Solution Manual Chapter 5 solution manual accounting principles 12th edition PDF

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Solutions Manual 5-1 Chapter 5CHAPTER 5Merchandising OperationsASSIGNMENT CLASSIFICATION TABLEStudy Objectives QuestionsBrief Exercises ExercisesAProblemsBProblems BYP Identify the differences between service and merchandising companies. 1, 2, 3, 4 1, 2 1 1A,2A,*11A1B, 2B,*11B1 Prepare entries for p...

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Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

CHAPTER 5 Merchandising Operations ASSIGNMENT CLASSIFICATION TABLE Study Objectives

Questions

Brief Exercises

Exercises

A Problems

B Problems

BYP

1. Identify the differences between service and merchandising companies.

1, 2, 3, 4

1, 2

1

1A, 2A,*11A

1B, 2B, *11B

1

2. Prepare entries for purchases under a perpetual inventory system.

5, 6, 7, 8, 9, 10

3, 4, 5

2, 3, 4, 6, *13

2A, 3A, 4A, 5A

2B, 3B, 4B, 5B

4, 5

3. Prepare entries for sales under a perpetual inventory system.

7, 8, 9, 10, 11, 12

4, 6

2, 3, 5, 6, *13

2A, 3A, 4A, 5A

2B, 3B, 4B, 5B

4

4. Prepare a single-step and a multiple-step income statement.

13, 14, 15, 16, 17

7, 8, 9

7, 8, 9, 10

5A, 6A, 7A, 9A

5B, 6B, 7B, 9B

1, 3, 7

5. Calculate the gross profit 18, 19, 20, margin and profit margin.

10, 11

6, 9, 10, 11

8A, 9A, 10A, *14A

8B, 9B, 10B, *14B

1, 2, 3, 4, 6, 7

6. Prepare entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A).

*12, *13, *14, *15, *16

*12, *13, *14, *15

*11A, *12A, *13A, *14A, *15A

*11B, *12B, *13B, *14B, *15B

Solutions Manual

*21, *22, *23

5-1

Chapter 5

Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A

Identify appropriate inventory system.

Moderate

15-20

2A

Record purchase and sales transactions.

Moderate

20-30

3A

Record purchase and sales transactions.

Moderate

20-30

4A

Record and post purchase and sales transactions; prepare trial balance.

Simple

30-40

5A

Record and post transactions and prepare partial financial statements.

Simple

30-40

6A

Prepare single- and multiple-step income statements.

Moderate

20-30

7A

Record and post adjusting entries; prepare adjusted trial balance and financial statements.

Moderate

35-45

8A

Calculate profitability ratios and comment.

Moderate

15-20

9A

Calculate amounts and assess profitability.

Complex

30-40

10A

Calculate ratios and comment.

Simple

20-30

*11A

Record purchase and sales transactions; discuss inventory systems.

Moderate

20-30

*12A

Record purchase and sales transactions.

Moderate

20-30

*13A

Record and post purchase and sales transactions; prepare trial balance.

Simple

30-40

*14A

Prepare partial income statement; calculate gross profit.

Simple

20-30

*15A

Prepare financial statements.

Moderate

40-50

Identify appropriate inventory system.

Moderate

15-20

1B

Solutions Manual

5-2

Chapter 5

Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 2B

Description Record purchase and sales transactions.

Difficulty Level Moderate

Time Allotted (min.) 20-30

3B

Record purchase and sales transactions.

Moderate

20-30

4B

Record and post purchase and sales transactions; prepare trial balance.

Simple

30-40

5B

Record and post transactions and prepare partial financial statements.

Simple

30-40

6B

Prepare single- and multiple-step income statements.

Moderate

20-30

7B

Record and post adjusting entries; prepare adjusted trial balance and financial statements.

Moderate

35-45

8B

Calculate profitability ratios and comment.

Moderate

15-20

9B

Calculate amounts and assess profitability.

Complex

30-40

10B

Calculate ratios and comment.

Simple

20-30

*11B

Record purchase and sales transactions; discuss inventory systems.

Moderate

20-30

*12B

Record purchase and sales transactions.

Moderate

20-30

*13B

Record and post purchase and sales transactions; prepare trial balance.

Simple

30-40

*14B

Prepare partial income statement; calculate gross profit.

Simple

20-30

*15B

Prepare financial statements.

Moderate

40-50

Solutions Manual

5-3

Chapter 5

Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ANSWERS TO QUESTIONS 1.

