Posted: March 1st, 2014
Analysis of Merchandising Income Statement
The figures are as follows:
2010
2009
Net sales
$325,000
$350,000
Cost of goods sold
225,000
225,000
Gross margin
$100,000
$125,000
Operating expenses
75,000
50,000
Income before income taxes $ 25,000
$ 75,000
Still not satisfied, Jones went through all the individual sales and purchase records for the year.
Both sales and purchases were verified. However, the 2010ending inventory should have been
$57,000, given the unit purchases and sales during the year. After puzzling over all this
information, Jones comes to you for accounting help.
1. Using Jones’s new information, recompute the cost of goods sold for 2009and 2010, and
account for the difference in income before income taxes between 2009 and 2010.
2. Suggest at least two reasons for the discrepancy in the 2010 ending inventory. How might
Jones improve the management of the original store?
Management Issues
E 3. Indicate whether each of the following items is associated with (a) allocating the cost of
inventories in accordance with the matching rule, (b) assessing the impact of inventory decisions,
(c) evaluating the level of inventory, or (d) engaging in an unethical action.
1. Computing inventory turnover
2. Valuing inventory at an amount to meet management’s targeted net income
3. Application of the just-in-time operating environment
4. Determining the effects of inventory decisions on cash flows
5. Apportioning the cost of goods available for sale to ending inventory and cost of goods sold
6. Determining the effects of inventory methods on income taxes
7. Determining the assumption about the flow of costs into and out of the company
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