Merchandising Operations and the Accounting Cycle - Pearson

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Gulf Canada Resources www.gulf.ca EXHIBIT 5-9 Single-Step Income Statement 244 Part One The Basic Structure of Accounting liabilities and shareholders’ equity at right). There are also two basic formats for the income statement: multi-step and single-step. A recent survey indicated the multistep format was used by more than 90 percent of the companies surveyed; the remainder used the single-step format. 2 Multi-Step Income Statement The multi-step format shows subtotals to highlight significant relationships. In addition to net income, it also presents gross margin and operating income, or income from operations. This format communicates a merchandiser’s results of operations especially well, because gross margin and income from operations are two key measures of operating performance. Schneider Corporation (maker of Schneider’s meat products) uses the multi-step format. The income statements presented thus far in this chapter have been multi-step income statements. Austin Sound Centre Inc.’s multi-step income statement for the year ended December 31, 2004, appears in Exhibit 5-7. Single-Step Income Statement The single-step format groups all revenues together, and then lists and deducts all expenses together without drawing any subtotals. Gulf Canada Resources uses this format. The single-step format has the advantage of listing all revenues together and all expenses together, as shown in Exhibit 5-9. Thus it clearly distinguishes revenues from expenses. The income statements in Chapters 1 through 4 were single-step. This format works well for service entities because they have no gross margin to report or for companies that have several types of revenues. Most published financial statements are highly condensed. Appendix A at the end of the book gives the income statement for Intrawest Corporation. Of course, condensed statements are supplemented with desired details in the notes to the financial statements. AUSTIN SOUND CENTRE INC. Income Statement For the Year Ended December 31, 2004 Revenues: Net sales (net of sales discounts, $1,400, and returns and allowances, $2,000)........... $165,900 Interest revenue .................................................. 1,000 Total revenues ................................................ 166,900 Expenses: Cost of goods sold .............................................. $ 90,800 Wages expense .................................................... 10,200 Rent expense ....................................................... 8,400 Interest expense .................................................. 1,500 Insurance expense .............................................. 1,000 Amortization expense—furniture.................... 600 Supplies expense ................................................ 550 Total expenses ................................................ 113,050 Net income ................................................................ $ 53,850 2 Byrd, C., I. Chen, and H. Chapman, Financial Reporting in Canada 1999, Twenty-fourth Edition. (Toronto: Canadian Institute of Chartered Accountants, 1999), p. 28.
Two Key Ratios for Decision Making Merchandise inventory is the most important asset to a merchandising business because it captures the essence of the entity. To manage the business, owners and managers focus on the best way to sell the inventory. They use several ratios to evaluate operations, among them gross margin percentage and rate of inventory turnover. The Gross Margin Percentage A key decision tool for a merchandiser is related to gross margin, which is net sales minus cost of goods sold. Merchandisers strive to increase the gross margin percentage, which is computed as follows: For Austin Sound Centre Inc. (Exhibit 5-7) Gross margin Gross margin percentage = = $75,100 = 0.453 = 45.3% Net sales revenue $165,900 The gross margin percentage (also called the gross profit percentage) is one of the most carefully watched measures of profitability. A 45-percent gross margin means that each dollar of sales generates 45 cents of gross profit. On average, the goods cost the seller 55 cents. A small increase in the gross margin percentage may signal an important rise in income, and vice versa for a decrease. Exhibit 5-10 compares Austin Sound Centre Inc.’s gross margin to Wal-Mart’s gross margin. The Rate of Inventory Turnover Owners and managers strive to sell inventory as quickly as possible because it generates no profit until it is sold. The faster