Chapter Eight Questions
1. Define the term merchandise inventory.
The products that merchandising companies buy and
sell are called merchandise inventory.
2. Identify three examples of merchandise inventory.
Food, clothing, textbooks, toys, automobiles,
appliances, etc.
3. What is the major difference between merchandising and manufacturing?
Merchandising companies sell the products they
purchase. Manufacturing companies take the products they purchase, combine them
with other products to create different products, which they then sell.
4. Identify four major steps involved with merchandise inventory.
Step 1: purchase merchandise from suppliers.
Step 2: sell merchandise to customers.
Step 3: collect cash from customers.
Step 4: pay cash to suppliers.
5. What is the primary objective of the four merchandise inventory steps you identified in question 4?
The primary objective of merchandising companies is
to increase their resources by charging customers more than it cost the
companies to buy the products and get them to customers.
6. How is gross profit calculated?
Gross profit = net sales - cost of goods sold.
7. Why is gross profit important to merchandising companies?
Unless companies can charge customers more than it
cost the companies to buy the products, it is virtually impossible for them to
increase their resources through management activities.
8. State the formula for calculating gross profit percentage.
Gross profit percentage = gross profit / net sales.
9. How often are merchandise inventory records updated in a perpetual inventory system?
Perpetual inventory systems update inventory records
constantly. Whenever a transaction occurs that changes merchandise, the
perpetual inventory system updates the inventory records.
10. How does a perpetual inventory system differ from a periodic inventory system?
Periodic inventory systems update inventory records
only at the end of an accounting period, while perpetual inventory systems
update inventory records constantly. For practical purposes this means periodic
inventory systems update inventory records at the end of each month, while
perpetual inventory systems may update inventory records numerous times each
day.
11. What is the reason merchandising companies inspect the merchandise they purchase?
Merchandise is inspected to make certain it is what
the company ordered and is in good enough condition to be sold to customers.
12. What is the most important use merchandising companies make of their merchandise inventory?
Most merchandise inventory is sold to customers.
13. Why do merchandising companies maintain some merchandise inventory at the end of each accounting period?
Merchandising companies keep some inventory on hand
at the end of each period in order to have merchandise available to be sold to
customers at the beginning of the next period.
14. After a merchandising company purchases merchandise, what are the three most important actions the company can take with the merchandise?
Return it to suppliers.
Sell it to customers.
Keep it on hand to sell to customers next period.
15. After a merchandising company purchases merchandise, inspects it, and returns any unwanted items, what are the two most important actions the company can take with the remaining merchandise?
Sell it to customers.
Keep it on hand to sell to customers next period.
16. What is the relationship between a company's cost of goods sold and its ending merchandise inventory?
Merchandise available for sale - cost of goods sold
= ending merchandise inventory.
17. Identify the name of the largest expense on the income statement of most merchandising companies.
Cost of goods sold.
18. What does a FIFO inventory system do with the first unit costs coming into a merchandising company?
FIFO assigns the first unit costs to the first units
sold during the period.
19. What does a FIFO inventory system do with the last unit costs coming into a merchandising company?
FIFO assigns the last unit costs to the units
remaining in inventory at the end of the period.
20. What does a LIFO inventory system do with the first unit costs that coming into a merchandising company?
LIFO assigns the first unit costs to the units
remaining in inventory at the end of the period, which in a LIFO perpetual
inventory system may be the end of a day rather than the end of a month.
21. What does a LIFO inventory system do with the last unit costs coming into a merchandising company?
LIFO assigns the last unit costs to the first units
sold during the period.
22. What is the difference between tax planning and tax evasion?
Tax planning involves the legal choosing among
accounting methods to minimize or postpone the payment of income taxes. Tax
evasion is the illegal, willful violation of income tax laws.
23. In what section of the balance sheet is merchandise inventory reported?
Merchandise inventory is reported on the balance
sheet as a current asset.
24. On which financial statement and in which section is the cost of goods sold reported?
The cost of goods sold is reported on the income
statement in its own section immediately following net sales revenue.
Chapter Eight Exercises
Exercise 8.1: Merchandising Income
The Chang Corporation began operations on September 1. During September, the company purchased 1,000 pairs of gloves at a cost of $30 per pair. By the end of September, the company had sold all the gloves for $42 per pair. The company's operating expenses for September were $8,000 and its effective income tax rate was 40%.
1. Determine the company's September sales revenue.
$42,000 = 1,000 pairs of gloves x $42 per
pair.
