Calculating Gross Profit Margin and Inventory Turnover
The following table presents sales revenue, cost of goods sold, and inventory amounts for three retailers of fine jewelry, Tiffany & Co., Zale Corporation, and Blue Nile, Inc. (an Internet retailer).

a. Compute the gross profit margin (GPM) for each of these companies for 2013 and 2012.
Note: Round GPM answers to one decimal place (ex: 0.2345 = 23.5%).

b. Compute the inventory turnover ratio and the average inventory days outstanding for 2013 for each company.

Do not round until your final answer.

Round inventory turnover to one decimal place. Round average inventory days outstanding to nearest whole number.

Togo Co. has the following financial statements.

Required

Use the information in the financial statements to answer the following questions:

(a)      Calculate the following ratios:

     (i) return on sales ratio (as a %)

    (ii) return on assets ratio (as a %)

   (iii) return on equity ratio (as a %)

(b)     Based on these ratios, comment on the profitability of the company.

(c)     Calculate the following ratios:

     (i) the current ratio

    (ii) the quick ratio

(d)     Based on these ratios, comment on the liquidity of the company.

(e)     Calculate the following ratios:

     (i) the gross profit to sales ratio (as a %)

    (ii) the ratio of operating expenses to sales (as a %)

   (iii) the operating income to sales ratio (as a %)

   (iv) the net income to sales ratio (as a %)

    (v) the interest cover ratio

   (vi) the dividend cover ratio

(f)      Based on these ratios, comment on the profitability of the company.

(g)     Calculate the following:

     (i) the receivables turnover ratio

    (ii) the receivables collection period

   (iii) the inventory turnover ratio

   (iv) the inventory holding period

    (v) the total asset turnover ratio

(h)     Based on these ratios, comment on the efficiency of the company.

(i)      Assume Togo Co.’s share price is $100 per share, and there are 100,000 shares in issue. Calculate the following:

     (i) the dividend payout ratio

    (ii) the earnings per share

   (iii) the price to earnings ratio

(j)      Based on these ratios, comment on the desirability of these shares as an investment.

Sheffield Co. had sales revenue of $550,900 in 2020. Other items recorded during the year were:

Prepare a single-step income statement for Sheffield for 2020. Sheffield has 100,700 shares of stock outstanding. (Round earnings per share to 2 decimal places, e.g. 1.48.)

Revenue Recognition for ABC Software Company under ASC 606

ABC COMPANY was stumped by U.S. accounting rules for revenue recognition and gave up trying to comply with them.  The Japanese giant recognized this would lead to the delisting of its ADR shares on NASDAQ.  ABC also said it would be able to file its 2006 annual report under U.S. GAAP and it couldn’t vouch for its financial statements since 2000.  ABC COMPANY said a restatement was not practicable because of the complexities.  ABC noted that its financial statements under Japanese GAAP are current and not affected by this announcement.  

Under accounting principles generally accepted in the United States of America, revenue recognition rules are complicated for software companies whose contracts combine the sale of software with maintenance service agreements.  Previously, a standard called SOP 97-2 for companies wishing to recognize the software-sales revenue up front must perform an analysis of such contracts that provides “vendor specific objective evidence” (VSOP) of consistent treatment of sales and service.  That analysis, which ABC COMPANY says it has been unable to complete, required before portions of revenue from a single contract can be broken out and recognized at different times.  ABC says it is unable to complete the VSOE analysis for its auditor in time to file the annual report for the year ending March 31, 2006 even though ABC had previously been warned by NASDAQ and received an extension.  

On June 17, 2008 the Securities and Exchange Commission instituted proceedings against ABC pursuant to the Securities and Exchange Act of 1934.  The resulting order revoked the U.S. registration of each class of ABC’s registered securities and ordered ABC to cease and desist from committing certain violations based on ABC’s failure to file annual reports and maintain sufficient internal controls, and failure to make and keep accurate books and records.  Following the revocation order ABC securities remain listed for trading, and actively trade, in Japan.  ABC's American Depositary Receipt Program was subsequently terminated as of March 31, 2010.  

