Chapter 05 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

ANSWERS TO QUESTIONS - CHAPTER 5
1. The term “inventory” includes a supply of goods that is

available or in the process of being available for sale to
customers. Inventory also includes stores of goods that
are used in the process of operating the business. Some
examples of inventory include items that are available for
sale to customers, i.e., computers at a computer sales
store. It also includes goods in the process of being
manufactured, i.e., computer components for a computer
manufacturer. Inventory also includes stock of office
supplies and operating supplies, i.e., stamps, paper,
envelopes, paper bags, and plastic bags.
2. Merchandise inventory is finished goods that are held for

sale to customers. The term “inventory” is more broad
and includes stocks of supplies for use in the business
operations. Costs that are included in “merchandise
inventory” include the cost of the product, transportation-
in costs, packaging costs, transit insurance, etc.
3. Product costs are costs associated with goods for resale,

usually inventory costs. Period costs are costs that are
not directly traceable to products, for example, operating
expenses.
4. Cost of goods available for sale is the total of inventory on

hand at the beginning of the period plus inventory
purchased during the period.
5. The cost of the items that have not been sold are allocated
to merchandise inventory (asset) and are shown on the
balance sheet. The cost of the items that have been sold
are allocated to cost of goods sold (expense) and are
shown on the income statement.
6. Period costs are expensed in the period they are incurred

or used. Product costs are expensed in the period in
which the inventory is sold.
5-1
5-2
7. Net Sales $600,000
Cost of Goods Sold (375,000)
Gross Margin $225,000
Cost of Goods Available for Sale$450,000

Ending Merchandise Inventory$ 75,000
8. Under a perpetual inventory system, the balance in the

inventory account is increased each time goods are
purchased and decreased each time goods are sold.
Under the periodic inventory system, the inventory
balance is adjusted only at the end of the period. The
major advantage of the perpetual system is the inventory
account will reflect changes to inventory on a continual
basis. The primary advantage of the periodic method is
recording efficiency. It is not necessary to increase and
decrease inventory when goods are bought and sold.
A physical inventory should be taken regardless of the

method used. When using the periodic method, it is
necessary to take a physical count in order to adjust the
inventory account to the correct balance and record the
cost of the goods sold. A physical count is necessary
under the perpetual method in order to adjust the balance
of the inventory account for items that have been lost,
stolen, or damaged.
9. a. Assets increase, stockholders’ equity increases - The

balance sheet, statement of cash flows, and statement
of changes in stockholders’ equity are affected.
b. Assets increase, stockholders’ equity increases - This is

similar to an acquisition of cash capital from the owner
except that inventory and not cash is increased. The
balance sheet and statement of changes in
stockholders’ equity are affected. The statement of
cash flows is not affected.
5-3
c. This is an asset exchange and total assets would not
change. The balance sheet and statement of cash flows
are affected.
5-4
d. Assets both increase and decrease (cash increases,
inventory decreases) and stockholders’ equity both
increases and decreases (revenue is increased and cost
of goods sold is increased). The balance sheet, income
statement, statement of changes in stockholders’
equity, and statement of cash flows are affected.
10. Assets would both increase and decrease (cash increases

by $20,000 and inventory decreases by $12,000) and
stockholders’ equity both increases and decreases
(revenue is increased by $20,000 and cost of goods sold is
increased by $12,000). All four financial statements are
affected.
11. Shipping cost of goods shipped F.O.B. shipping point will

be paid by the buyer of the goods.
12. Transportation-in is the cost of freight and shipping

charges on goods purchased. It is a product cost because
it is a part of the cost of the goods purchased.
13. The $80 transportation-in is a product cost and is debited

to the Merchandise Inventory account. The $135
transportation-out is a period cost and is debited to the
expense account Transportation-out.
14. When allowances are granted it is usually because the

customer received inferior or damaged merchandise.
When granting an allowance, the seller does not take back
the goods and saves the cost of shipping and replacing the
product. In addition, it saves time in handling the
problem.
15. 2/10, n/30 means that a 2% discount may be taken off of

the selling price if payment is made within ten days of the
invoice date. If the discount is not taken, the amount of
the invoice is due in 30 days.
16. If the $5,000 is for the purchase of inventory, this is an

asset exchange in that inventory is increased and cash is
decreased. A $5,000 payment for commissions is an asset
5-5
use transaction; assets are decreased and stockholders’
equity is decreased (commissions expense is increased).
5-6
17. Cash discounts are offered to customers to encourage
prompt payment.
18. Transportation-out is the freight or shipping cost on goods

sold. It is a period cost.
19. Purchase returns refer to the situation where the buyer of

the goods returns them. Sales returns refer to the
situation where goods sold by the seller are returned to
the seller. Generally a sales return on the seller's books is
a purchase return on the buyer's books. Sales returns
cause an increase in assets (inventory) to the seller as
previously sold merchandise is returned. Stockholders’
equity is increased as cost of goods sold is reduced by the
original cost of the goods. A sales return will also cause a
reduction of cash or accounts receivable as money must
be refunded or credit given on accounts receivable.
Stockholders’ equity will decrease by a corresponding
reduction in revenue. The net effect of a sales return is to
decrease assets and decrease stockholders’ equity.
Purchase returns are either an asset exchange or asset
use. Either cash is increased or accounts payable is
decreased and merchandise inventory is decreased.
20. Net sales is gross sales less sales returns and allowances
and less sales discounts.
21. The multistep income statement provides more

information on the results of various business activities.
For example, net income from operations is computed
separately from other gains and losses. Also, any unusual
items are reported separately from normal operating
activities. The single-step income statement shows a
single comparison of total revenues with total expenses.
22. When using the periodic method of accounting for

inventory, the schedule of cost of goods sold is prepared to
determine the dollar amount of the cost of sales. It is
generally used only for internal reporting purposes.
5-7
23. The periodic inventory system does not separate the cost
of lost, damaged, or stolen merchandise from the cost of
goods sold. This system fails to provide management with
information necessary to make decisions on controlling such
inventory losses.
24. Common size income statements covering several
accounting periods help management identify changes
and trends in various operating costs relative to sales. For
example, net income may be increasing from year-to-year,
yet may be declining as a percentage of sales.
Comparison of common size income statements over
several years will help management identify which
expenses have been rising disproportionately with sales
and take corrective action.
25. The return on sales ratio is the amount of net income

generated per dollar of sales. The ratio is computed by
dividing net income by net sales.
5-8
Note to Instructors: In this chapter the term “net sales” is
used in the income statement for all exercises and problems
using the perpetual method since any sales discounts, returns
and allowances will be reflected in the balance to the Sales
Revenue account.
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 5
EXERCISE 5-1A
a.
Darwin Consulting
Income Statement
For the Year Ended 20XX
Revenue
Consulting Revenue $12,00
0
Expenses
Salaries Expense (7,200)
Net Income $4,800
Darwin Consulting
Balance Sheet
As of the End of the Year 20XX
Assets
Cash $14,80
0
Total Assets $14,80
0
Liabilities
Notes Payable $10,000
Total Liabilities $10,00
0
Stockholders’ Equity
Retained Earnings 4,800
5-9
Total Stockholders’ Equity 4,800
Total Liab. and Stockholders’ $14,80

Equity 0
5-10
EXERCISE 5-1A a. (cont.)
Darwin Consulting
Statement of Cash Flows
For Year Ended 20XX
Cash Flows From Operating
Activities:
Inflow from Revenue $12,000
Outflow for Salaries (7,200)
Net Cash Flow from Operating $ 4,800
Activ.
Cash Flows From Investing -0-

Activities
Cash Flows From Financing

Activities:
Inflow from Loan 10,000
Net Cash Flow from Financing 10,000
Activ.
Net Increase in Cash 14,800

Plus: Beginning Cash Balance -0-
Ending Cash Balance $14,800
5-11
University Book Mart

Income Statement
For the Year Ended 20XX
Net Sales $12,000
Gross Margin 5,500
Expenses
Operating Expenses (700)
Net Income $4,800

Balance Sheet
As of the End of the Year 20XX
Assets
Cash $13,050
Merchandise Inventory 1,750
Total Assets $14,800
Liabilities
Equity
5-12
EXERCISE 5-1Aa. (cont.)

