Merchandising Operations and the Accounting Cycle - Pearson

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278 Part One The Basic Structure of Accounting 2. Understanding the operating cycle of a merchandiser (Obj. 1, 3) Gayle Yip-Chuck has come to you for advice. Earlier this year, she opened a record store in a plaza near the university she had attended. The store sells compact discs at very low prices and on special credit for students. Many of the students at the university are co-op students who alternate school and work terms. Gayle allows co-op students to buy on credit while they are on a school term, with the understanding that they will pay their account shortly after starting a work term. Business has been very good. Gayle is sure it is because of her competitive prices and the unique credit terms she offers. Her problem is that she is short of cash, and her loan with the bank has grown significantly. The bank manager has indicated that he wishes to reduce Yip-Chuck’s line of credit because he is worried that she will get into financial difficulties. Required 1. Explain to Yip-Chuck why you think she is short of cash. 2. Yip-Chuck has asked you to explain her problem to the bank manager and to assist in asking for more credit. What might you say to the bank manager to assist Yip-Chuck? 3. Correcting an inventory error (Obj. 6) The employees of Northern Tech Company Ltd. made an error when they performed the periodic inventory count at year end, October 31, 2003. Part of one warehouse was not counted and therefore was not included in inventory. Required 1. Indicate the effect of the inventory error on cost of goods sold, gross margin, and net income for the year ended October 31, 2003. 2. Will the error affect cost of goods sold, gross margin, and net income in 2004? If so, what will be the effect? Financial Statement Problem Closing entries for a corporation that sells merchandise; evaluating ratio data (Obj. 3, 5) This problem uses both the income statement (consolidated statement of operations) and the balance sheet of Intrawest Corporation in Appendix A. It will aid your understanding of the closing process of a business. 1. Journalize Intrawest’s closing entries for the year ended June 30, 2000. You will be unfamiliar with certain revenues and expenses, but you should treat them all similarly. Make “General and administrative” the final expense you close. 2. What amount was closed to Retained Earnings? What were dividends in 2000? 3. Intrawest is not a typical merchandiser but it does have two types of inventory: (1) Inventory related to ski operations (Note 7 in the financial statements); (2) Inventory of properties under development and held for sale (Note 5). The company develops resort properties for resale, some of which will be sold in the current year and are classified as current assets. The remainder of the properties will be sold in future years and are classified as long-term assets. What balances are reported as current assets on the balance sheet for the two types of inventory at June 30, 2000? At June 30, 1999?
Supplement to Chapter 5 Accounting for Merchandise in a Periodic Inventory System Purchasing Merchandise in the Periodic Inventory System Some businesses find it uneconomical to invest in a computerized (perpetual) inventory system that keeps up-to-the-minute records of merchandise on hand and cost of goods sold. Recording Purchases of Inventory All inventory systems use the Inventory account. But in a periodic inventory system, purchases, purchase discounts, purchase returns and allowances, and freight costs are recorded in separate expense accounts bearing these titles. Let’s account for Austin Sound Centre Inc.’s purchase of the JVC goods in Exhibit 5S-1. For the moment, disregard GST and use the invoice total of $707.00 when recording purchases and purchase discounts. GST is discussed on page 234. The following entries record the purchase and payment on account within the discount period: May 27 Purchases ................................................................... 707.00 Accounts Payable................................................ 707.00 Purchased inventory on account. June 10 Accounts Payable........................................... 707.00 Cash............................................................ 685.79 Purchase Discounts ($707.00 × 0.03) ...... 21.21 Paid for inventory on account within discount period. The discount is $21.21. Recording Purchase Returns and Allowances Suppose instead that prior to payment, Austin Sound returned to JVC goods costing $70 and also received from JVC a purchase allowance of $10. Austin Sound would record these transactions as follows: June 3 Accounts Payable ..................................................... 70.00 Purchase Returns and Allowances ................... 70.00 Returned inventory to seller. June 4 Accounts Payable ..................................................... 10.00 Purchase Returns and Allowances ................... 10.00 Received a purchase allowance. During the period, the business records the cost of all inventory bought in the Purchases account. The balance of Purchases is a gross amount because it does not include subtractions for purchase discounts, returns, or allowances. Net purchases is the remainder computed by subtracting the contra accounts from Purchases: Purchase (debit balance account) – Purchase Discounts (credit balance account) – Purchase Returns and Allowances (credit balance account) = Net purchases (a debit subtotal, not a separate account) OBJECTIVE S2 Account for the purchase and sale of inventory under the periodic inventory system KEY POINT A contra account always has a companion account with the opposite balance. Thus both Purchase Discounts and Purchase Returns and Allowances (credit balances) are reported with Purchases (debit balance) on the income statement. Chapter Five Merchandising Operations and the Accounting Cycle 279
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 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
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: HEIGHTS PHARMACY LTD. Balance Sheet
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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