Recently, new revenue recognition standards have been adopted in the USA.  ABC’s management would like your advice on whether it might be a good time to apply for the company to be listed on a US stock exchange by complying with revenue recognition requirements.

ABC has the following sources of income that should be evaluated.

1. Licensing of product.  Customers pay an upfront fee of $12,000 for 12 months to use ABC’s software.  Customers can access ABC’s software at any time during the period.  The contract term starts on July 1 and go through June 30.  ABC provides hosting and maintenance of the site.
2. Implementation . ABC software will provide training, project management, data conversion and process consulting to onboard new clients. Implementation services typically require full-time work for 3-months on average with a team of 3 providing hourly billing at a rate of $150 per hour.
3. Hardware sales.  ABC is a reseller of key components.  ABC has no inventory obligations and drop ships produce from the manufacturer’s distribution site.  The mark-up on hardware sales is 10% for ABC.

Other considerations:

Does the customer have the ability to forgo the hosting provided by the Company and instead host it on their own servers, or some other remote server (e.g., AWS, Microsoft Azure)
Yes, this is an option we make available, though we highly discourage it. Out of 2000+ customers, less than two dozen forgo the hosting services.

·         How integral are the implementation services to using the software?
Highly integral. We provide no generic services. For example, as part of implementation, we provide an overview of the ABC database, but we do not educate customers on relational database management systems.

·         Could the customer source the implementation services from some other third party?
A customer has only one option for sourcing implementation services: 1) Company ABC if the system was purchased through direct sales, or 2) a channel partner if the system was purchased through that channel partner.

·         Does ABC perform regular upgrades to the software?
Yes

·         Does the customer have to pay separately to get access to such upgrades?
No, upgrades are included as part of the annual license subscription.

·         If ABC provides upgrades, are they promised (explicitly or implicitly) at any sort of regular cadence?
Releases (i.e., upgrades) are delivered every four weeks like clockwork.

·         Is there a minimum number of upgrades promised or implied during the term of the contract?
License subscriptions run on an annual basis, though contracts are often times multiple-year subscriptions. Thirteen releases per year are implied in an annual subscription.

Explain the following

1.       A.  Would the license meet the definition of a performance obligation?

B. Would the license be classified as a license of functional intellectual property or symbolic intellectual property?

C. Would the revenue be recognized at the point in time that access to the license is granted to the customer or over the license term?

2.          Discuss the revenue recognition for Implementation

3.          Discuss revenue recognition for Hardware sales.

4.          Discuss a factor that could change one of your answers.

1. Show graphically the changes in Producer Surplus, Consumer Surplus, Deadweight Loss and Government Tax Revenue when the government institutes a Tariff on imports? If the economy is a large economy show graphically an optimal tariff.

Calculating Gross Profit Margin and Inventory Turnover
The following table presents sales revenue, cost of goods sold, and inventory amounts for three retailers of fine jewelry, Tiffany & Co., Zale Corporation, and Blue Nile, Inc. (an Internet retailer).

a. Compute the gross profit margin (GPM) for each of these companies for 2013 and 2012.

b. Compute the inventory turnover ratio and the average inventory days outstanding for 2013 for each company.

Do not round until your final answer.

Round inventory turnover to one decimal place. Round average inventory days outstanding to nearest whole number.

d. Zale reports that as of July 31, 2013 its LIFO reserve totaled $108 million while at July 31, 2012 it totaled $75.3 million. Using a 35% tax rate, how much money did Zale save in fiscal 2013 using LIFO and how much has Zale saved since it began using LIFO to value its inventories?

Round each answer to one decimal place.

You own and operate a hamburger. Each year, you receive revenue of $400,000 from your hamburger and associated food sales, and it costs you $200,000 for the food. In addition, you pay $80,000 for electricity, taxes, and other expenses per year. Instead of running the hamburger, you could become a management consultant and receive a yearly salary of $100,000. A large clothing retail chain wants to expand and offers to rent the store from you for $40,000 per year. How do you explain to your friends that despite making a profit, it is too costly for you to continue running your store?