For Year Ended 20XX
Activities:
Outflow for Inventory (8,250)
Outflow for Operating Expense (700)
Net Cash Flow from Operating $3,050
Activities

Activities

Activities:
Activities

b. Darwin Consulting is a service business and has service

revenue and expenses. Notice that University Book Mart is
a merchandising business and has sales, cost of goods sold
(with the calculation of gross margin), and operating
expenses.
c. The only difference in the balance sheets of the two

businesses is in the type of assets each owns. Darwin’s
only asset is cash, while University Book Mart has both cash
and inventory.
d. The cash flows from operating activities section of the

statement of cash flow is different for the two businesses.
5-13
Darwin only had cash outflow for the salaries of $7,200,
while University Book Mart had a cash outflow for both the
purchase of inventory and the payment of operating
expenses. Darwin has a larger ending cash balance
because part of University Book Mart’s assets is in
inventory.
5-14
EXERCISE 5-2A
a.
Hope Jackson Merchandising
General Journal, 2006
Date Account Titles Debit Credit
1. Cash 25,000
Common Stock 25,000
2. Merchandise Inventory 22,000
Cash 22,000
3a. Cash 24,000
Sales Revenue 24,000
3b. Cost of Goods Sold 17,000
b.
T-Accounts
Assets = Stockholders’ Equity
Cash Common Stock
1. 25,000 2. 22,000 1. 25,000
3a. Bal.25,000
24,000
Bal.
27,000
Sales Revenue
Merchandise 3a.24,000
Inventory
2. 22,000 3b. Bal.24,000
17,000
Bal. 5,000
Cost of Goods Sold
3b.17,000
Bal.17,000
5-15
EXERCISE 5-2A (cont.)
c.
Hope Jackson Merchandising
Income Statement
For the Year Ended December 31, 2006
Net Sales $24,000
Gross Margin 7,000
Operating Expenses -0-
Operating Income $ 7,000
d. Total assets: $32,000 (Cash $27,000 + Inventory $5,000).
5-16
EXERCISE 5-3A a.
Stonebrook Merchandising Co. Effect of Events on the Financial Statements
Statement of
Events Balance Sheet Income Statement Cash Flows
Assets Liab. Stkholders’ Equity Rev. Exp. Net Inc.
Cash A. Rec. Mdse. Inv. A. Pay. C. Stk.
Ret. Ear.
Beg. Bal. 48,000 NA NA NA 48,000 NA NA NA NA NA

1. Pur. Inv. NA NA 50,000 50,000 NA NA NA NA NA NA
2. Sold NA 56,000 NA NA NA 56,000 56,000 NA 56,000 NA
Inv.
3. Inv. NA NA (36,000) NA NA (36,000) NA 36,000 (36,000) NA
Cost
4. Pd. AP (30,000) NA NA (30,000) NA NA NA NA NA (30,000) OA
5. Coll. AR 40,000 (40,000) NA NA NA NA NA NA NA 40,000 OA
6. Pd. Exp. (8,000) NA NA NA NA (8,000) NA 8,000 (8,000) (8,000) OA
End. Bal. 50,000 16,000 14,000 20,000 48,000 12,000 56,000 44,000 12,000 2,000 NC
b. $16,000
c. $20,000
d. Sales $56,000
Gross Margin 20,000
Operating Exp. (8,000)
Net Income $12,000
e. Cash Flows From Operating Activities:
Inflow from Customers $40,000
Outflow for Expenses (8,000)
5-17
Net Cash Flow from Operating Activities $ 2,000
5-18
f. Net income is $12,000 and net cash flow from operating

activities is only $2,000, a difference of $10,000. Revenue
earned amounted to $56,000 but only $40,000 was
collected. Expenses actually incurred amounted to
$44,000, but only $38,000 of the expense was paid for.
$16,000 more revenue was earned than collected, and
$6,000 more expense was incurred than paid. This
accounts for the $10,000 difference in net income and cash
flow from operating activities.
5-19
EXERCISE 5-4A
a.
Mary’s Beauty Supply
General Journal for 2006
1. Cash 10,000
Common Stock 10,000
Cash 7,000
3a. Cash 7,800
Sales Revenue 7,800
4. Advertising Expense 600
Cash 600
b.
T-Accounts
Cash Common Stock Sales Revenue
1. 10,000 2. 7,000 1. 10,000 3a. 7,800
3a. 7,800 4. 600 Bal. Bal.7,800
10,000
Bal.
10,200
Cost of Goods Sold
Mdse. Inventory 3b. 5,200
2. 7,000 3b. Bal.5,200
5,200
Bal. 1,800
Advertising
Expense
4. 600
Bal. 600
5-20
5-21
c.
Mary’s Beauty Supply
Trial Balance
December 31, 2006
Account Titles Debit Credit
Cash $10,200
Common Stock $10,000
Sales Revenue 7,800
Cost of Goods Sold 5,200
Advertising Expense 600
Totals $17,800 $17,800
5-22
EXERCISE 5-5A
a. buyer
b. seller
c. buyer
d. seller
5-23
EXERCISE 5-6A
a.
The Gift Shop
Accounts Payable 5,500
2. Merchandise Inventory 250
Cash 250
3. Accounts Payable 800
Merchandise Inventory 800
5a. Cash 7,750
Sales Revenue 7,750
6. Transportation-out 200
Cash 200
7. Accounts Payable 4,000
Cash 4,000
5-24
b.
The Gift Shop
T-Accounts
Assets = Liabilities + Stockholders’
Equity
Cash Accounts Payable Common Stock
Bal. 8,000 3. 800 1. 5,500 Bal.
10,000
5a. 7,750 2. 250 4. 350
6. 200 7. 4,000 Retained Earnings
7. 4,000 Bal. 350 Bal. 1,000
Bal.
11,300
Sales Revenue
Mdse. Inventory 5a. 7,750
Bal. 3,000 Bal. 7,750
1. 5,500 3. 800
2. 250 4. 350 Cost of Goods Sold
5b. 5b.
4,000 4,000
Bal. 3,600 Bal.
4,000
Transportation-out
6. 200
Bal. 200
5-25
c.
The Gift Shop
Income Statement
Net Sales $7,750
Gross Margin 3,750
Operating Expenses
Transportation-out (200)
Operating Income $3,550
The Gift Shop

Activities:
Outflow for Merchandise (4,250)
Inventory
Outflow for Expenses (200)
Activities
Activities
Cash Flows From Financing -0-
Activities
Net Change in Cash 3,300
Plus: Beginning Cash Balance 8,000
d. The difference between net income and net cash flow from
operating activities is caused by the shop not selling all of
5-26
the inventory that it purchased during the period. The cash
payment for inventory is included in the statement of cash
flows, but only the portion of that payment allocated to
goods actually sold is included on the income statement.
5-27
EXERCISE 5-7A
Transaction Debited to
Inventory
1. Purchase of inventory Yes
2. Allowance for damaged No
inventory
3. Transportation-out No
4. Purchase discount No
5. Transportation-in Yes
6. Purchase computer No
5-28
EXERCISE 5-8A
a.
Transactio Period Product Not
n Costs Costs Applicable
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
5-29
b.
Turner Company Horizontal Statements Model for 2003
Balance Sheet Income Statement Statement

of
Assets = Liab. + Stkholders’ Rev. − Exp. =Net Inc. Cash Flows
Equity
Cash + A. Rec. + Mdse. = A. Pay. +C. Stk. + Ret.
Inv. Ear.
1. Stock 2,500 + NA + NA = NA +2,500 + NA NA − NA = NA 2,500 FA

2. Pur Inv. NA + NA + 14,000 14,000 + NA + NA NA − NA = NA NA
3. Freight (150)+ NA + 150 = NA + NA + NA NA − NA = NA (150)
OA
4. Ret. NA + NA + (600) = (600) + NA + NA NA − NA = NA NA
Inv.
5. Sold NA + 14,350 + NA = NA + NA + 14,350 14,35 − NA =14,350 NA
Inv. 0
5. Cost NA + NA + (8,250) = NA + NA + (8,250) NA − 8,250 = (8,250) NA
6. Pd. Frt. (60)+ NA + NA = NA + NA + (60) NA − 60 = (60) (60)
OA
7. Coll. 11,750 +(11,750 + NA = NA + NA + NA NA − NA = NA 11,750 OA
AR )
8. Pd. AP (10,000 + NA + NA =(10,00 + NA + NA NA − NA = NA (10,000)
) 0) OA
9. Pd. (275)+ NA + NA = NA + NA + (275) NA − 275 = (275) (275)
Exp. OA
10. Pd. (500)+ NA + NA = NA + NA + (500) NA − 500 = (500) (500)
Exp. OA
End. Bal. 3,265 + 2,600 + 5,300 = 3,400 +2,500 + 5,265 14,35 − 9,085 = 5,265 3,265 NC
0
5-30
5-31
EXERCISE 5-9A
a. Purchase $12,400
Less, return (2,400)
Gross due (subject of the discount)10,000
Discount percentage x2%
Amount of discount $ 200
Gross amount due $10,000