2. Determine the company's September cost of goods sold.
$30,000 = 1,000 pairs of gloves x $30 per
pair.
3. Determine the company's September gross profit.
|
Sales |
$42,000 |
|
Cost of Goods Sold |
$30,000 |
|
Gross Profit |
$12,000 |
4. Determine the company's September income before taxes.
|
Sales |
$42,000 |
|
Cost of Goods Sold |
$30,000 |
|
Gross Profit |
$12,000 |
|
Operating Expenses |
$8,000 |
|
Income Before Taxes |
$4,000 |
5. Determine the company's September income taxes expense.
|
Sales |
$42,000 |
|
Cost of Goods Sold |
$30,000 |
|
Gross Profit |
$12,000 |
|
Operating Expenses |
$8,000 |
|
Income Before Taxes |
$4,000 |
|
Income Taxes Expense ($1,600 x .40 |
$1,600 |
6. Determine the company's September net income.
|
Sales |
$42,000 |
|
Cost of Goods Sold |
$30,000 |
|
Gross Profit |
$12,000 |
|
Operating Expenses |
$8,000 |
|
Income Before Taxes |
$4,000 |
|
Income Taxes Expense |
$1,600 |
|
Net Income |
$2,400 |
7. If the Chang Corporation paid cash for all its September purchases, operating
expenses, and income taxes expense, by what dollar amount did the company's
resources increase in September as a result of buying and selling merchandise?
Cash would have increased by $2,400 and
stockholders' equity would have increased by $2,400 (net income).
Exercise 8.2: Gross Profit Percentage
The following information is from the records of the Masse
Corporation.
|
|
Year 3 |
Year 2 |
Year 1 |
|
Sales |
$22,959 |
$22,384 |
$22,145 |
|
Cost of Goods Sold |
$17,405 |
$17,109 |
$17,079 |
|
Gross Profit |
$5,554 |
$5,275 |
$5,066 |
|
Operating Expenses |
$4,805 |
$4,601 |
$4,418 |
|
Income from Operations |
$749 |
$674 |
$648 |
|
Other Revenues and (Expenses) |
($328) |
($390) |
($475) |
|
Income Before Taxes |
$421 |
$284 |
$173 |
|
Income Taxes Expense |
$152 |
$113 |
$72 |
|
Net Income |
$269 |
$171 |
$101 |
1. Calculate the Masse Corporation's gross profit percentage for Year 3.
Gross profit percentage = gross profit / sales
Gross Profit Percentage = $5,554 / $22,959 = .242 =
24.2%
2. Calculate the Masse Corporation's gross profit percentage for Year 2.
Gross profit percentage = $5,275 / $22,384 = .236 =
23.6%
3. Calculate the Masse Corporation's gross profit percentage for Year 1.
Gross profit percentage = $5,066 / $22,145 = .229 =
22.9%
4. Comment on the trend you see in the company's gross profit percentage.
The company's gross profit has been increasing each
year. This increase could be due to increased sales prices, decreased
purchase prices, or sales of higher profit margin products.
Exercise 8.3: Beginning Merchandise Inventory
During February, the Reeney Corporation purchased $56,000 of merchandise inventory and returned $4,000 of the merchandise. The company sold to customers merchandise that cost the company $42,000. At the end of February, the company had $15,000 of merchandise on hand.
Calculate the cost of merchandise inventory the Reeney Corporation had on
hand at the beginning of February.
|
Beginning Inventory |
$5,000 |
|
|
|
Purchases |
$56,000 |
$4,000 |
Purchases Returns |
|
|
|
$42,000 |
Cost of Goods Sold |
|
Ending Inventory |
$15,000 |
|
|
Exercise 8.4: Merchandise Purchases
At the beginning of March, the Chandran Corporation had merchandise inventory of $8,000 on hand. During March, the Chandran Corporation returned $3,000 of the merchandise it purchased in March. The company sold to customers merchandise that cost the company $24,000. At the end of March, the company had $11,000 of merchandise on hand.
Calculate the cost of merchandise inventory the Chandran Corporation
purchased during March.
|
Beginning Inventory |
$8,000 |
|
|
|
Purchases |
$30,000 |
$3,000 |
Purchases Returns |
|
|
|
$24,000 |
Cost of Goods Sold |
|
Ending Inventory |
$11,000 |
|
|
Exercise 8.5: Purchases Returns
At the beginning of April, the Damron Corporation had merchandise inventory of $19,000 on hand. During April, the Damron Corporation purchased $63,000 of merchandise inventory. The company sold to customers merchandise that cost the company $71,000. At the end of April, the company had $6,000 of merchandise on hand.