PROBLEM: ASC 606: Revenue from Contacts with Customers, Correction of Accounting Errors, Professional Research, and Accounting Theory (Conceptual Framework)

Ian Mathews is a creator of board games. Ian will be selling his most recent game, Radical Rainbows, through his newly formed company, UPR, Inc. UPR was formed in June, 2018. Ian contributed $1,000 to UPR in exchange for 100% of UPR’s voting common stock. Ian has had unprecedented success with the first two games in his most recent game trilogy: unicorns, ponies and rainbows. Ian was looking to finance UPR’s initial production run of the third game, Radical Rainbows at a rate of 7.5% or less.   The best deal offered by several banks had an APR of 8%. That was more than Ian was willing to pay and he felt there were other sources of financing that were less expensive.

As he had done for the first two games in the series: Unstable Unicorns and Perplexed Ponies, Ian turned to Kickstarter to finance the cost of the first production run of Radical Rainbows. Normally, UPR will be selling Radical Rainbows for $50 per game. UPR offered to sell Radical Rainbows to its Kickstarter backers for $45 per game.   The Kickstarter campaign was completed in two days, and on June 1, 2018 UPR received $225,000 in exchange for a promise to deliver 5000 games to its Kickstarter backers on December 1, 2019.  

At a manufacturing cost of $30 per game, UPR will be able to produce 7500 units with the $225,000 raised in the Kickstarter campaign. The 7500 games would be ready for shipment on December 1, 2019.

On June 1, 2018, UPR’s bookkeeper made the following entry to record the receipt of cash:

On December 1, 2019, UPR was able to deliver the 5000 board games to its Kickstarter backers. UPR also sold and delivered the additional 2500 games to other customers for the normal retail price of $50 per game. UPR’s bookkeeper made the following entries to record these transactions:

UPR used the $126,000 in cash available to UPR in December, 2019 to manufacture another 4200 board games. Those games were in finished goods inventory at December 31, 2019 and were sold in January, 2020 for $50 per game

UPR’s Financial Statements at December 31, 2019 and 2018 as prepared by UPR’s bookkeeper showed the following:

*You can assume that the Cash, Inventory, Common Stock and Cost of Goods Sold amounts as shown in both the journal entries and financial statements are correct.

Your analysis of this problem will involve using ASC 606 - Revenue from Contracts with Customers. UPR adopted ASC 606 when Ian formed the company in 2018. UPR has applied ASC 606 incorrectly.

You can assume that a contract is in place and that only one performance obligation exists: the delivery of the board game to the customer. Thus, determining the Transaction Price is the issue that needs to be addressed. The principles for the determining transaction prices can be found in ASC Subtopic 606-10-32-2 through 606-10-32-27. You may also want to refer to the illustrations (examples) contained in ASC 606. A list of the illustrations can be found at ASC Subtopic 606-10-55-93.

QUESTIONS TO BE ANSWERED

You must answer the following questions:

What are the additional entries or correct entries required on the following dates? If the entries made by the bookkeeper are correct, indicate “Bookkeeper made correct entry”. Otherwise use the Journal Entry template to record your answer and then paste into your answer.:

June 1, 2018

December 31, 2018 Adjusting Journal Entry

December 1, 2019

Use the attached Excel Template, show the corrected comparative Balance Sheet and Income Statement at December 31, 2019 and December 31, 2018.   Paste the template into your answer.

Using references to ASC 606 explain how your arrived at your answers in 1. And 2. Above.

From the point of view of a potential investor or lender to UPR, do the corrected financial statements or the original financial statements prepared by UPR’s bookkeeper better reflect the economics of UPR during its initial two years in business? Why?             