Less, discount ( 200)
Net amount due $ 9,800
b.
Event Account title Debit Credit
Pur. Merchandise Inventory 12,400
Return Accounts Payable 2,400
Payme Accounts Payable 200
nt
Cash 9,800
c. $10,000; he would not be eligible for the discount.
d. The Glass Exchange would be willing to give a discount for

prompt payment of the account. The quicker The Glass
Exchange can convert accounts receivable into cash, the
quicker the company can pay its debts or buy additional
inventory.
5-32
EXERCISE 5-10A
a.
Upton Company
1a. Accounts Receivable 90,800
2. Transportation-out 2,600
Cash 2,600
3a. Sales Revenue 8,800
Accounts Receivable 8,800
3b. Merchandise Inventory 5,600
4. Sales Revenue 3,400
5. Cash 56,000
5-33
b.
Upton Company
T-Accounts for 2002
Cash Common Stock Retained Earnings
Bal. Bal. Bal.
13,000 40,000 43,000
5. 56,000 2. 2,600
Bal. Sales Revenue
66,400
3a. 8,800 1a.
90,800
Accounts 4. 3,400
Receivable
1a. 90,800 3a. 8,800 Bal.
78,600
4. 3,400
5. Cost of Goods Sold
56,000
Bal. 1b. 3b.5,600
22,600 60,400
Bal.
54,800
Mdse. Inventory
Bal. 1b. Transportation-out
70,000 60,400
3b. 5,600 2. 2,600
Bal. Bal. 2,600
15,200
5-34
c.
Upton Company
Financial Statements
Income Statement
Net Sales $78,600
Gross Margin 23,800
Operating Expenses
Transportation-out (2,600)
Balance Sheet
Assets
Cash
$66,400
0
Liabilities $
-0-
Common Stock
$40,000
Total Liabilities and $104,20
Stockholders’ Equity 0
5-35
EXERCISE 5-10A c. (cont.)
Upton Company
Activities:
Activities 0
Activities
Activities
0
d. Upton Company would grant an allowance to Jones for

several reasons. First, Jones already has the goods and if
he keeps them it will save the expense of a return. If the
goods are damaged, then Upton will either have to repair
the merchandise or sell them to another customer at a
reduced price. Also, assuming Jones can sell the goods, he
already has them in stock and will not have to wait on
another shipment. Also, he is getting the goods at a
reduced price. This arrangement can benefit both buyer
and seller.
5-36
EXERCISE 5-11A
a.
Stone Sales
1. Cash 60,000
Common Stock 60,000
3a. Accounts Payable 720
3b. Accounts Payable 35,280
Cash 35,280
5a. Sales Revenue 300
Accounts Receivable 300
5b. Cash 29,700
6. Operating Expenses 7,600
Cash 7,600
5-37
b.
Stone Sales
T-Accounts for 2005
Equity
1. 60,000 3b. 3a. 720 2. 1. 60,000
35,280 36,000
5b. 6. 7,600 3b. Bal.
29,700 35,280 60,000
Bal. Bal. -0-
46,820
Sales Revenue
Accounts 5a. 300 4a. 30,000
Receivable
4a. 5a. 300 Bal.
30,000 29,700
5b.
29,700
Bal. -0-
Cost of Goods Sold
Mdse. Inventory 4b.
20,000
2. 36,000 3a. 720 Bal.
20,000
4b.
20,000
Bal. Operating
15,280 Expenses
6. 7,600
Bal. 7,600
5-38
c.
Stone Sales Horizontal Statements Model for 2005
Assets = Liab. + Stkholders’ Income Statement Statement

Equity of
Cash + A. Rec. + M. Inv. = A. Pay. + C. Stk.+ Ret. Rev. − Exp. = Net Cash Flows
Ear Inc.
1. Stock 60,000 + NA + NA = NA + 60,00 + NA NA − NA = NA 60,000 FA

0
2. Pur. Inv. NA + NA + 36,000 =36,000 + NA + NA NA − NA = NA NA
3a. Disc. NA + NA + (720) = (720) + NA + NA NA − NA = NA NA
3b. Pd. AP (35,280 + NA + NA = (35,28 + NA + NA NA − NA = NA
(35,280)
) 0) OA
4a. Sold NA + 30,000 + NA = NA + NA +30,000 30,00 − =
NA 30,000 NA
Inv. 0
4b. Cost NA + NA + (20,000 = NA + NA +(20,000 NA − 20,000 =(20,00 NA
) ) 0)
5a. AR NA + (300) + NA = NA + NA + (300) (300) − NA = (300) NA
Disc.
5b. Coll. 29,700 + (29,700 + NA = NA + NA + NA NA − NA = NA 29,700 OA
AR )
6. Pd. Exp. (7,600) + NA + NA = NA + NA + (7,600) NA − 7,600 =(7,600) (7,600) OA
End. Bal. 46,820 + -0- + 15,280 = -0- + 60,00 + 2,100 29,70 − 27,600= 2,100 46,820 NC
0 0
d. Gross Margin:
Net Sales $29,700
Gross Margin $ 9,700
5-39
Net Income:
Gross Margin $9,700
Less: Operating Expenses (7,600)
Net Income $2,100 or see Net Income column above.
5-40
e. Cash discounts are given to encourage prompt payment of

accounts receivable. Many times the discount cost is less
than the cost of obtaining cash externally (loan).
f. Stone Sales will get a 2% discount if the account is paid

within 10 days; if the discount is not taken, the full
amount of the invoice is due in 30 days.
5-41
EXERCISE 5-12A
a.
Retail Sales Company
Cash 500
7b. Cash 21,560
Cash 14,256
5-42

9. Selling and Administrative 3,200
Expenses
Cash 3,200
Cash 14,400
5-43
b.
T-Accounts for 2004
Equity
Bal. 4. 1,000 1. Bal.
15,000 30,000 20,000
7b. 2. 500 5. 200
21,560
8b. 8a. 144 Retained Earnings
14,256
9. 3,200 8b. Bal. 5,000
14,256
10. 10.
14,400 14,400
Bal. Bal. -0- Sales Revenue
4,204
6a. 4,000 3a. 26,000
Accounts 7a. 440
Receivable
3a. 6a. 4,000 Bal.
26,000 21,560
7a. 440
7b. Cost of Goods Sold
21,560
Bal. -0- 3b. 6b. 2,400
17,000
Bal.
14,600
Mdse. Inventory
Bal.
10,000
1. 30,000 3b. Selling & Adm.
17,000 Exp.
2. 500 4. 1,000 9. 3,200
6b. 2,400 5. 200 Bal.3,200
8a. 144
Bal.
24,556
5-44
5-45
c.
Trial Balance
December 31, 2004
Cash $ 4,204
Selling and Administrative 3,200
Expenses
Totals $46,560 $46,560
5-46
d.
Income Statement
Net Sales $21,560
Gross Margin 6,960
Operating Expenses
Selling and Administrative (3,200)
Expenses
Balance Sheet
Assets
Cash $
4,204
Liabilities $ -0-
Common Stock
$20,000
5-47
EXERCISE 5-12A d. (cont.)

