Merchandising Operations and the Accounting Cycle - Pearson

Assignment Material
Questions
1. Gross margin is often mentioned in the business
press as an important measure of success. What
does gross margin measure, and why is it important?
2. Describe the operating cycle for (a) the purchase
and cash sale of inventory, and (b) the purchase
and sale of inventory on account.
3. Identify ten items of information on an invoice.
4. Indicate which accounts are debited and credited
under the perpetual inventory system for (a) a
credit purchase of inventory and the subsequent
cash payment, and (b) a credit sale of inventory
and the subsequent cash collection. Assume no discounts,
returns, allowances, or freight.
5. Inventory costing $1,000 is purchased and invoiced
on July 28 under terms of 3/10 n/30. Compute the
payment amount on August 6. How much would
the payment be on August 9? What explains the
difference? What is the latest acceptable payment
date under the terms of sale?
6. Inventory listed at $35,000 is sold subject to a quantity
discount of $3,000 and under payment terms
of 2/15 n/45. What is the net sales revenue on this
sale if the customer pays within 15 days?
7. Name the new contra accounts introduced in this
chapter.
8. Briefly discuss the similarity in computing supplies
expense and computing cost of goods sold by
the method shown in Exhibit 5-12 on page 247.
9. Why is the title of Cost of Goods Sold especially
descriptive? What type of account is Cost of
Goods Sold?
Exercises
256 Part One The Basic Structure of Accounting
10. Beginning inventory is $5,000, net purchases total
$30,000, and freight in is $1,000. If ending inventory
is $8,000, what is cost of goods sold?
11. You are evaluating two companies as possible investments.
One entity sells its services; the other
entity is a merchandiser. How can you identify the
merchandiser by examining the two entities’ balance
sheets and income statements?
12. You are beginning the adjusting and closing process
at the end of your company’s fiscal year. Does the
trial balance carry the final ending amount of
inventory? Why or why not?
13. Give the adjusting entry for inventory if shrinkage
is $9,100.
14. What is the identifying characteristic of the “other”
category of revenues and expenses? Give an example
of each.
15. Name and describe formats for the two income
statements and identify the type of business to
which each format best applies.
16. List eight different operating expenses.
17. Which financial statement reports sales discounts
and sales returns and allowances? Show how they
are reported, using any reasonable amounts in your
illustration.
18. Does a merchandiser prefer a high or low rate of inventory
turnover? Explain.
19. In general, what does a decreasing gross margin
percentage, coupled with an increasing rate of inventory
turnover, suggest about a business’s
pricing strategy?
Exercise 5-1 Evaluating a company’s revenues, gross margin, operating income, and net
income (Obj. 1)
The Toy Store Inc. reported the information shown on page 257:
Required
1. Is The Toy Store Inc. a merchandising entity, a service business, or both? How can
you tell? List the items in The Toy Store Inc. financial statements that influence
your answer.
2. Compute The Toy Store Inc.’s gross margin for fiscal years 2004 and 2003. Did the
gross margin increase or decrease in 2004? Is this a good sign or a bad sign about
the company?
3. Write a brief memo to the president advising her of The Toy Store Inc.’s trend of
sales, gross margin, and net income. Indicate whether the outlook for The Toy
Store Inc.’s is favourable or unfavourable, based on this trend. Use the following
memo format: