Question

Below are transactions conducted by Sydney Company during its second year of operation (20X2). A PERPETUAL INVENTORY SYSTEM is used. The normal balances at the beginning of the year are as follows:

                                    Cash $ 58,000

                                    Accounts receivable $3,800

                                    Merchandise inventory                                               $ 14,000

                                    Common Stock                                                             $ 45,000

                                    Retained Earnings $ 30,800

TRANSACTIONS for 20X2.

Purchased $57,000 of merchandise on account from a supplier with credit terms n/30.

Purchased $2000 of Supplies on account.

Purchased equipment for $18,000 cash.

Sold merchandise to a customer for $55,000 on account. Credit terms were 2/10;n/30. Sydney’s cost for the merchandise was $30,000.

A customer returned merchandise to Sydney because they changed their mind. There was nothing wrong with the merchandise, so Sydney put the merchandise back on the shelf and gave the customer full credit on their account. The merchandise cost Sydney $500 and had a sell price of $900.

Paid cash to the supplier for invoices totaling $28,000 on account.

Paid $9,000 cash for Selling & Administrative Expenses.

A customer paid Sydney on account for invoices totaling $10,000. Since the payment to Sydney was made within the discount period, a 2% discount was taken from this amount by the customer.

Adjustments made at year-end

A count of supplies at year end indicated a balance of $300.

A count of Merchandise Inventory revealed that $41,100 of Merchandise Inventory is still available at year-end.

Recorded depreciation expense of $3600 for a full year.

Accrued Selling & Administrative expenses of $1800.

REQUIRED:               

Post beginning balances to the T-accounts (or you may use an accounting equation spreadsheet.

Record the transactions. Record directly to T-accounts using the transaction number as a posting reference.

Prepare a multi-step income statement for the current year ending12/31/20X2.

Prepare a classified Balance sheet as of year-end 12/31/20X2.

Prepare a statement of cash flows for the current year 12/31/20X2.

Merchandising Transactions with adjustments

Questions to be answered:

What is the balance in the Merchandise Inventory account at the end of the year? What does this mean?

Calculate the Gross Margin Ratio and Profit Margin Ratio at year end. What are the different things that they are indicating for the company?

Calculate the Current Ratio and Acid Test Ratio at the end of the year? What are the different things that they are indicating for the company?

Calculate the Inventory turnover and Days Sales in Inventory for the year. What are these indicating for the company?

What will be the balance in the Retained Earnings account after all closing entries are made (show calculation)? What does this balance mean?

Be aware of accounting principles used to make adjusting entries.

Be aware of the impact of each transaction on the financial statements.

Be aware of common transactions used in a perpetual inventory system.

Answer 1

Answers

1 & 2)
T – the Accounts :
DEBIT	AMOUNT $	CREDIT	AMOUNT $
The Cash a/c
OB	58000	3	18000
8	9800	6	28000
		7	9000
		CB	12800
AR a/c
OB	3800	5	900
4	55000	8	10000
		CB	47900
Merchandise Inventory a/c
OB	14000	4	30000
1	57000	10	400
5	500	CB	41100
Common Stock a/c
		OB	45000
Retained Earnings a/c
		OB	30800
AP a/c
6	28000	1	57000
CB	31000	2	2000
Supplies a/c
2	2000	Supp exp	1700
		CB	300
Equipment a/c
3	18000
Sales Revenues a/c
		4	55000
COGS a/c
4	30000	5	500
10	400	CB	29900
Sales return a/c
5	900
Selling & Admin Exp a/c
7	9000	CB	10800
12	1800
Discount sales a/c
8	200
Supplies exp a/c
9	1700
Depreciation a/c
11	3600
Acc Dep a/c
		11	3600
Expenses payable a/c
		12	1800
3. Multi Step Income Statement:
	Amount $
Revenues	55000
Less: Sales return	-900
Net Sales	54100
Less: COGS	29900
Gross Profit	24200
Less: Expenses:
Discount	200
Selling and Admin	10800
Supplies	1700
Depreciation	3600
Total Expenses	16300
Net Income	7900
4. Balance Sheet:
Assets	20X2	20X1
Cash	12800	58000
AR	47900	3800
Merc. Inventory	41100	14000
Supplies	300
Current Assets	102100	75800
Equipment	18000
Acc Dep - Equ	-3600
Total Assets	116500	75800
Liabilities	amount $
AP	31000	0
EP	1800	0
Current Liabilities	32800	0
CS	45000	45000
RE	30800	30800
Net Income	7900
Total Liabilities	116500	75800

5) Cash Flow Statement :
Cash flow from Operating Activities:
Net Income	7900
Add:Dep	3600
Less: increase in AR	-44100
Less: increase in M Inven	-27100
Less: increase in supplies	-300
Add: increase in AP	31000
Add: increase in EP	1800
The Cash outflow of Operating Activities	-27200
The Cash flow from Investing Activities:
Less: purchase of equip	-18000
total cash outflow of all activities	-45200
Add: Opening Balance	58000
Closing Balance	12800