Activities:
Net Cash Flow from Operating $(10,79
Activities 6)
Activities
Activities
Net Change in Cash (10,796)
Ending Cash Balance $ 4,204
5-48
EXERCISE 5-13A
a.
Burk Merchandising
T-Accounts for 2002
1. 80,000 2. 1. 3a.
56,000 80,000 68,400
3a. 68,400 Bal. Bal.
80,000 68,400
Bal.
92,400
Cost of Goods Sold
Mdse. Inventory 3b.
43,000
2. 56,000 3b. 4. 1,400
43,000
Bal. Bal.
13,000 44,400
4. 1,400 (13,000 − 11,600)
Bal.
11,600
b.
Burk Merchandising
Income Statement
For Year Ended December 31, 2002
Net Sales $68,400
Cost of Goods Sold (44,400
)
Gross Margin 24,000
Net Income $24,000
5-49
EXERCISE 5-13A b. (cont.)
Burk Merchandising
Balance Sheet
As of December 31, 2002
Assets
Cash $92,400
0
Liabilities $
-0-
Total Liab. And Stockholders’ $104,00
Equity 0
c. Lost, stolen, or damaged inventory may not have been

accounted for. When management discovers differences in
the book balance of the inventory and the physical count of
the inventory, adjusting entries are made to the books to
reduce the inventory account to its actual balance. For
control purposes, it is important for management to know
the amount of lost or damaged inventory.
5-50
EXERCISE 5-14A
Even Even
t t Asset = Liab. + S. Rev. − E = Net Cash
No. Type s Equity xp. Inc. Flow
1. AE +− NA NA NA NA NA − OA
2. AS + + NA NA NA NA NA
3a. AS + NA + + NA + + OA
3b. AU − NA − NA + − NA
4a. AS + NA + + NA + NA
4b. AU − NA − NA + − NA
5. AU − − NA NA NA NA NA
6. AU − NA − NA + − − OA
7. AU − − NA NA NA NA − OA
8. AE +− NA NA NA NA NA + OA
9. AE +− NA NA NA NA NA + OA
10. AU − NA − NA + − − OA
5-51
EXERCISE 5-15A
Beginning Mdse. $ 1,050

Inventory
Plus: Merchandise 5,250
Purchased
Goods Available for Sale 6,300
Less: Ending Mdse. (2,200)
Inventory
Cost of Goods Sold $ 4,100
a. Goods Available for Sale

$6,300
b. Cost of Goods Sold

$4,100
c. Merchandise Inventory on year-end balance sheet

$2,200
5-52
EXERCISE 5-16A
Single-Step Income Statement:
Quick Foods
Income Statement
Net Sales Revenue $ 400
Expenses
Cost of Goods Sold $225
Interest Expense 35
Salaries Expense 65
Supplies Expense 28
Total Expenses (453)
Net Income (Loss) $ (53)
Multistep Income Statement:
Quick Foods
Income Statement
Net Sales Revenue $ 400
Cost of Goods Sold (225)
Gross Margin 175
Operating Expenses
Advertising Expense $100
Salaries Expense 65
Supplies Expense 28
Total Operating Expenses (193)
Operating Income (Loss) (18)
Interest Expense (35)
Net Income (Loss) $ (53)
EXERCISE 5-17A
a.
5-53
Valley Retailers
Schedule of Cost of Goods Sold
Beginning Merchandise Inventory $ 24,900
Plus: Purchases 306,400
Plus: Transportation-in 2,160
Less: Purchase Returns and (9,600)
Allowances
Cost of Goods Available for Sale 323,860
Less: Ending Merchandise Inventory (29,300)
Cost of Goods Sold $294,56
0
b.
Valley Retailers
Income Statement
For Year Ended 20XX
Net Sales Revenue* $673,63
0
0)
Gross Margin 379,070
Operating Expenses (51,400)
Net Income $327,67
0
*Sales, $680,000 − Sales Returns and Allow., $6,370 = Net

Sales, $673,630
5-54
EXERCISE 5-18A
a.
Joy Gift Shop
1. Cash 33,500
Common Stock 33,500
Common Stock 2,500
3. Purchases 43,500
4. Advertising Expense 2,750
Cash 2,750
5. Cash 77,500
6. Salaries Expense 8,000
Cash 8,000
Cash 35,000
8 adj. Cost of Goods Sold* 39,000
(Ending)
Purchases 43,500
(owner
contribution)
*Cost of Goods Sold Calculation:

Beginning Merchandise Inventory$ -0-
Owner Contribution 2,500
Purchases 43,500
Less: Ending Merchandise Inventory ( 7,000)
5-55
b.
Joy Gift Shop
T-Accounts for 2007
Equity
1. 33,500 4. 2,750 7. 35,000 3. 43,500 1. 33,500
5. 77,500 6. 8,000 Bal.8,500 2. 2,500
7. 35,000 Bal.
36,000
Bal.
65,250
Sales Revenue
Merchandise 5. 77,500
Inventory
2. 2,500 8. 2,500 Bal.
77,500
8. 7,000
Bal. 7,000 Cost of Goods Sold
8. 39,000
Bal.39,000
Purchases
3. 43,500 8. 43,500
Bal. -0-
Advertising Expense
4. 2,750
Bal. 2,750
Salaries Expense
6. 8,000
Bal. 8,000
5-56
c.
Joy Gift Shop
Income Statement
Sales Revenue $77,500
Gross Margin 38,500
Operating Expenses
Advertising Expense $2,750
Salaries Expense 8,000
Total Operating (10,750)
Expenses
Statement of Changes in Stockholders’ Equity

Beginning Common $ -0-
Stock
Plus: Stock Issued 36,000
Ending Common Stock $36,000
Beginning Retained -0-
Earnings
Plus: Net Income 27,750
Ending Retained 27,750
Earnings
Total Stockholders’ $63,750
Equity
5-57
EXERCISE 5-18A c. (cont.)
Joy Gift Shop

Balance Sheet
Assets
Cash $65,250
Liabilities
Accounts Payable $ 8,500
Total Liabilities and Stockholders’ $72,250
Equity


Activities:
Activities
Activities
Activities
Inflow from Stock Issue 33,500
5-58
5-59
d.
Joy Gift Shop
General Journal
Closing Entries
cl Sales Revenue 77,500
cl Retained Earnings 49,750
Advertising Expense 2,750
5-60
EXERCISE 5-18A d. (cont.)
Joy Gift Shop

T-Accounts
Equity
Bal. Bal.8,500 Bal.
65,250 36,000
Retained Earnings
Merchandise cl 49,750 cl 77,500
Inventory
Bal. 7,000 Bal.
27,750
Sales Revenue
Bal.
77,500
cl 77,500
Bal. -0-
Cost of Goods Sold

Bal.
39,000
cl 39,000
Bal. -0-
Advertising Expense
Bal. 2,750
cl 2,750
Bal. -0-
Salaries Expense
Bal. 8,000
cl 8,000
Bal. -0-
5-61
e.
Joy Gift Shop
After Closing Trial Balance
Cash $65,250
Common Stock 36,000
Totals $72,250 $72,250
f. Less recordkeeping is usually required when the periodic

method is used. There is no requirement to remove the
cost of items from inventory when the goods are sold. The
cost is accounted for at the end of the year when goods still
on hand are counted and the adjustment is made.
g. Capital acquired from the stockholders does not have to be

cash. In this problem, one of the stockholders contributed
inventory to the business in exchange for stock. This
amount is shown as stock issued on the statement of
changes in stockholders’ equity, but since it was not a cash
contribution, it does not show up on the statement of cash
flows.
5-62
EXERCISE 5-19A
a.
Al’s Sails
1. Cash 25,000
Notes Payable 25,000
Cash 20,000
4. Cash 7,000
Cash 2,500
6. Interest Expense* 1,750
Interest Payable 1,750
*$25,000 x 7% = $1,750.
5-63
b.
Al’s Sails
T-Accounts
Equity
Cash Notes Payable Sales Revenue
1. 25,000 2. 1.25,000 3a.
20,000 17,000
4. 7,000 5. 2,500 Bal. Bal.
25,000 17,000
Bal. 9,500
Interest Payable Cost of Goods Sold
Accounts 6. 1,750 3b. 9,000
Receivable
3a. 4. 7,000 Bal. Bal. 9,000
17,000 1,750
Bal.
10,000
Operating
Expenses
Mdse. Inventory 5. 2,500
2. 20,000 3b. 9,000 Bal. 2,500
Bal.
11,000
Interest Expense
6. 1,750
Bal. 1,750
c.
Al’s Sails
Income Statement
Net Sales $17,00
0
Gross Margin 8,000
5-64
Net Income from Operations 5,500
Interest Expense (1,750)
Net Income $ 3,750
5-65
c.
Al’s Sails
Balance Sheet
Assets
Cash $ 9,500
Liabilities
Equity
For the Year Ending December 31, 2008
Activities:
Inflow from Customers $ 7,000
Activities 0)
Activities
Activities:
Cash Inflow from Loan 25,000
5-66
d. Al will not be able to repay half of his loan. He only

collected $7,000 of the amount that was sold. In addition,
he paid $2,500 in operating expenses. His ending cash
balance is only $9,500. He may be able to pay the interest
due on the loan and pay some on the principal, especially if
he can collect some more of the accounts receivable.
However, he must keep enough cash on hand to purchase
additional inventory if he plans to continue in business.
5-67
EXERCISE 5-20A
a. 50 days; Kay will have to pay within 10 days if she takes the
discount, but will have 60 days to pay if she does not take
the discount.
b. Assuming she has no other cash, Kay would have to borrow

the invoice amount less the discount or $260,000 x .98 =
$254,800.
c. Interest cost for 50 days: 254,800 x 7% x 50/365 =