Calculate the cost of merchandise the Damron Corporation returned during
April.
|
Beginning Inventory |
$19,000 |
|
|
|
Purchases |
$63,000 |
$5,000 |
Purchases Returns |
|
|
|
$71,000 |
Cost of Goods Sold |
|
Ending Inventory |
$6,000 |
|
|
Exercise 8.6: Cost of Goods Sold
At the beginning of May, the Dumais Corporation had merchandise inventory of $7,000 on hand. During May, the Dumais Corporation purchased $36,000 of merchandise inventory. The company returned merchandise that cost the company $2,000. At the end of May, the company had $4,000 of merchandise on hand.
Calculate the cost of merchandise the Dumais Corporation sold to its
customers during May.
|
Beginning Inventory |
$7,000 |
|
|
|
Purchases |
$36,000 |
$2,000 |
Purchases Returns |
|
|
|
$37,000 |
Cost of Goods Sold |
|
Ending Inventory |
$4,000 |
|
|
Exercise 8.7: Ending Merchandise Inventory
At the beginning of June, the Pierce Corporation had on hand merchandise that cost $27,000. During June, the company purchased $106,000 of merchandise inventory and returned $18,000 of the merchandise. The company sold to customers merchandise that cost the company $96,000.
Calculate the cost of merchandise inventory that the Pierce Corporation had
on hand at the end of June.
|
Beginning Inventory |
$27,000 |
|
|
|
Purchases |
$106,000 |
$18,000 |
Purchases Returns |
|
|
|
$96,000 |
Cost of Goods Sold |
|
Ending Inventory |
$19,000 |
|
|
Exercise 8.8: Merchandising Journal Entries
Prepare the journal entries required to record the following transactions of the Katsikas Corporation. Before you prepare each entry, determine the transaction's effects on the company's resources and sources of resources.
July 1: Purchased $15,000 of merchandise on account.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $15,000 |
= |
+ $15,000 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 1 |
Merchandise Inventory |
|
15,000 |
|
|
|
Accounts Payable |
|
|
15,000 |
|
|
Merchandise purchased |
|
|
|
July 5: Sold on account $3,500 of merchandise to customers for $5,900.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $3,500 + $5,900 |
= |
|
|
|
|
- $3,500 + $5,900 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 5 |
Cost of Goods Sold |
|
3,500 |
|
|
|
Merchandise Inventory |
|
|
3,500 |
|
|
Merchandise sold |
|
|
|
|
|
|
|
|
|
|
5 |
Accounts Receivable |
|
5,900 |
|
|
|
Sales |
|
|
5,900 |
|
|
Sales on account |
|
|
|
July 9: Returned for credit $800 of merchandise purchased on July 1.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $800 |
= |
- $800 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 9 |
Accounts Payable |
|
800 |
|
|
|
Merchandise Inventory |
|
|
800 |
|
|
Purchases returns |
|
|
|
July 14: Paid cash for $9,000 of additional merchandise.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $9,000 |
|
|
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 14 |
Merchandise Inventory |
|
9,000 |
|
|
|
Cash |
|
|
9,000 |
|
|
Merchandise purchased |
|
|
|
July 18: Sold $4,800 of merchandise to customers for $8,000 cash.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $4,800 + $8,000 |
= |
|
|
|
|
- $4,800 + $8,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 18 |
Cost of Goods Sold |
|
4,800 |
|
|
|
Merchandise Inventory |
|
|
4,800 |
|
|
Merchandise sold |
|
|
|
|
|
|
|
|
|
|
18 |
Cash |
|
8,000 |
|
|
|
Sales |
|
|
8,000 |
|
|
Cash sales |
|
|
|
July 21: Purchased $12,000 of merchandise on account.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $12,000 |
= |
+ $12,000 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 21 |
Merchandise Inventory |
|
12,000 |
|
|
|
Accounts Payable |
|
|
12,000 |
|
|
Merchandise purchased |
|
|
|
July 25: Sold on account $6,500 of merchandise to customers for $11,000.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $6,500 + $11,000 |
= |
|
|
|
|
- $6,500 + $11,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 25 |
Cost of Goods Sold |
|
6,500 |
|
|
|
Merchandise Inventory |
|
|
6,500 |
|
|
Merchandise sold |
|
|
|
|
|
|
|
|
|
|
25 |
Accounts Receivable |
|
11,000 |
|
|
|
Sales |
|
|
11,000 |
|
|
Sales on account |
|
|
|
July 27: Paid $6,000 cash as partial payment for merchandise purchased on July
1.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $6,000 |
= |
- $6,000 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 27 |
Accounts Payable |
|
6,000 |
|
|
|
Cash |
|
|
6,000 |
|
|
Payment for merchandise |
|
|
|
July 30: Returned for credit $1,200 of merchandise purchased on July 21.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $1,200 |
= |
- $1,200 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 30 |
Accounts Payable |
|
1,200 |
|
|
|
Merchandise Inventory |
|
|
1,200 |
|
|
Purchases returns |
|
|
|
Exercise 8.9: FIFO Inventory Costing
The Lord Corporation began July with 15 units of merchandise inventory on hand. Each unit had cost the company $22. During July, the company made the following purchases: July 7, 18 units at $25 each; July 19, 23 units at $27 each; and July 27, 24 units at $29 each. The company made the following sales in July: July 12, 17 units at $50 each; July 21, 22 units at $50 each; and July 29, 27 units at $50 each. The company uses the FIFO perpetual inventory method.
