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Chapter 4 – ExercisesExercise 4a.Cost of merchandise sold:Merchandise inventory, May 1, 20Y1$175,000Purchases$1,400,000Less:Purchases returns andallowances$20,000Purchases discounts18,00038,000Net purchases$1,362,000Add freight in13,000Cost of merchandise purchased1,375,000Merchandise available for sale$1,550,000Less merchandise inventory,April 30, 20Y2240,000Cost of merchandise sold$1,310,000b.$940,000 ($2,250,000 – $1,310,000)Exercise 9a.QUALITY INTERIORS COMPANYIncome StatementFor the Year Ended October 31, 20Y5Revenue from sales:Sales$5,000,000Less:Sales returns and allowances$100,000Sales discounts400,000500,000Net sales$4,500,000Cost of merchandise sold2,500,000Gross profit$2,000,000Operating expenses:Selling expenses$850,000Administrative expenses600,000Total operating expenses1,450,000Income from operations$550,000Other expense:Interest expense50,000Net income$500,000b.The major advantage of the multiple-step form of income statement is that relationships such as gross profit to sales are indicated, and the calculation of income from operations is also reported. The major disadvantages are that it is more complex and the total revenues and expenses are not indicated, as is the case in the single-step income statement.Exercise 111.Sales returns and allowances and sales discounts should be deducted from (not added to) sales.2.Sales returns and allowances and sales discounts should be deducted from sales to yield “net sales” (not gross sales).3.Deducting the cost of merchandise sold from net sales yields gross profit.4.Deducting the total expenses from gross profit would yield income from operations (or operating income).5.Interest revenue should be reported under the caption “Other income” and should be added to income from operations to arrive at net income.6.The final amount on the income statement should be labeled net income, not gross profit.A correct income statement would be as follows:CARLSBAD COMPANYIncome StatementFor the Year Ended February 28, 20Y9Revenue from sales:Sales$4,400,000Less:Sales returns and allowances$120,000Sales discounts60,000180,000Net sales$4,220,000Cost of merchandise sold2,650,000Gross profit$1,570,000Expenses:Selling expenses$800,000Administrative expenses600,000Delivery expense50,000Total expenses1,450,000Income from operations$120,000Other income:Interest revenue40,000Net income$160,000Exercise 18a.Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeMerch.Accts.StatementInvent.=Payable120,000120,000b.Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeMerch.Accts.StatementInvent.=Payable–16,000–16,000c.Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeMerch.Accts.StatementCash+Invent.=Payable–101,920–2,080–104,000 Exercise 23a.Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeAccts.Merch.RetainedStatementRec.+Invent.=Earnings86,000–51,600 34,400Income StatementSales86,000Cost of merch. sold–51,600Net income34,400b.Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeAccts.Merch.RetainedStatementRec.+Invent.=Earnings–9,0005,000 –4,000Income StatementSales returns & allowances–9,000Cost of merch. sold5,000Net income–4,000c.Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeAccts.RetainedStatementCash+Rec.=Earnings75,460–77,000 –1,540Income StatementSales discounts–1,540Chapter 4 – ProblemsProblem 5 1.Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeAccts.Merch.RetainedStatementCash+Rec.+Inv.=EarningsJune 8.– 40018,250–10,000 7,850 June 8.Income StatementJune 8.Sales18,250Cost of merch. sold–10,000Delivery exp.–400Net income7,850Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeAccts.Merch.RetainedStatementRec.+Invent.=EarningsJune 12.–5,0003,000 –2,000 June 12.Income StatementJune 12.Sales returns ??& allow.–5,000Cost of merch.?sold 3,000Net income–2,000Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeAccts.RetainedStatementCash+Rec.=EarningsJune 23.12,985–13,250–265 June 23.Income StatementJune 23.Sales discounts–265Problem 5, ContinuedBalance SheetAssets=Liabilities+Stockholders’ EquityIncomeAccts.Merch.RetainedStatementRec.+Inventory=EarningsJune 24.15,000–9,000 6,000 June 24.Income StatementJune 24.Sales15,000Cost of merch. sold–9,000Net income6,000Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeAccts.StatementCash+Rec.June 30.15,000–15,000 2.Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeMerch.Accts.StatementInvent.=PayableJune 8.18,25018,250 Problem 5, ContinuedBalance SheetAssets=Liabilities+Stockholders’ EquityIncomeMerch.Accts.StatementInvent.=PayableJune 12.–5,000–5,000 Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeMerch.Accts.StatementCash+Invent.=PayableJune 23. –12,985–265–13,250 Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeMerch.Accts.StatementInvent.=PayableJune 24.15,00015,000 Problem 5, ConcludedBalance SheetAssets=Liabilities+Stockholders’ EquityIncomeMerch.StatementCash+Inv.June 26.–375375 Balance SheetAssets=Liabilities+Stockholders’ EquityIncomeAccts.StatementCash=PayableJune 30. –15,000–15,000 ................
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