$2,443.29.
Total that would have to be repaid: $254,800 + $2,443.29 =
$257,243.29.
Savings by borrowing to pay the invoice within 10 days:
$260,000 − $257,243.29 = $2,756.71.
Memo:
It would be most cost effective for Kay to borrow the money
in order to pay the invoice within the discount period. Kay
would be incurring interest for a period of 50 days at a cost
of $2,443.29. However, she would save $5,200 by paying
within the discount period. The net savings to Amy would
be $2,756.71.
5-68
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 5
PROBLEM 5-21A
T-accounts are provided for the instructor’s use:
Mackey Company
T-Accounts 2007, 2008, and 2009
2007 20,000 9,800 2007 2007 2,350
20,000
14,100 4,600 Bal. 2,350
Bal. 19,700 2008 1,800
2008 17,500 12,000 Bal. 4,150
6,200 2009 3,600
Bal. 19,000 Bal. 7,750
2009 18,500
26,000
7,400 Sales Revenue
Bal. 19,100 cl 14,100 2007 14,100
Bal. -0-
Merchandise Inv. cl 17,500 2008 17,500
2007 9,800 7,150 Bal. -0-
Bal. 2,650 cl 26,000 2009 26,000
2008 12,000 9,500 Bal. -0-
Bal. 5,150
2009 18,500 15,000
2007 7,150 cl 7,150
Bal. -0-
2008 9,500 cl 9,500
Bal. -0-
2009 cl 15,000
15,000
Bal. -0-
Selling and Adm. Exp.

2007 4,600 cl 4,600
Bal. -0-
2008 6,200 cl 6,200
Bal. -0-
2009 cl 7,400
7,400
Bal. -0-
5-69
5-70
PROBLEM 5-21A (cont.)
Mackey Company
Income Statements
2007 2008 2009
Net Sales $14,100 $17,50 $26,000
0
Cost of Goods Sold (7,150) (9,500) (15,000)
Gross Margin 6,950 8,000 11,000
Operating Expenses
Selling and Admin. (4,600) (6,200) (7,400)
Expense
Operating Income $ 2,350 $ $ 3,600
1,800
Balance Sheets
Assets
Cash $19,700 $19,000 $19,100
Merchandise Inventory 2,650 5,150 8,650
Total Assets $22,350 $24,150 $27,750
Liabilities $ -0- $ $
-0- -0-
Common Stock 20,000 20,000 20,000
Retained Earnings 2,350 4,150 7,750
Total Stockholders’ Equity 22,350 24,150 27,750
Total Liab. and Stkholders’ $22,350 $24,150 $27,750
Equity
5-71
PROBLEM 5-22A
Event Product Period Costs

Costs
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
PROBLEM 5-23A
Event Freight Costs Period/Product

Paid
a. $ -0- NA
b. $ -0- NA
c. $190 Product
d. $100 Period
5-72
PROBLEM 5-24A
a.
Doss Heater Company
Effect of Transactions on Financial Statements Using Horizontal Statements Model
Balance Sheet Income Statement Statement of
Date Assets = Liab. + Stockholders’ Rev. − Exp. = Net Cash Flows
Equity Inc.
Cash + Acct. + Inv. = Acct. + C. Stk. + Ret.
Rec. Pay. Earn.
9/1 30,000 + NA + NA = NA + 30,000 + NA NA − NA = NA 30,000 FA
9/1 NA + NA + 18,000 = 18,000 + NA + NA NA − NA = NA NA
9/5 (800) + NA + 800 = NA + NA + NA NA − NA = NA (800) OA
9/8a. NA + 8,800 + NA = NA + NA + 8,800 8,800 − NA = 8,800 NA
9/8b. NA + NA + (4,500) = NA + NA + (4,500) −
NA 4,500 = (4,500) NA
9/8 NA + NA + (900) = (900) + NA + NA NA − NA = NA NA
9/10a NA + NA + (171) = (171) + NA + NA NA − NA = NA NA
.
9/10b (8,379) + NA + NA = (8,379) + NA + NA NA − NA = NA (8,379) OA
.
9/15 8,800 + (8,800) + NA = NA + NA + NA NA − NA = NA 8,800 OA
9/30 (8,550) + NA + NA = (8,550) + NA + NA NA − NA = NA (8,550) OA
9/30 (1,720) + NA + NA = NA + NA + (1,720) NA − 1,720 = (1,720) (1,720) OA
Tot. 19,351 + -0- + 13,229 = -0- + 30,000 + 2,580 8,800 − 6,220 = 2,580 19,351 NC
5-73
b.
Doss Heater Company
General Journal, September 2009
Sept. 1 Cash 30,000
Common Stock 30,000
Sept. 1 Merchandise Inventory 18,000
Sept. 5 Merchandise Inventory 800
Cash 800
Sept. 8a. Accounts Receivable 8,800
Sales Revenue 8,800
Sept. Cost of Goods Sold 4,500
8b.
Sept. 8 Accounts Payable 900
Sept. Accounts Payable 171
10a.
Sept. Accounts Payable 8,379
10b.
Cash 8,379
Sept. 15 Cash 8,800
Sept. 30 Accounts Payable 8,550
Cash 8,550
Sept. 30 Selling and Admin. Expense 1,720
Cash 1,720
5-74
c.
Doss Heater Company
T-Accounts, September 2009
Equity
9/1 30,000 9/5 800 9/1 9/1 30,000
18,000
9/15 8,800 9/10b. 8,379 9/8 900
9/30 8,550 9/10a. 171 Sales Revenue
9/30 1,720 9/10b. 9/8a.
8,379 8,800
Bal. 19,351 9/30 8,550 Bal. 8,800
Bal. -0-
Accounts Receivable Cost of Goods Sold
9/8a. 8,800 9/15 8,800 9/8b. 4,500
Bal. -0- Bal. 4,500
Merchandise Inventory Selling & Adm.

Expense
9/1 18,000 9/8b. 4,500 9/30 1,720
9/5 800 9/8 900 Bal. 1,720
9/10a. 171
Bal. 13,229
5-75
d. & e.
Doss Heater Company
For the Month Ended September 30, 2009
Income Statement
Net Sales $8,800
Gross Margin 4,300
Operating Expenses
Selling and Adm. Expense (1,720)

Cash Flows From Oper.
Activities:
Outflow for Inventory
(17,729)
Outflow for Selling and Adm. (1,720)
Exp.
Act. 9)
Activities
Cash Flows From Fin.
Activities:
Act.
5-76
f. The difference between net income and net cash flow
from operating activities [$2,580 − ($10,649) = $13,229]
is due entirely to unsold inventory that has already been
paid for.
5-77
PROBLEM 5-25A
a.
W. Coyle Company
Effect of Events on the Financial Statements for 2005
Event Even Balance Sheet Income Statement Statement of
t
No. Type Assets = Liab. + S. Rev. − Exp. = Net Inc. Cash Flows
Equity
1a. AS + + NA NA NA NA NA
1b. AE +− NA NA NA NA NA − OA
3a. AU − − NA NA NA NA NA
Disc.
3b. AU − − NA NA NA NA − OA
Pay.
4a. AS + NA + + NA + NA
Sale
4b. AU − NA − NA + − NA
Cost
5a. Ret AU − NA − − NA − − OA
5b. AS + NA + NA − + NA
Ret.
6. AU − NA − NA + − − OA
7a. AU − NA − − NA − NA
Disc.
7b. AE +− NA NA NA NA NA + OA
Coll.
8. AU − NA − NA + − NA
5-78
b. & c,
W. Coyle Company General Journal
1a. Merchandise Inventory 2,200
1b. Merchandise Inventory 110
Cash 110
Cash 1,980
Sales Revenue 5,500
Cash 710
Cost of Goods Sold 400
Cash 60
7b. Cash 5,390
8. Cost of Goods Sold (Inventory 520
Loss)
5-79
c.
W. Coyle Company
T-Accounts for 2005
Assets = Liabilities + Stockholders’ Equity