the sales occur, the higher the income. The slower the sales, the lower the income. Ideally, a business could operate with zero inventory. Most businesses, however, including retailers such as Austin Sound Centre Inc., must keep goods on hand for customers. Successful merchandisers purchase carefully to keep the goods moving through the business at a rapid pace. Inventory turnover, the ratio of cost of goods sold to average inventory, indicates how rapidly inventory is sold. Its computation follows: For Austin Sound Centre Inc. (Exhibit 5-7) Inventory Cost of goods sold Cost of goods sold $90,800 = = = turnover Average inventory (Beginning inventory ($38,600* + $40,200)/2 +ending inventory)/2 = 2.3 times per year (about every 159 days) *Taken from the balance sheet at the end of the preceding period. Inventory turnover is usually computed for an annual period, and the relevant cost-of-goods sold figure is the amount from the entire year. Average inventory is computed from the beginning and ending balances of the annual period. Austin Sound Centre Inc.’s beginning inventory would be taken from the business’s balance sheet at the end of the preceding year. The resulting inventory turnover statistic shows how many times the average level of inventory was sold during the year. A high rate of turnover is preferable to a low turnover rate. An increase in turnover rate usually means higher profits, but may sometimes lead to a shortage of inventory to sell. OBJECTIVE 5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business WORKING IT OUT Cavey Company Ltd. reports sales revenue of $3,000,000 and cost of goods sold of $1,800,000 for the 2002 fiscal year. Calculate (1) Cavey’s gross margin percentage for 2002, and (2) Cost of goods sold as a percentage of sales for 2002. (3) What do these percentages mean to Cavey management? A: (1) Gross margin = $3,000,000 – $1,800,000 = $1,200,000 Gross margin percentage = $1,200,000/$3,000,000 = 40% (2) $1,800,000/$3,000,000 = 60% (3) Per dollar of sales, Cavey spends (on average) $0.60 to acquire or manufacture its products and it earns (on average) $0.40 of gross margin per dollar of sales revenue. Wal-Mart www.wal-mart.com EXHIBIT 5-10 Gross Margin on $1.00 of Sales for Two Merchandisers $1.00 $0.75 $0.50 $0.25 Gross profit $0.21 Cost of goods sold $0.79 Gross profit $0.45 Cost of goods sold $0.55 Wal-Mart Austin Sound Centre Inc. Chapter Five Merchandising Operations and the Accounting Cycle 245
Page 1 and 2: C H 5A P T E R Merchandising Operat
Page 3 and 4: Before launching into merchandising
Page 5 and 6: Suppose FGL’s Sports Experts stor
Page 7 and 8: debiting the Inventory account. A $
Page 9 and 10: Austin paid within the discount per
Page 11 and 12: STOP & THINK Refer to the Accounts
Page 13 and 14: STOP & THINK Why is there no Januar
Page 15 and 16: sales. Therefore the GST paid on pu
Page 17 and 18: Requirement 2 Inventory Cost of Goo
Page 19 and 20: Exhibit 5-5. All the new accounts
Page 21 and 22: EXHIBIT 5-7 Financial Statements of
Page 23: Journal Adjusting Entries a. Dec. 3
Page 27 and 28: Wal-Mart 1 2 3 4 5 6 Austin Sound C
Page 29 and 30: Decision Guidelines How do merchand
Page 31 and 32: 3. Prepare the company’s multi-st
Page 33 and 34: Requirement 3 JAN KING DISTRIBUTING
Page 35 and 36: c. Buying a large enough quantity o
Page 37 and 38: Date: ___________________________ T
Page 39 and 40: 2. The R39 truck tires were ordered
Page 41 and 42: Required 1. Prepare the business’
Page 43 and 44: $7,700, $12,160, and $10,180 thousa
Page 45 and 46: 2. The note payable signed on May 2
Page 47 and 48: Trial Balance Adjustments Account T
Page 49 and 50: Sales discounts....................
Page 51 and 52: e. Store supplies on hand at Decemb
Page 53 and 54: Required 1. Inventory on hand at Se
Page 55 and 56: c. The equipment is expected to las
Page 57 and 58: HEIGHTS PHARMACY LTD. Balance Sheet
Page 59 and 60: Supplement to Chapter 5 Accounting
Page 61 and 62: Panel A Panel B Beginning inventory
Page 63 and 64: AUSTIN SOUND CENTRE INC. Trial Bala
Page 65 and 66: Assets Current assets: Cash .......
Page 67 and 68: Journal Adjusting Entries a. Dec. 3
Page 69 and 70: Summary Problem for Your Review The
Page 71 and 72: Requirement 2 Adjusting Entries 200
Page 73 and 74: Requirement 4 Inventory Cost of goo
Page 75 and 76:
Required Journalize these transacti
Page 77:
BLISS SALES COMPANY LTD. Trial Bala
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Merchandising Operations and the Accounting Cycle - Pearson

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