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Chapter 5: Q5-19RQ (page 294)
What are the four steps involved in the closing process for a merchandising company?
The closing process for a merchandising company includes the following four steps:
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How is the net cost of inventory calculated?
Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first year of operations, and the shareholders are generally pleased with operating results as shown by the following income statement:
PARTY-TIME T-SHIRTS
Income Statement
Year Ended December 31, 2017
Net Sales Revenue \(350,000
Cost of Goods Sold 210,000
Gross Profit 140,000
Operating Expenses:
Selling Expense 40,000
Administrative Expense 25,000
Net Income \)75,000
Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to increase profits to \(100,000 during 2018.
a. Hildebrand believes he should advertise more heavily. He believes additional advertising costing \)20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales increase in 2018, Cost of Goods Sold will increase proportionately.
b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to the existing product line. An importer can supply a minimum of 1,000 dresses for \(40 each; Party-Time can mark these dresses up 100% and sell them for \)80. Hildebrand realizes he will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.
Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to show the expected net income under each plan.
What is the Cost of Goods Sold (COGS), and where is it reported?
Taylor Department Store uses a periodic inventory system. The adjusted trial balance of Taylor Department Store at December 31, 2018, follows:
TAYLOR DEPARTMENT STORE
Adjusted Trial Balance
December 31, 2018
Balance
Account Title Debit Credit
Cash \(7,900
Accounts Receivable 85,300
Merchandise Inventory (beginning) 37,600
Office Supplies 300
Furniture 83,000
Accumulated Depreciation-Furniture \)18,500
Accounts Payable 28,500
Salaries Payable 2,900
Unearned Revenue 14,500
Notes Payable, long-term 32,000
Common Stock 20,000
Retained Earnings 45,400
Dividends 89,000
Sales Revenue 380,800
Purchases 284,000
Purchase Returns and Allowances 110,000
Purchase Discounts 7,000
Freight-In 100
Selling Expense 42,900
Administrative Expense 26,300
Interest Expense 3,200
Total \(659,600 \)659,600
Requirements
1. Prepare Taylor Department Store鈥檚 multi-step income statement for the year ended December 31, 2018. Assume ending Merchandise Inventory is $36,700.
2. Journalize Taylor Department Store鈥檚 closing entries.
Camilia Communications reported the following figures from its adjusted trial balance for its first year of business, which ended on July 31, 2018:
Cash \( 2,900 Cost of Goods Sold \) 18,700
Selling Expenses 1,400 Equipment, net 9,500
Accounts Payable 4,300 Accrued Liabilities 1,800
Common Stock 4,365 Net Sales Revenue 29,200
Notes Payable, long-term 500 Accounts Receivable 3,200
Merchandise Inventory 1,100 Interest Expense 65
Administrative Expenses 3,300
Prepare Camilia Communication鈥檚 multi-step income statement for the year ended July 31, 2018.
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