B 4,300 1b 110 2. 200 1a 2,200 Bal 10,000
al. . . .
7b. 5,390 3b 1,980 3a. 20
.
5a 710 3b. 1,980
.
6. 60 Bal. -0- Retained Earnings
B 6,830 Bal 3,300
al. .
cl 3,180 cl 4,680
Bal 4,800
.
Mdse. Inventory
B 9,000 Sales Revenue
al.
1a. 2,200 2. 200 5a. 710 4a. 5,500
1b. 110 3a 20 7a. 110
.
5b. 400 4b 3,000 Bal 4,680
. .
B 8,490 cl 4,680
al.
8. 520 Bal -0-
.
B 7,970
al.
Cost of Goods Sold
4b. 3,000
Accounts 8. 520 5b. 400
Receivable
4a. 5,500 7a 110 Bal. 3,120
.
7b. 5,390 cl 3,120
B -0- Bal. -0-
al.
Transportation-out
6. 60
Bal. 60
cl 60
Bal. -0-
5-80
PROBLEM 5-25A
d.
W. Coyle Company
Income Statement
Net Sales $4,680
Gross Margin 1,560
Operating Expenses

Beginning Common Stock $10,000
Plus: Stock Issued -0-
Beginning Retained 3,300
Earnings
Ending Retained Earnings 4,800
Total Stockholders’ Equity $14,800
5-81
PROBLEM 5-25A d. (cont.)
W. Coyle Company
Balance Sheet
Assets
Cash $ 6,830
Total Assets $14,80
0
Liabilities $
-0-
Equity 0

Activities:
Activities
Activities
Activities
5-82
5-83
e.
Closing Entries
Dec. Sales Revenue 4,680
31
Dec. Retained Earnings 3,180
31
Transportation-out 60
See T-Accounts in part c. for closing entries.
W. Coyle Company
December 31, 2005
Cash $ 6,830
Totals $14,800 $14,800
5-84
PROBLEM 5-26A
a.
Pittman Sales Co.
Beginning Merchandise $ 18,000

Inventory
Purchases 130,000
Purchase Returns and (2,700)
Allowances
Transportation-in 5,500
Cost of Goods Available for 150,800
Sale
Less: Ending Merchandise (20,100)
Inventory
5-85
b.
Pittman Sales Co.
Income Statement
Revenue
Sales Returns and (8,000)
Allowances
Sales Discounts (13,500)
Net Sales $268,500
Operating Expenses
Miscellaneous Expense 800
Transportation-out 10,800
Rent Expense 14,000
Depreciation Expense 3,000
Total Operating Expenses (94,400)
Operating Income 43,400
Non-Operating Items
Net Income Before Income 38,400
Tax
Income Taxes (10,700)
Net Income $ 27,700
5-86
c.
Pittman Sales Co.
Income Statement
Revenue
Allowances
Net Sales $268,500
Operating Expenses
Transportation-out 10,800
Rent Expense 14,000
Interest Expense 5,000
Income Taxes 10,700
Total Expenses (240,800)
Net Income $ 27,700
5-87
PROBLEM 5-27A
a.
Horner Home Products
Event Account Titles Debit Credit
1a. Land 8,000
Cash 8,000
1b. Building 45,000
Cash 5,000
2. Purchases 23,000
3. Transportation-in 230
Cash 230
Purchase Returns and 2,000
Allow.
5. Cash 27,000
6. Accounts Receivable 50,000
Purchase Discounts 420
Cash 20,580
8. Selling Expenses 1,200
Cash 1,200
9a. Sales Discounts 350
9b. Cash ($35,000 − $350 + 46,650
$12,000)
5-88
PROBLEM 5-27A a. (cont.)

10. Interest Expense ($40,000 x 3,200
8%)
Cash 3,200
11. Notes Payable 2,000
Cash 2,000
12. Depreciation Expense1 1,125
Accumulated Depreciation 1,125
13. Cost of Goods Sold2 50,810
Purchase Discounts 420
Allowances
Purchases 23,000
Transportation-in 230
($60,000 − $30,000)
1
$45,000 ÷ 40 = $1,125 per year.
2
Cost of Goods Sold: Beginning Merchandise Inventory
$60,000
Purchases 23,000
Purchase Ret. and Allow. (2,000)
Purchase Discounts (420)
Cost of Goods Available 80,810
Less: Ending Merchandise Inventory
(30,000)
5-89
b.
B 14,000 1a 8,000 4. 2,000 Bal 5,000 B 50,000
al. . . al.
5. 27,000 1b 5,000 7a. 420 2. 23,000
.
9b. 46,650 3. 230 7b 20,580 Retained Earnings
.
7b 20,580 Bal 5,000 B 8,000
. . al.
8. 1,200
10 3,200 Notes Payable Sales Revenue
.
11 2,000 11. 2,000 Bal 20,000 5. 27,000
. .
B 47,440 1b. 40,000 6. 50,000
al.
Bal 58,000 B 77,000
. al.
Accounts Receivable
B 9,000 9a 350 Sales Discounts
al. .
6. 50,000 9b 46,650 9a 350
. .
B 12,000
al.
Purchases
Merchandise 2. 23,000 13. 23,000
Inventory
B 60,000 13 30,000 B -0-
al. . al.
B 30,000
al.
Purchase Returns &
Allow.
Building 13 2,000 4. 2,000
.
1b. 45,000 B -0-
al.
B 45,000
al.
Purchase Discounts
Accumulated Depr. 13 420 7a. 420
.
12 1,125 B -0-
. al.
Bal. 1,125
Transportation-in
5-90
Land 3. 230 13. 230
1a. 8,000 B -0-
al.
B 8,000
al.
Cost of Goods Sold
13 50,810
.
Interest Expense
10 3,200
.
Selling Expenses
8. 1,200
Depreciation Expense
12 1,125
.
c.
Beginning Mdse. Inventory $60,000
1/1/2005
Purchases 23,000
Purchase Discounts (420)
Purchase Returns and Allow. (2,000)
Cost of Goods Available for $80,810
Sale
Ending Merchandise Inventory (30,000)
5-91
PROBLEM 5-27A c. (cont.)

Income Statement
Revenue
Sales Discounts (350)
Net Sales $76,650
Gross Margin 25,840
Operating Expenses
Selling Expenses 1,200
Total Operating Expense (2,325)
Non-Operating Expense
Net Income $20,315

Earnings
5-92

Balance Sheet
Assets
Cash $47,440
Building $45,000
Accumulated (1,125) 43,875
Depreciation
Land 8,000
5
Liabilities
Total Liabilities $ 63,000
Common Stock 50,000
Total Stockholders’ 78,315
Equity
Total Liab. and Stk. $141,31
Equity 5
5-93

Activities:
Activities 0
Cash Flows From Investing
Activities:
Outflow for Purchase of Bldg. (13,000)
and Land
Net Cash Flow from Investing (13,000
Activities )
Activities:
Outflow for Loan Payment (2,000)
Net Cash Flow from Financing (2,000)
Activities
0
5-94
PROBLEM 5-28A
Marcy Company
Common Size Income Statements
2001 % 2002 %
Net Sales $302,900 100 $370,500 100
Cost of Goods Sold (217,400) (72) (264,700) (71)
Gross Margin 85,500 28 105,800 29
Operating Expenses
Selling and Adm. Exp. (40,800) (13) (58,210) (16)
Net Income $ 44,700 15 $ 47,590 13
Based on the common size income statements, the claims

made by the president appear to be true. The dollar amount
of the sales increased from $302,900 to $370,500, an increase
of 22%, and the gross margin percentage actually increased
slightly. This means the company is selling the goods at
approximately the same markup as the year before. The fact
that operating expenses increased by 43% indicates the
company did spend more on advertising. The increase in
operating expenses did cause the percentage of net income to
sales to fall from 15% to 13%. Profits increased overall from
$44,700 to $47,590 from 2001 to 2002.
5-95
SOLUTIONS TO EXERCISES SERIES B - CHAPTER 5
EXERCISE 5-1B
a.
Davis CPAs
Income Statement
For the Period Ended 20XX
Revenue
Consulting Revenue $15,00
0
Expenses
Salaries Expenses (10,000
)
Net Income $5,000
Davis CPAs
Balance Sheet
As of the End of the Period 20XX
Assets
Cash $25,00
0
Total Assets $25,00
0
Liabilities
0

Equity 0
5-96
EXERCISE 5-1B a. (cont.)
Davis CPAs
For Period Ended 20XX
Activities:
Outflow for Salaries (10,000)
Activ.

