Question

1. Describe the difference between a service and merchandising firm. Give an example of each from publicly traded companies.
2. Give a detailed example of the recording of purchases under a perpetual inventory system including returns, allowances and discounts.
3. Give a detailed example of the recording sales revenues under a perpetual inventory system including returns, allowances and discounts.
4. Give a detailed example of the recording of purchases under a periodic inventory system including returns, allowances and discounts.
5. Give a detailed example of the recording sales revenues under a periodic inventory system including returns, allowances and discounts.
6. What are the differences between a single-step and a multiple-step income statement?
7. Give an example of how to calculate cost of goods sold under a periodic inventory system. Show all relevant accounts.
8. Explain how the gross profit rate and the profit margin are computed.

Answer 1

Answer1.

Merchandising iBusiness

A imerchandising ibusiness isells igoods, ialso iknown ias imerchandise. iGood ieg. iof imerchandising ibusinesses iinclude iretail iclothing, igrocery istores iand ibookstores. iSome ibusinesses iproduce ithe igoods ithey isell, iwhile iother imerchandise ibusinesses ibuy iand isell igoods ithey've ipurchased iwholesale. iOr iit icould ibe ia icombination iof ithe itwo.

Service iBusiness iDefined

A iservice ibusiness iprovides iservices ito iits icustomers. iNail isalons, iaccountants, ilaw ifirms iand icleaning iservices iare ieg. iof iservice ibusinesses. Specialized iexpenses ifor ia iservice ibusiness iare imainly ioverhead ifocused, iwith ilabor ioften ibeing ithe ilargest iexpenditure. iSecond iwould itypically ibe ithe imaterials irequired ito isupply ithe iservice.

iThe imain idifference ibetween ia imerchandising icompany iand ia iservice iindustry icompany iis ithat ithe imerchandising icompany imust istock iinventory. iThis ibecomes iimportant iwhen isetting iup ithe iaccounting ifor ithe ibusiness.

Answer2.and ianswer3.

Perpetual iinventory isystem iprovides ia irunning ibalance iof icost iof igoods iavailable ifor isale iand icost iof igoods isold. iUnder ithis isystem, ino ipurchases iaccount iis imaintained ibecause iinventory iaccount iis idirectly idebited iwith ieach ipurchase iof imerchandise. iThe iexpenses ithat iare iincurred ito iobtain imerchandise iinventory iincrease ithe icost iof imerchandise iavailable ifor isale. iThese iexpenses iare, itherefore, ialso idebited ito iinventory iaccount. iEg. iof isuch iexpenses iare ifreight-in iand iinsurances ietc. iEach itime ithe imerchandise iis isold, ithe irelated icost iis itransferred ifrom iinventory iaccount ito icost iof igoods isold iaccount iby idebiting icost iof igoods isold iand icrediting iinventory iaccount

On i1st iApril i2013, iMetro icompany ipurchases i15 iwashing imachines iat i$500 iper imachine ion iaccount. iThe isupplier iallows ia idiscount iof i5% iif ipayment iis imade iwithin i10 idays iof ipurchase. iThe iMetro icompany iuses inet iprice imethod ito irecord ithe ipurchase iof iinventory.

The ifollowing ijournal ientry iwould ibe imade iin ithe ibooks iof iMetro icompany ito irecord ithe ipurchase iof imerchandise:

particulars	debit i	credit
i		i
inventory i	7125	i
i i i i i i i i i iaccounts ipayable	i	7125

Net iof idiscount: i($500 i× i15) i– i$25 idiscount

(2). iOn ithe isame iday, iMetro icompany ipays i$320 ifor ifreight iand i$100 ifor iinsurance.

The ifollowing ijournal ientry iwould ibe imade ito irecord ithe ipayment iof ifreight-in iand iinsurance iexpenses

particulars	debit i	credit
inventory	420	i
i i i icash/accounts ipayable	i	420

On iApril i07, iMetro icompany ireturns i5 iwashing imachines ito ithe isupplier.

The ireturn iof iwashing imachines ito ithe isupplier idecreases ithe icost iof iinventory iand iaccounts ipayable. iThe ifollowing ientry iwould ibe imade ito irecord ithis idecrease:

particulars	debit i	credit
accounts ipayable	2375	i
i i i i i i i ito iinventory	2375	xxx

(4). iOn iApril i9, iMetro isends ithe ipayment ivia ionline ibanking isystem iand itakes ithe iadvantage iof ithe idiscount ioffered iby ithe isupplier.

As ithe ipayment iis imade iwithin i10 idays, ithe iMetro icompany iis ientitled ito ireceive idiscount. iThe ifollowing ientry iwould ibe imade ito irecord ithe ipayment:

particulars	debit i	credit
accounts ipayable	4750	i
i i i i i i i i i i icash	i	4750

$7,125 i– i$2,375)

On iApril i15, iMetro icompany isells i4 iwashing imachines iat i$750 iper imachine. iThe iMetro icompany idoes inot iallow iany idiscount ito icustomers.