C. The following activities describe revenue and cash receipt systems of Kiara Outdoor Berhad.

Kiara Outdoor Berhad is a Sintok based wholesaler of rafting and camping equipment that serves outdoor sports camping retailers throughout the northern area of peninsular Malaysia. You have been hired by Kiara Outdoor Berhad to evaluate their processes, risks and internal controls. Below is the revenue cycle procedures of Kiara Outdoor Berhad.

Sales Order Procedures

Customer orders are mailed or emailed to the sales department. The sales clerk checks the customer’s creditworthiness from a computer terminal by running a validation application. The credit check program determines if the customer’s account is up to date regarding payments and the customer has not exceeded his or her credit limit. Computer controls in the application prevent further processing of any transactions that fails the credit check. The credit manager may override the validation control.

The clerk then records the sales order through his/her computer terminal after the customer’s credit is verified. A digital copy of the order is distributed to the warehouse and shipping department for further processing. The sales clerk records the sales in the sales journal. Finally, the clerk files the hard copy of the customer order in the sales department.
The warehouse manager is prompted by receipt of the digital sales order on the warehouse terminal. The manager prints out two copies of order, the stock release and a shipping notice. A warehouse clerk uses the stock release to pick the selected items from the shelves and sends them to the shipping department along with stock release and the shipping notice. The warehouse manager then updates the inventory subsidiary ledger and the general ledger control account from his/her computer terminal.

The shipping clerk will match the goods, stock release and shipping notice to the corresponding digital sales order displayed on his terminal. The shipping clerk will print out three copies of the bill of lading and a packing slip if goods and all documents are match. Two copies of bill of lading and the packing slip are sent along with the goods to the transporter. The stock release copy and shipping notice are sent to the accounts receivable (AR) department. The third bill of lading copy is filed in the shipping department.

Upon receipt of the stock release and shipping notice, the AR clerk manually creates a hard copy invoice which is immediately mailed to the customer. The clerk then uses information on the stock release to update the AR subsidiary ledger and general ledger (GL) from his computer terminal. The clerk files the stock release and shipping notice in the AR department.

Cash Receipt Procedures

Customer payments come directly to the general mail room along with other mail items. The mail clerk sorts the mail, opens the customer payment envelope, removes the customer’s cheque and remittance advice (RA) and reconciles the two documents. The clerk manually prepares two hard copies of remittance list to control the cheques and RA. One copy will be sent to the AR department along with the corresponding RAs. The other copy of remittance list accompanies the cheques to the cash receipts department.

Once the cheques and remittance list arrive in the cash receipt department, the accounts clerk reconciles the documents, endorses the cheques and manually prepares three hard     copies of deposit slip. The clerk then updates the cash receipts journal and the GL from his computer terminal. Then he sends the cheques and two copies of deposit slip to the bank.
Finally, he files the third copy of the deposit slip and the remittance in the department.

The AR clerk reconciles the remittance list and RAs then updates the AR subsidiary ledger and GL. Finally, the remittance list and RAs are filed in the department.

REQUIRED:

(a) Identify FIVE (5) internal control weaknesses of revenue systems at Kiara Outdoor Berhad.

(b) Identify ONE (1) risk involves for EACH internal control weaknesses identified in (a).

(c) Suggest ONE (1) physical control procedure for EACH internal control weakness identified in (a).

(d) Suggest ONE (1) information technology (IT) control procedure for EACH internal control weakness identified in (a).

During the year, TRC Corporation has the following inventory transactions. Date Transaction Number of Units Unit Cost Total Cost Jan. 1 Beginning inventory 60 $ 52 $ 3,120 Apr. 7 Purchase 140 54 7,560 Jul. 16 Purchase 210 57 11,970 Oct. 6 Purchase 120 58 6,960 530 $ 29,610 For the entire year, the company sells 450 units of inventory for $70 each.  

1. Using FIFO, calculate ending inventory, cost of goods sold, sales revenue, and gross profit.

2. Using LIFO, calculate ending inventory, cost of goods sold, sales revenue, and gross profit.