Merchandising Operations and the Accounting Cycle - Pearson

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Extending Your Knowledge 276 Part One The Basic Structure of Accounting Decision Problems 1. Using financial statements to decide on a business expansion (Obj. 4, 5) Link Back to Chapter 4 (Classified Balance Sheet, Current Ratio, Debt Ratio). David Garner is the sole shareholder of Heights Pharmacy Ltd., which has prospered during its second year of operation. In deciding whether to open another pharmacy in the area, Garner’s bookkeeper has prepared the current financial statements of the business. HEIGHTS PHARMACY LTD. Income Statement For the Year Ended December 31, 2003 Sales revenue....................................................................... $180,000 Interest revenue .................................................................. 24,600 Total revenue....................................................................... 204,600 Cost of goods sold.............................................................. 87,000 Gross margin....................................................................... 117,600 Operating expenses: Salary expense .............................................................. 20,000 Rent expense................................................................. 12,000 Interest expense............................................................ 6,000 Amortization expense ................................................. 4,900 Utilities expense ........................................................... 2,330 Supplies expense.......................................................... 1,500 Total operating expenses......................................... 46,730 Income from operations .................................................... 70,870 Other expense: Sales discounts ($3,600) and returns ($7,100)........... 10,700 Net income .......................................................................... $60,170 HEIGHTS PHARMACY LTD. Statement of Retained Earnings For the Year Ended December 31, 2003 Retained earnings, January 1, 2003 .............................................................. $10,000 Add: Net income............................................................................................ 60,170 Retained earnings, December 31, 2003 ........................................................ $70,170
HEIGHTS PHARMACY LTD. Balance Sheet December 31, 2003 Assets Current assets: Cash ................................................................................................................. $ 5,320 Accounts receivable....................................................................................... 10,710 Inventory......................................................................................................... 30,100 Supplies........................................................................................................... 2,800 Store fixtures................................................................................................... 63,000 Total current assets .................................................................................... Other asset: 111,930 Dividends........................................................................................................ 45,000 Total assets....................................................................................................... $156,930 Liabilities Current liabilities: Accumulated amortization—store fixtures................................................ $ 6,300 Accounts payable........................................................................................... 9,560 Salary payable ................................................................................................ 900 Total current liabilities .............................................................................. Other liability: 16,760 Note payable due in 90 days........................................................................ 50,000 Total liabilities ................................................................................................. 66,760 Shareholders’ Equity Common stock ................................................................................................ 20,000 Retained earnings ........................................................................................... 70,170 Total liabilities and shareholders’ equity .................................................... $156,930 David Garner recently read in an industry trade journal that a successful pharmacy meets all of these criteria: a. Gross margin is at least 50 percent. b. Current ratio is at least 2.0. c. Debt ratio is no higher than 0.50. d. Inventory turnover is at least 3.40 times per year. (Heights Pharmacy Ltd.’s inventory at December 31, 2003, was $19,200.) Basing his opinion on the entity’s financial statement data, David Garner believes the business meets all four criteria. He plans to go ahead with the expansion plan, and asks your advice on preparing the pharmacy’s financial statements in accordance with generally accepted accounting principles. He assures you that all amounts are correct. Required 1. Compute the four ratios based on the Heights Pharmacy Ltd. financial statements prepared by Garner’s bookkeeper. Does the business appear to be ready for expansion? 2. Prepare a correct multi-step income statement, a statement of retained earnings, and a classified balance sheet in report format. 3. On the basis of the corrected financial statements, compute correct measures of the four criteria listed in the trade journal. 4. Make a recommendation about whether to undertake the expansion at this time. Chapter Five Merchandising Operations and the Accounting Cycle 277
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C H 5A P T E R Merchandising Operat
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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 and 24: Journal Adjusting Entries a. Dec. 3
Page 25 and 26: Two Key Ratios for Decision Making
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
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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
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Page 51 and 52: e. Store supplies on hand at Decemb
Page 53 and 54: Required 1. Inventory on hand at Se
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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 .......
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Page 69 and 70: Summary Problem for Your Review The
Page 71 and 72: Requirement 2 Adjusting Entries 200
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Page 75 and 76: Required Journalize these transacti
Page 77: BLISS SALES COMPANY LTD. Trial Bala
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