1. Calculate the company’s July cost of goods sold
|
July 12 |
15 units x $22 = $330 |
|
|
2 units x $25 = $50 |
|
|
|
|
July 21 |
16 units x $25 = $400 |
|
|
6 units x $27 = $162 |
|
|
|
|
July 29 |
17 units x $27 = $459 |
|
|
10 units x $29 = $290 |
|
|
|
|
Total |
$1,691 |
2. Calculate the company’s cost of the merchandise inventory on hand on
July 31.
|
July 27 |
14 units x $29 = $406 |
|
|
|
|
Total |
$406 |
Check:
|
Cost of goods sold |
$1,691 |
|
Plus: Ending inventory |
$406 |
|
Merchandise available for sale |
$2,097 |
Exercise 8.10: LIFO Inventory Costing
The Connors Corporation began July with 15 units of merchandise inventory on hand. Each unit had cost the company $22. During July, the company made the following purchases: July 7, 18 units at $25 each; July 19, 23 units at $27 each; and July 27, 24 units at $29 each. The company made the following sales in July: July 12, 17 units at $50 each; July 21, 22 units at $50 each; and July 29, 27 units at $50 each. The company uses the LIFO perpetual inventory method.
1. Calculate the company’s July cost of goods sold.
|
July 12 |
17 units x $25 = $425 |
|
|
|
|
July 21 |
22 units x $27 = $594 |
|
|
|
|
July 29 |
24 units x $29 = $696 |
|
|
1 unit x $27 = $27 |
|
|
1 unit x $25 = $25 |
|
|
1 unit x $22 = $22 |
|
|
|
|
Total |
$1,789 |
2. Calculate the company’s cost of the merchandise inventory on hand on
July 31.
|
July 1 |
14 units x $22 = $308 |
|
|
|
|
Total |
$308 |
Check:
|
Cost of goods sold |
$1,789 |
|
Plus: Ending inventory |
$308 |
|
Merchandise available for sale |
$2,097 |
Exercise 8.11: FIFO Versus LIFO Inventory Costing
The Garnick Company reported annual sales of $20,000,000. If the company used the FIFO inventory method, its cost of goods sold would have been $11,000,000. The cost of goods sold under LIFO would have been $11,500,000. Operating expenses for the company were $6,000,000 during the year. The company estimates its income taxes expense to be approximately 40% of income before taxes.
1. Calculate the company’s net income under the FIFO inventory method.
$1,800,000 (see below)
2. Calculate the company’s net income under the LIFO inventory method.
$1,500,000 (see below)
3. Calculate the income tax advantage the company would realize if it were to
use the LIFO inventory method.
$200,000 (see below)
|
|
FIFO |
LIFO |
FIFO - LIFO |
|
Sales |
$20,000,000 |
$20,000,000 |
|
|
Cost of Goods Sold |
$11,000,000 |
$11,500,000 |
|
|
Gross Profit |
$9,000,000 |
$8,500,000 |
|
|
Operating Expenses |
$6,000,000 |
$6,000,000 |
|
|
Income Before Taxes |
$3,000,000 |
$2,500,000 |
|
|
Income Taxes Expense |
$1,200,000 |
$1,000,000 |
$200,000 |
|
Net Income |
$1,800,000 |
$1,500,000 |
|