Activities

Activities:
Activ.

5-97
Campus Dive Shop

Income Statement
For the Period Ended 20XX
Net Sales Revenue $15,000
Gross Margin 6,800
Expenses
Operating Expense (1,800)
Net Income $5,000
Campus Dive Shop

Balance Sheet
As of the End of the Period 20XX
Assets
Cash $20,700
Liabilities
Equity
5-98
EXERCISE 5-1Ba. (cont.)
Campus Dive Shop

Activities:
Outflow for Expense (1,800)
Net Cash Flow from Operating $ 700
Activities

Activities

Activities:
Activities

Net Increase in Cash $20,700
b. Campus Dive Shop is a merchandising business and has

inventory and cost of goods sold, product costs. Davis is a
service company and does not have product costs.
c. Davis is a service company and sells a service not a

product. Consequently, it does not have cost of goods sold
or gross margin. It only has selling and administrative
expense (period expense).
d. The only asset that Davis has is Cash. Campus Dive Shop
has two assets, cash and inventory. Davis does not sell a
product and does not have any inventory. Campus Dive
5-99
Shop sells products and must carry inventory available for
sale to customers.
5-100
EXERCISE 5-2B
a.
Don Jones Merchandising
1. Cash 20,000
Common Stock 20,000
Cash 15,000
3a. Cash 16,000
b.
T-Accounts
Cash Common Stock
1. 20,000 2. 15,000 1. 20,000
3a. Bal. 20,000
16,000
Bal.
21,000
Sales Revenue
Merchandise 3a.16,000
Inventory
2. 15,000 3b. Bal.16,000
10,000
Bal. 5,000
Cost of Goods Sold
3b.10,000
Bal.10,000
5-101
EXERCISE 5-2B (cont.)
c.
Don Jones Merchandising
Income Statement
Net Sales $16,000
Gross Margin 6,000
Net Income $ 6,000
d.
Activities:
Act.
5-102
EXERCISE 5-3B
a.
Bond Merchandising Co. Effect of Events on the Financial Statements
Events Balance Sheet Income Statement Statement
of
Assets = Liab. + Stkholders’ Rev. − Exp. = Net Inc. Cash Flows
Equity
Cash + A. Rec. + Mdse. = A. Pay. + C. Stk.+Ret.
Inv. Ear.
Beg. Bal. 28,000 + NA + NA = NA + 28,00 + NA NA − NA = NA NA

0
1. Pur. NA + NA + 30,000 =30,000 + NA + NA NA − NA = NA NA
Inv.
2. Sold NA +35,000 + NA = NA + NA +35,000 35,00 − NA =35,000 NA
Inv. 0
3. Inv. NA + NA +(25,000) = NA + NA + (25,00 NA − 25,000 =(25,000 NA
Cost 0) )
) ) OA
5. Coll. 22,000 +(22,000 + NA = NA + NA + NA NA − NA = NA 22,000 OA
AR )
6. Pd. (7,000)+ NA + NA = NA + NA + (7,000) NA − 7,000 = (7,000) (7,000) OA
Exp.
End. Bal. 23,000 +13,000 + 5,000 =10,000 + 28,00 + 3,000 35,00 − 32,000 = 3,000 (5,000) NC
0 0
b. $13,000
c. $10,000
d. Sales $35,000
5-103
Gross Margin 10,000
Operating Exp. (7,000)
Net Income $ 3,000
e. Cash Flows From Operating Activities:
Net Cash Flow from Operating Activities$ (5,000)
5-104
f. Ending retained earnings and net income are the same in

this problem because this is the first year of operations and
no dividends were paid. Ending Retained Earnings is
calculated as follows: Beginning Retained Earnings + Net
Income − Dividends = Ending Retained Earnings.
5-105
EXERCISE 5-4B
a.
Clark’s Clothing Center
1. Cash 7,000
Common Stock 7,000
Cash 4,000
3a. Cash 4,500
Sales Revenue 4,500
4. Advertising Expense 400
Cash 400
b.
T-Accounts
1. 7,000 2. 4,000 1. 7,000 3a. 4,500
3a. 4,500 4. 400 Bal. 7,000 Bal.4,500
Bal. 7,100
Cost of Goods Sold
2. 4,000 3b. Bal.3,000
3,000
Bal. 1,000
Advertising
Expense
4. 400
Bal. 400
5-106
c.
Clark’s Clothing Center
Trial Balance
December 31, 2004
Cash $ 7,100
Common Stock $ 7,000
Sales Revenue 4,500
Totals $11,500 $11,500
5-107
EXERCISE 5-5B
a. FOB destination
b. FOB shipping point
c. FOB shipping point
d. FOB destination
5-108
EXERCISE 5-6B
a.
Vanity Gift Shop
Cash 1,000
5a. Cash 31,000
Cash 800
Cash 15,000
5-109
b.
Vanity Gift Shop
T-Accounts
Equity
Bal. 3. 3,200 1. Bal.
32,000 22,000 40,000
5a. 2. 1,000 4. 1,400
31,000
6. 800 7. Retained Earnings
15,000
7. Bal. Bal. 4,000
15,000 2,400
Bal.
46,200
Sales Revenue
Mdse. Inventory 5a.31,000
Bal. Bal.
12,000 31,000
1. 22,000 3. 3,200
2. 1,000 4. 1,400 Cost of Goods Sold
5b. 5b.
16,000 16,000
Bal. Bal.
14,400 16,000
Transportation-out
6. 800
Bal. 800
5-110
c.
Vanity Gift Shop
Income Statement
Net Sales $31,000
Gross Margin 15,000
Operating Expenses
Balance Sheet
Assets
Cash $46,200
Liabilities
Equity
5-111
EXERCISE 5-6B c. (cont.)
Vanity Gift Shop


Activities:
Activities 0
Activities
Activities
0
d. The fact that net income and net cash flow from operating
activities is the same in this problem is coincidence.
Revenue is $31,000 and all is cash, so the amounts of
revenue and cash from revenue are the same. But since
not all of the inventory was sold and not all of the accounts
payable was paid, it is coincidence that the amount of
inventory sold and the amount of accounts payable paid of
$15,000 plus freight of $1,000 are both $16,000.
5-112
EXERCISE 5-7B
Transaction Debited to
Inventory
1. Purchase of inventory Yes
2. Allowance for damaged No
inventory
3. Transportation-in Yes
4. Cash Discount on Goods No
Sold
5. Transportation-out No
6. Purchase of office supplies No
5-113
EXERCISE 5-8B
a.
Transactio Period Product Not
n Costs Costs Applicable
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
5-114
b.
Action Nature Goods Horizontal Statements Model for 2004

of
Assets = Liab. + Stkholders’ Rev. − Exp. =Net Inc. Cash Flows
Equity
Cash + A. Rec. + Inv. = A. Pay. + C. Stk. + Ret.
Ear.
1. Stock 10,000 + NA + NA = NA +10,00 + NA NA − NA = NA 10,000 FA

0
2. Pur Inv. NA + NA + 56,000 56,000 + NA + NA NA − NA = NA NA
3. Freight (600)+ NA + 600 = NA + NA + NA NA − NA = NA (600)
OA
4. Sold Inv. NA + 57,400 + NA = NA + NA + 57,400 57,400 − NA =57,400 NA
4. Cost NA + NA + (33,00 = NA + NA + (33,000 NA − 33,000 =(33,000 NA
0) ) )
5. Pd. Frt. (420)+ NA + NA = NA + NA + (420) NA − 420 = (420) (420)
OA
6. Ret. Sale NA + (2,000)+ NA = NA + NA + (2,000) (2,000 − NA = (2,000) NA
)
6. Ret. Inv. NA + NA + 1,400 = NA + NA + 1,400 NA − (1,400)= 1,400 NA
7. Coll. AR 47,000 +(47,000 + NA = NA + NA + NA NA − NA = NA 47,000 OA
)
) ) OA
9. Pd. Exp. (1,100)+ NA + NA = NA + NA + (1,100) NA − 1,100 = (1,100) (1,100)
OA
10. Pd. (2,000)+ NA + NA = NA + NA + (2,000) NA − 2,000 = (2,000) (2,000)
Exp. OA
End. Bal. 12,880 + 8,400 + 25,000 =16,000 +10,00 + 20,280 55,400 − 35,120 =20,280 12,880 NC
5-115
0
5-116
EXERCISE 5-9B
a. Purchase $3,100
Less, return ( 600)
Gross due (subject to the discount)2,500
Discount percentage x2%
Amount of discount $ 50
Gross amount due $2,500

