Merchandising Operations and the Accounting Cycle - Pearson
Merchandising Operations and the Accounting Cycle - Pearson
Merchandising Operations and the Accounting Cycle - Pearson
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278 Part One The Basic Structure of <strong>Accounting</strong><br />
2. Underst<strong>and</strong>ing <strong>the</strong> operating cycle of a merch<strong>and</strong>iser (Obj. 1, 3)<br />
Gayle Yip-Chuck has come to you for advice. Earlier this year, she opened a record<br />
store in a plaza near <strong>the</strong> university she had attended. The store sells compact discs<br />
at very low prices <strong>and</strong> on special credit for students. Many of <strong>the</strong> students at <strong>the</strong> university<br />
are co-op students who alternate school <strong>and</strong> work terms. Gayle allows co-op<br />
students to buy on credit while <strong>the</strong>y are on a school term, with <strong>the</strong> underst<strong>and</strong>ing<br />
that <strong>the</strong>y will pay <strong>the</strong>ir account shortly after starting a work term.<br />
Business has been very good. Gayle is sure it is because of her competitive prices<br />
<strong>and</strong> <strong>the</strong> unique credit terms she offers. Her problem is that she is short of cash, <strong>and</strong><br />
her loan with <strong>the</strong> bank has grown significantly. The bank manager has indicated<br />
that he wishes to reduce Yip-Chuck’s line of credit because he is worried that she will<br />
get into financial difficulties.<br />
Required<br />
1. Explain to Yip-Chuck why you think she is short of cash.<br />
2. Yip-Chuck has asked you to explain her problem to <strong>the</strong> bank manager <strong>and</strong> to<br />
assist in asking for more credit. What might you say to <strong>the</strong> bank manager to assist<br />
Yip-Chuck?<br />
3. Correcting an inventory error (Obj. 6)<br />
The employees of Nor<strong>the</strong>rn Tech Company Ltd. made an error when <strong>the</strong>y performed<br />
<strong>the</strong> periodic inventory count at year end, October 31, 2003. Part of one warehouse<br />
was not counted <strong>and</strong> <strong>the</strong>refore was not included in inventory.<br />
Required<br />
1. Indicate <strong>the</strong> effect of <strong>the</strong> inventory error on cost of goods sold, gross margin,<br />
<strong>and</strong> net income for <strong>the</strong> year ended October 31, 2003.<br />
2. Will <strong>the</strong> error affect cost of goods sold, gross margin, <strong>and</strong> net income in 2004?<br />
If so, what will be <strong>the</strong> effect?<br />
Financial Statement Problem<br />
Closing entries for a corporation that sells merch<strong>and</strong>ise; evaluating ratio data<br />
(Obj. 3, 5)<br />
This problem uses both <strong>the</strong> income statement (consolidated statement of operations)<br />
<strong>and</strong> <strong>the</strong> balance sheet of Intrawest Corporation in Appendix A. It will aid<br />
your underst<strong>and</strong>ing of <strong>the</strong> closing process of a business.<br />
1. Journalize Intrawest’s closing entries for <strong>the</strong> year ended June 30, 2000. You will<br />
be unfamiliar with certain revenues <strong>and</strong> expenses, but you should treat <strong>the</strong>m all<br />
similarly. Make “General <strong>and</strong> administrative” <strong>the</strong> final expense you close.<br />
2. What amount was closed to Retained Earnings? What were dividends in 2000?<br />
3. Intrawest is not a typical merch<strong>and</strong>iser but it does have two types of inventory:<br />
(1) Inventory related to ski operations (Note 7 in <strong>the</strong> financial statements); (2)<br />
Inventory of properties under development <strong>and</strong> held for sale (Note 5). The company<br />
develops resort properties for resale, some of which will be sold in <strong>the</strong> current<br />
year <strong>and</strong> are classified as current assets. The remainder of <strong>the</strong> properties<br />
will be sold in future years <strong>and</strong> are classified as long-term assets. What balances<br />
are reported as current assets on <strong>the</strong> balance sheet for <strong>the</strong> two types of inventory<br />
at June 30, 2000? At June 30, 1999?