(a) The operating cycle is the time it takes to go from cash to cash in producing revenues. (b) The normal operating cycle for a merchandising company is likely to be longer than that of a service company because in a merchandising company inventory must first be purchased and sold, and then the receivables must be collected whereas in a service company the services only need to be provided (not purchased first and then stored until sold) and then the receivables must be collected.

2.

(a) The income measurement process of a merchandising company is the same as the service company in that profit is arrived at by deducting expenses from revenues. (b) The income measurement process of a merchandising company differs from that of a service company in that its revenue is derived from sales revenue, not service revenue. In addition, cost of goods sold is deducted from sales revenue to determine gross profit, before operating and other expenses similar to both types of companies are deducted (or other revenues are added).

3.

The company needs to compare the cost of the detailed record keeping required in a perpetual inventory system to the benefits of having the additional information about the inventory. One of the benefits of a perpetual inventory system is the ability to answer questions from customers about merchandise availability. In a used clothing business, this may not be of much benefit unless each inventory item is unique. Another benefit is the monitoring of inventory quantities in order to avoid running out of stock. Again, this may not be of benefit since the company does not order recurring or similar merchandise, and may not have a supplier to order from. But if the company is selling used clothing on consignment it will need to track each item in order to determine which consignor to pay when an item is sold. The company should carefully determine the cost of the detailed record keeping required, in particular for a new company. A perpetual inventory system requires more record keeping and therefore is more expensive to use. For example, a perpetual inventory system usually requires an investment in a point of sale system that is integrated with the inventory system.

4.

A physical count is an important control feature. By using a perpetual inventory system, a company knows what should be on hand. Performing a physical count and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock.

5.

The reason for recording the purchase of merchandise for resale in a separate account is to enable a company to determine its cost of goods sold and gross profit. This information is useful in managing costs and setting prices.

Solutions Manual

5-4

Chapter 5

Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 6.

(a) The value of the purchase discount to Butler Roofing is $100.00 ($10,000 × 1%). (b) Failing to take advantage of the discount terms, is like paying the supplier an extra $100 in order to settle a $9,900 invoice 20 days later. This works out to 1.01% [$100 ÷ $9,900] every 20 days. On an annual basis this amounts to 18.4% [($100 ÷ $9,900 × (365 ÷ 20)].

7.

The company should record the sale as revenue in June, when it is sold to a customer. The merchandise purchased should be recorded as an asset, merchandise inventory, in April. It should be recorded as cost of goods sold (an expense) in June when the inventory is sold and the revenue is recognized. This is necessary in order to match the cost with the related revenue.

8.

(a) FOB shipping point means that the goods are placed free on board by the seller at the point of shipping. The buyer pays the freight costs from the point of shipping to the buyer’s destination because title passes at shipping point. FOB destination means the goods are delivered by the seller to their destination where the title passes. The seller pays for shipping to the buyer’s destination. (b) FOB shipping point will result in a debit to the Merchandise Inventory account by the buyer because title has transferred at shipping point and the inventory is now owned by the buyer. FOB destination will result in a debit to Freight Out by the seller because they are paying for the freight.

9.

In a perpetual inventory system, purchase returns are credited to the Merchandise Inventory because the items purchased have been returned to the vendor and are no longer available to be sold to customers. Sales returns are not debited directly to the Sales account because this would not provide information about the goods returned. This information can be useful in making decisions. Debiting returns directly to sales may also cause problems in comparing sales for different periods.

10. (a) A quantity discount gives a reduction in the price according to the volume of the purchase. A purchase discount is offered by a seller to a buyer for early payment of an invoice. When the buyer pays the invoice within the discount period, the amount of the discount decreases the Merchandise Inventory account. A sales discount is the same as a purchase discount but from the seller’s point of view. (b) Quantity discounts are not recorded or accounted for separately but become part of the recorded sales price. When collected within the discount period, the seller records the discount as a debit to the Sales Discounts account, which is a contra revenue account to Sales. Buyers record purchase discounts when taken as a credit to Merchandise Inventory under the perpetual system or Purchase Discounts when using the periodic system.

Solutions Manual

5-5

Chapter 5

Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 11.

If the inventory is not resaleable, it cannot be included in inventory since it cannot be resold and it has no value. The cost remains in cost of goods sold since it is a cost of doing business. If the inventory is resaleable, it still has value to the company. In this case, the inventory is debited to inventory again and the cost of goods sold is credited.

