sales is to have
To remedy both of these weaknesses in internal contol over purchases, the receiv-
with the existing assets at reasonable intervals. The comparison of the cash regis-
ing report and the purchase order should go to the accounting department to be
compared with the invoices before payment is authorized. In addition, prior to pay-
ment, the invoice should be approved by the person who submitted the purchase
requisition to ensure that he or she actually received the quantity and quality of
from the cash register for comparison with the amount turned in to the cashier.
Chapter 5, P 10.
the salesclerk take the cash drawer to the cashier and count the cash in the pres-
ter tape with the cash in the cash drawer at the end of each day accomplishes this
Cash sales One objective of internal control is to compare the records of assets
objective. However, the comparison should be made by someone other than the
1. Significant internal control weaknesses
2.
3.
The Perpetual Inventory System
on how well the company is doing. Centralization of the records would mean that
the store managers. Perhaps this system needs to be strengthened with a better
ordered quickly, and slow-selling books can be moved to other stores or returned
Chapter 5, C 1.
Chapter 5, C 2.
to the publisher before they have to be offered at lower prices. In addition, finan-
cial statements can be prepared frequently, giving management constant feedback
administer. There may be some merit to the system of relying on the judgment of
tory levels can be monitored on a day-by-day basis. Fast-selling books can be re-
petual inventory system.
Note to the instructor: This case can be used for class discussion or as a writing
exercise. It is also excellent for use with small groups, with the participants being
asked to develop arguments for either the periodic inventory system or the per-
training program for managers and a better system for monitoring sales within the
An advantage of the periodic inventory system is that it is usually less costly to
The Periodic Inventory System
A principal advantage of the perpetual inventory system is that sales and inven-
able except within each store. Sales in the book business can fluctuate unexpect-
edly, and top management may not know when one store has run out of a title and
instead of when invoice is received; negotiate longer payment times.)
another store has been unable to sell it. Another disadvantage of the periodic in-
ventory system is that financial statements are prepared only when a physical in-
ventory is taken (in this case, every six months).
stores. The patterns of sales in different neighborhoods do vary, and the store
managers are probably the best people to monitor these trends. The disadvantage
of the periodic inventory system is that little information about inventory is avail-
288
best position to evaluate their own situations. A solution to this last disadvantage
is to give the managers ready access to the perpetual inventory records and let
them have a say in decisions about purchases.
ployees must be trained to follow procedures in recording sales, purchases, and
returns and in maintaining the records. This may be much more costly than hiring
and training qualified store managers. Also, the centralization of the records takes
considerable autonomy away from the individual store managers, who are in the
vantage of the perpetual inventory system is the cost to install and maintain it. Em-
from stores where sales have been slow to those where sales are better. A disad-
Note to the instructor: Many specialty store chains, including bookstores, use a
perpetual inventory system like the one proposed for Books Unlimited. Sales are
sales trends among the stores could be monitored, allowing inventory to be shifted
monitored at the national or regional level, and individual store managers have
Chapter 5, C 2. (Continued)
Chapter 5, C 4.
1.
2.
3.
Please let me know if you have any questions.
Chapter 5, C 5.
days' payable is 19.
months.
the days' payable is very important to CVS in financing the inventory. Its
In summary, the financing period for CVS is about 47 days (45 + 21 – 19).
CVS needs to provide inventory financing for somewhat less than two
291
2009 % 2009 %
$98,729 100.0% $63,335 100.0%
Net sales
Chapter 5, C 6.
(Dollars in millions)
CVS Walgreens
$ 53,000 $ —
$200,000 $271,000
15,000 20,000
$185,000 $251,000
19,000 27,000
204,000 278,000
$257,000 $278,000
32,000 53,000
Chapter 5, C 7.
2011
Purchases
2010
1. Cost of goods sold recomputed
Less ending inventory
Purchases
Less purchases allowances
Cost of goods available for sale
Freight-in
Net cost of purchases
Beginning inventory
(1) assume a more active role in managing the original store, including being physi-
2.
Possible reasons for the inventory loss suggested
cally present on a random schedule; (2) institute controls over cash receipts to en-
Chapter 5, C 7. (Continued)