The isale iof i4 iwashing imachines itransfers ithe icost iof iinventory ifrom iinventory iaccount ito icost iof igoods isold iaccount. iTwo ijournal ientries iwould ibe imade; ione ifor ithe isale iof i4 iwashing imachines iand ione ifor ithe itransfer iof icost ifrom iinventory iaccount ito icost iof igoods isold iaccount:

particulars	debit i	credit
accounts irecievable	3000	i
sales	i	3000
i i i		i
inventory	2068	i
i i i icost iof igoods isold		2068
i	i	i

ost iof i4 imachines isold:

[($475 i× i10 imachines) i+ i$420 iexpenses]/10 i= i$517 iper imachine

$517 i× i4 imachines i= i$2,068

Answer4 ianswer5. iAnd ianswer7

Under iperiodic iinventory isystem iinventory iaccount iis inot iupdated ifor ieach ipurchase iand ieach isale. iAll ipurchases iare idebited ito ipurchases iaccount. iAt ithe iend iof ithe iperiod, ithe itotal iin ipurchases iaccount iis iadded ito ithe ibeginning ibalance iof ithe iinventory ito icompute icost iof igoods iavailable ifor isale. iThe iending iinventory iis idetermined iat ithe iend iof ithe iperiod iby ia iphysical icount iand isubtracted ifrom ithe icost iof igoods iavailable ifor isale ito icompute ithe icost iof igoods isold.

The igeneral iformula ito icompute icost iof igoods isold iunder iperiodic iinventory isystem iis igiven ibelow:

Cost iof igoods isold i(COGS) i= iBeginning iinventory i+ iPurchases i– iClosing iinventory

The ifollowing iinformation ibelongs ito iJohn icompany, ia iretailer iof ihigh-end ifashion iproducts:

Inventory ibalance ion iJanuary i1, i2016: i$600,000

Purchases imade iduring ithe iyear i2016: i$1,200,000

Inventory ibalance ion iDecember i31, i2016: i$500,000

Required: iCompute icost iof igoods isold ifor ithe iyear i2016 iassuming ithe icompany iuses ia iperiodic iinventory isystem.

Solution:

Cost iof igoods isold i(COGS) i= iBeginning iinventory i+ iPurchases i– iClosing iinventory

= i$600,000 i+ i$1,200,000 i– i$500,000

= i$1,300,000

The ifollowing iinformation ibelongs ito iParadise iHardware iStore:

Beginning iinventory: i200 iunits iat i$12 i= i$2,400

Purchases imade iduring ithe iperiod: i1800 iunits iat i$12 i= i$21,600

Sales imade iduring ithe iperiod: i1200 iunits iat i$24 i= i$28,800

Ending iinventory: i800 iunits iat i$12 i= i$9,600

Required: iMake ijournal ientries ito irecord iabove itransactions iassuming ia iperiodic iinventory isystem iis iused iby iParadise iHardware iStore.

i	particulars	debit i	credit
i	purchase	21600	i
i	iaccounts ipayable	i	21600
i	accounts irecievable	28800	i
i	i i i i i i i i i i i isales	i	28800
i	i	i	i
i	inventory(end)	9600	i
i	cost iof igoods isold	14400	i
i	i i i i i i i i i i i i ipurchases		21600
i	i i i i i i i i i i i iinventory i(bigining0		2400
i	i	i	i

Answer i6

Single-Step iIncome iStatement

A isingle-step iincome istatement ipresents ithe irevenue, iexpenses iand iultimately ithe iprofit ior iloss igenerated iby ia ibusiness, ibut iit ireports ion ithis iinformation iby iusing ijust ione iequation ito icalculate iprofits. iThe iequation iused iin ia isingle-step iincome istatement iis:

Net iIncome i= i(Revenues i+ iGains) i– i(Expenses i+ iLosses)

The isingle-step iincome istatement ioffers ia istraightforward iaccounting iof ithe ifinancial iactivity iof iyour ibusiness. iIt’s ieasy ito iunderstand iand irelatively ieasy ito iprepare.

Multi-Step iIncome iStatement

A imulti-step iincome istatement ireports imuch iof ithe isame igeneral iinformation iincluded iin ia isingle-step iincome istatement, ibut iit iuses imultiple iequations ito idetermine ithe inet iincome, ior iprofit, iof ithe icompany.

The imulti-step iincome istatement ibreaks idown ioperating irevenues iand ioperating iexpenses iversus inon-operating irevenues iand inon-operating iexpenses. iThis iseparates irevenues iand iexpenses ithat iare idirectly irelated ito ithe ibusiness’s ioperations ifrom ithose ithat iare inot idirectly itied ito iits ioperations.

The imulti-step iincome istatement iuses ithree idifferent iaccounting iformulas ito iarrive iat ithe inet iincome:

1. iGROSS iPROFIT i= iNET iSALES i– iCOST iOF iGOODS iSOLD

Cost iof igoods isold iis isubtracted ifrom inet isales. iThis igives ithe igross iprofit.

2. iOPERATING iINCOME i= iGROSS iPROFIT i– iOPERATING iEXPENSES

Operating iexpenses iare isubtracted ifrom igross iprofit. iThis igives iyou ithe ioperating iincome.

3. iNET iINCOME i= iOPERATING iINCOME i+