Question

Exercise 6-21 Complete the accounting cycle using inventory transactions (LO6-2, 6-3, 6-5, 6-6, 6-7)

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On January 1, 2021, the general ledger of Big Blast Fireworks includes the following account balances:

Accounts	Debit			Credit
Cash	$	24,500
Accounts Receivable		43,000
Allowance for Uncollectible Accounts				$	2,900
Inventory		43,000
Land		81,100
Accounts Payable					28,700
Notes Payable (6%, due in 3 years)					43,000
Common Stock					69,000
Retained Earnings					48,000
Totals	$	191,600		$	191,600

The $43,000 beginning balance of inventory consists of 430 units, each costing $100. During January 2021, Big Blast Fireworks had the following inventory transactions:

January		3		Purchase 1,150 units for $121,900 on account ($106 each).
January		8		Purchase 1,250 units for $138,750 on account ($111 each).
January		12		Purchase 1,350 units for $156,600 on account ($116 each).
January		15		Return 165 of the units purchased on January 12 because of defects.
January		19		Sell 3,900 units on account for $624,000. The cost of the units sold is determined using a FIFO perpetual inventory system.
January		22		Receive $573,000 from customers on accounts receivable.
January		24		Pay $380,000 to inventory suppliers on accounts payable.
January		27		Write off accounts receivable as uncollectible, $2,200.
January		31		Pay cash for salaries during January, $132,000.

The following information is available on January 31, 2021.

1. At the end of January, the company estimates that the remaining units of inventory are expected to sell in February for only $100 each.
2. The company estimates future uncollectible accounts. The company determines $5,300 of accounts receivable on January 31 are past due, and 35% of these accounts are estimated to be uncollectible. The remaining accounts receivable on January 31 are not past due, and 3% of these accounts are estimated to be uncollectible. (Hint: Use the January 31 accounts receivable balance calculated in the general ledger.)
3. Accrued interest expense on notes payable for January. Interest is expected to be paid each December 31.
4. Accrued income taxes at the end of January are $13,600.

Exercise 6-21 Part 7

7. Analyze how well Big Blast Fireworks’ manages its inventory:

a-1. Calculate the inventory turnover ratio for the month of January. (Round your final answer to 1 decimal place)
  

a-2. If the industry average of the inventory turnover ratio for the month of January is 13.2 times, is the company managing its inventory more or less efficiently than other companies in the same industry?
  

multiple choice 1

• More

• Less

  

b-1. Calculate the gross profit ratio for the month of January. (Round your final answer to 1 decimal place)
  

b-2. If the industry average gross profit ratio is 33.0%, is the company more or less profitable per dollar of sales than other companies in the same industry?
  

multiple choice 2

• More

• Less

  

c. Is the company’s strategy to sell a higher volume of less expensive items or does the company appear to be selling a lower volume of more expensive items?
  

multiple choice 3

• Higher volume of less expensive

• Lower volume of more expensive

Answer 1

Please refer the following image for the solution: