Question

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

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On January 1, Year 1, the general ledger of a company includes the following account balances:

Accounts	Debit			Credit
Cash	$	24,100
Accounts Receivable		42,000
Allowance for Uncollectible Accounts				$	2,500
Inventory		41,000
Land		78,100
Accounts Payable					29,700
Notes Payable (12%, due in 3 years)					41,000
Common Stock					67,000
Retained Earnings					45,000
Totals	$	185,200		$	185,200

The $41,000 beginning balance of inventory consists of 410 units, each costing $100. During January Year 1, the company had the following inventory transactions:

January		3		Purchase 2,000 units for $218,000 on account ($109 each).
January		8		Purchase 2,100 units for $239,400 on account ($114 each).
January		12		Purchase 2,200 units for $261,800 on account ($119 each).
January		15		Return 155 of the units purchased on January 12 because of defects.
January		19		Sell 6,400 units on account for $960,000. The cost of the units sold is determined using a FIFO perpetual inventory system.
January		22		Receive $950,000 from customers on accounts receivable.
January		24		Pay $680,000 to inventory suppliers on accounts payable.
January		27		Write off accounts receivable as uncollectible, $2,000.
January		31		Pay cash for salaries during January, $125,000.

The following information is available on January 31, Year 1.

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 $5,100 of accounts receivable on January 31 are past due, and 40% of these accounts are estimated to be uncollectible. The remaining accounts receivable on January 31 are not past due, and 5% 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 $13,400.

Exercise 6-21B Part 7

7. Analyze how well the company 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 18.5 times, is the company managing its inventory more or less efficiently than other companies in the same industry?
  

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• 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%, is the company more or less profitable per dollar of sales than other companies in the same industry?
  

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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?
  

• Higher volume of less expensive

• Lower volume of more expensive

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