12.

By shipping more product than was ordered, customers will be annoyed with Agnew Inc. and there will be damage done to customer relationships. Goods that are returned will cost additional freight charges. Annoyed customers could possibly refuse the whole order which will result in a lost sale. It is not an ethical tactic to implement this procedure as the objective is obviously to manipulate sales results and boost profit in the current year.

13.

In a single-step income statement, all data are classified into two categories: (1) revenues and (2) expenses. It is referred to as a single-step income statement because only a single step—subtracting expenses from revenues—is needed to determine profit before income tax. A multiple-step income statement requires several steps to determine profit before income tax. First, cost of goods sold is deducted from sales to determine gross profit. Operating expenses are then deducted to calculate profit from operations. Finally, other revenues and expenses are added or deducted to determine profit before income tax. The deduction of income tax to calculate profit (loss) is the same under both formats. In addition, both formats produce the same profit amount for the period.

14.

Shoppers Drug Mart uses a multiple-step income statement.

15. (a) When classifying expenses by their nature, they are reported in accordance with their natural classification (for example, salaries, deprecation, and so on). When classifying expenses by their function, they are reported according to the activity (business function) for which they were incurred (for example, cost of goods sold, administrative, selling). (b) It does not matter whether a single-step or multiple-step income statement is prepared, expenses must be classified either by nature or by function. 16.

Because the Katz Group is a private enterprise, it can follow Accounting Standards for Private Enterprises (ASPE). Companies following ASPE can classify their expenses in whatever manner is useful to them. Shoppers, which follows IFRS must classify its expenses by their nature or their function.

17.

Interest expense is a non-operating expense because it relates to how a company’s operations are financed. This is not always within the company’s control and is usually not a decision of the general manager but of the chief financial officer.

Solutions Manual

5-6

Chapter 5

Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 18.

The difference between gross profit margin and profit margin is that the gross profit margin measures the amount by which the selling price exceeds the cost of goods sold while the profit margin measures the extent to which sales cover all expenses (including the cost of goods sold).

19.

Factors affecting a company’s gross profit margin include the selling price and the cost of the merchandise. Recall that gross profit = net sales − cost of goods sold. Selling products with a higher price or “mark-up” or selling products with a lower cost would result in an increased gross profit margin. Selling products with a lower price (perhaps dues to increased competition that results in lower selling prices) or selling products with a higher cost (perhaps due to price increases from suppliers and shippers) would result in a lower gross profit margin.

20.

High gross profit Computer services and software companies Pharmaceutical manufacturers Luxury goods retailers

Low gross profit Low-price retail companies such as Walmart Grocery stores Forestry and wood products

*21. (a) Added/Deducted Deducted Deducted Added

Accounts Purchase Returns and Allowances Purchase Discounts Freight In *22.

(b) Normal Balance Credit Credit Debit

Periodic System Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased (Purchases – Purchase Discounts – Purchase Returns and Allowances + Freight In) – Ending Inventory Ending inventory as well as cost of goods sold for the period, is calculated at the end of period. Perpetual System Cost of Goods Sold = the cost of the item(s) sold Cost of goods sold is calculated at the time of each sale and recorded as an increase (debit) to the Cost of Goods Sold account and a decrease (credit) to the Merchandise Inventory account.

Solutions Manual

5-7

Chapter 5

Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) *23.

The calculation of cost of goods sold is shown in detail in the income statement of a company using the periodic system. In a perpetual system, it is one line and amount only. Periodic System Cost of Goods Sold = 1. Add the cost of goods purchased (where the cost of goods purchased is equal to purchases less purchases discounts and purchases returns and allowances plus freight in) to the cost of goods on hand at the beginning of the period (beginning inventory). The result is the cost of goods available for sale. 2. Subtract the cost of goods on hand at the end of the period (ending inventory) from the cost of goods available for sale. The result is the cost of goods sold. Perpetual System Cost of Goods Sold = one number, which is the total of cost of goods sold as previously determined and recorded for all sales.

Solutions Manual

5-8

Chapter 5

Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a)

The company with the most efficient operating cycle is Company A as it uses the fewest number of days in its cycle to obtain cash.

(b)

The company which is most likely a service company is Company A as it does not have to manufacture or deliver inventory and consequently takes the fewest number of days to obtain cash. Company C, with the highest number of days in its operating cycle is likely the manufacturing company and t...