Merchandising Operations and the Accounting Cycle - Pearson

c. The equipment is expected to last five years and have no value at the end of five
years.
d. Unearned sales of $2,000 were earned by August 31, 2004.
Required
1. Record all adjustments and closing entries that would be required on August 31,
2004.
2. Prepare the financial statements of Saskatoon Skate Products Ltd. for the year ended
August 31, 2004.
Challenge Problems
Problem 5-1C Understanding purchasing and gross margin (Obj. 1, 2, 5)
You have been recently hired as an accountant by AllSave Stores Ltd., a small chain
of discount stores. One of your first activities is to review the accounting system
for AllSave.
In your review, you discover that the company determines selling prices by
adding a standard markup on cost of 10 percent (i.e., cost plus 10 percent of cost) to
the cost of all products. The company uses a perpetual inventory system. You also
discover that your predecessor, a bookkeeper, had set up the accounting system so
that all purchase discounts and purchase returns and allowances were accumulated
in an account that was treated as “other income” for financial statement purposes
because he believed that they were financing items and not related to
operations.
Marion Farouk, President of AllSave, has an MBA and uses modern decisionmaking
techniques in running AllSave. Two ratios she particularly favours are the
gross margin percentage and inventory turnover ratio.
Required
1. What is a possible effect of the accounting system described on the pricing of
products and thus operations of AllSave Stores Ltd.?
2. What is the effect of the accounting system instituted by your predecessor on
the two ratios Ms. Farouk favours?
Problem 5-2C Using an inventory system for control (Obj. 1)
Arthur Leung is concerned about theft by shoplifters in his chain of three electronics
stores and has come to your public accounting firm for advice. Specifically,
he has several questions he would like you to answer.
a. He wonders if there is any inventory system he can use that will allow him to keep
track of products that leave his stores as legitimate purchases and merchandise
that is stolen?
b. He realizes that carrying inventory is expensive and wants to know if you have
any suggestions as to how he can keep close tabs on his inventory at the three
stores so he can be sure that the stores don’t run out of product.
c. The space in the stores is limited. Arthur also wants to install an inventory system
that will tell him when a product is slow-moving or obsolete so he can clear
it out and replace it with a potentially faster-moving product.
Required
Indicate whether a perpetual inventory system or a periodic inventory system will
provide Arthur with answers to the three questions he has asked. Explain how the
inventory system indicated will provide the specific information he has requested.
Chapter Five Merchandising Operations and the Accounting Cycle 275