Less, discount ( 50)
Net amount due $2,450
b.
Event Account title Debit Credit
Pur. Merchandise Inventory 3,100
Return Accounts Payable 600
Payme Accounts Payable 50
nt
Cash 2,450
c. $2,500; he would not be eligible for the discount.
d. Wang would be willing to pay within the discount period in

order to take advantage of the discount. Taking the
discount will reduce the cost of the merchandise by $50.
While this does not seem like a large savings, if the rate is
annualized the savings is considerable. A 2% discount for
paying within 10 days, or 35 days before the total amount
would be due, amounts to a savings of $1.42857 per day
($50 ÷ 35 days). Even if Wang borrowed the $2,450 at a
10% interest rate, the cost of borrowing would only be
$23.49 ($2,450 x 10% x 35/365) or $.67 per day. Wang
5-117
would still save $.758 per day, even if the company had to
borrow the funds to pay early.
5-118
EXERCISE 5-10B
a.
Smart Company
Cash 500
4. Sales Revenue 2,000
5. Cash 30,000
5-119
b.
Smart Company
T-Accounts for 2004
Bal. 7,000 Bal. Bal.
25,000 20,000
5. 30,000 2. 500
Bal. Sales Revenue
36,500
3a. 4,000 1a.
50,000
Accounts 4. 2,000
Receivable
1a. 50,000 3a. 4,000 Bal.
44,000
4. 2,000
5. Cost of Goods Sold
30,000
Bal. 1b. 3b.3,000
14,000 32,000
Bal.
29,000
Mdse. Inventory
Bal. 1b. Transportation-out
38,000 32,000
3b. 3,000 2. 500
Bal. 9,000 Bal. 500
5-120
c.
Smart Company
Income Statement
Net Sales $44,000
Gross Margin 15,000
Operating Expenses
Balance Sheet
Assets
Cash
$36,500
Liabilities $
-0-
Common Stock
$25,000
5-121
Smart Company
Activities:
Activities 0
Activities
Activities
0
d. Mitchell may agree to keep the damaged goods for several

reasons. First, Mitchell already has the goods and,
assuming the goods can be sold, will not have to wait on
another shipment. Also, Mitchell is getting the goods at a
reduced price. Smart benefits because he does not have to
pay for the shipping cost of the returned goods and any
repair cost in order to sell them to another customer. This
arrangement can benefit both buyer and seller.
5-122
EXERCISE 5-11B
a.
Nelson Sand & Gravel
1. Cash 15,000
Common Stock 15,000
Cash 8,820
Sales Revenue 7,500
5b. Cash 7,425
6. Operating Expense 1,900
Cash 1,900
5-123
b.
Nelson Sand & Gravel
T-Accounts for 2006
Equity
1. 15,000 3b. 8,820 3a. 180 2. 9,000 1. 15,000
5b. 7,425 6. 1,900 3b. 8,820 Bal.
15,000
Bal. Bal. -0-
11,705
Sales Revenue
Accounts 5a. 75 4a. 7,500
Receivable
4a. 7,500 5a. 75 Bal. 7,425
5b. 7,425
Bal. -0-
Cost of Goods Sold
2. 9,000 3a. 180 Bal. 5,000
4b.
5,000
Bal. 3,820 Operating Expense
6. 1,900
Bal. 1,900
5-124
c.
Nelson Sand & Gravel Horizontal Statements Model for 2006
Assets = Liab. + Stk. Equity Income Statement Statement

of
Cash + A. Rec. + Inv. = A. Pay. + C. Stk.+ Ret. Rev. − Exp. = Net Cash Flows
Ear Inc.
1. Stock 15,000 + NA + NA = NA + 15,00 + NA NA − NA = NA 15,000 FA

0
2. Pur. Inv. NA + NA + 9,000 = 9,000 + NA + NA NA − NA = NA NA
3a. Disc. NA + NA + (180) = (180) + NA + NA NA − NA = NA NA
3b. Pd. AP (8,820) + NA + NA = (8,820) + NA + NA NA − NA = NA (8,820) OA
4a. Sold NA + 7,500 + NA = NA + NA + 7,500 7,500 − NA = 7,500 NA
Inv.
4b. Cost NA + NA + (5,000) = NA + NA + (5,000) NA − 5,000 =(5,000) NA
5a. AR NA + (75) + NA = NA + NA + (75) (75) − NA = (75) NA
Disc.
5b. Coll. 7,425 + (7,425) + NA = NA + NA + NA NA − NA = NA 7,425 OA
AR
6. Pd. Exp. (1,900) + NA + NA = NA + NA + (1,900) NA − 1,900 =(1,900) (1,900) OA
End. Bal. 11,705 + -0- + 3,820 = -0- + 15,00 + 525 7,425 − 6,900 = 525 11,705 NC
0
d. Gross Margin:
Net Sales $7,425
Gross Margin $2,425
Net Income:
Gross Margin $2,425
5-125
Less: Operating Expense (1,900)
Net Income $ 525 or see Net Income column above.
5-126
e. Cash discounts are given to encourage prompt payment of

accounts receivable. A faster collection of accounts
receivable will give Nelson cash faster and allow Nelson to
pay its bills quicker. Many times the discount cost is less
than the cost of obtaining cash externally (loan).
f. Nelson Sand & Gravel will give a 2% discount to the

purchaser if the account is paid within 10 days; if the
discount is not taken, the full amount of the invoice is due
in 30 days.
5-127
EXERCISE 5-12B
a.
Macomb Merchandise Company
Cash 600
7b. Cash 35,640
Cash 21,070
5-128

9. Selling and Administrative 4,300
Expenses
Cash 4,300
Cash 21,500
5-129
b.
T-Accounts for 2006
Equity
Bal. 4. 1,500 1. Bal.
20,000 45,000 25,000
7b. 2. 600 5. 500
35,640
8b. 8a. 430 Retained Earnings
21,070
9. 4,300 8b. Bal.
21,070 10,000
10. 10.
21,500 21,500
Bal. Bal. -0- Sales Revenue
8,170
6a. 6,000 3a. 42,000
Accounts 7a. 360
Receivable
3a. 6a. Bal.
42,000 6,000 35,640
7a. 360
7b. Cost of Goods Sold
35,640
Bal. -0- 3b. 6b. 3,400
23,000
Bal.
19,600
Mdse. Inventory
Bal.
15,000
1. 45,000 3b. Selling & Adm.
23,000 Exp.
2. 600 4. 1,500 9. 4,300
6b. 3,400 5. 500 Bal.4,300
8a. 430
Bal.
38,570
5-130
5-131
c.
Trial Balance
December 31, 2006
Cash $ 8,170
Selling and Administrative 4,300
Expenses
Totals $70,640 $70,640
5-132
d.
Income Statement
Net Sales $35,640
Gross Margin 16,040
Operating Expenses
Selling and Administrative (4,300)
Expenses
Balance Sheet
Assets
Cash $
8,170
Liabilities $ -0-
Common Stock
$25,000
Equity
5-133
EXERCISE 5-12B d. (cont.)

Activities:
Activities 0)
Activities
Activities
Net Change in Cash (11,830)
5-134
EXERCISE 5-13B
a.
Carroll Traders
T-Accounts for 2005
1. 20,000 2. 1. 3a.
14,000 20,000 17,100
3a. 17,100 Bal. Bal.
20,000 17,100
Bal.
23,100
Cost of Goods Sold
Mdse. Inventory 3b.
10,750
2. 14,000 3b. 4. 350
10,750
Bal. 3,250 Bal.
11,100
4. 350
Bal. 2,900
b.
Carroll Traders
Income Statement
For Year Ended December 31, 2005
Net Sales $17,100
)
Gross Margin 6,000
Operating Expense -0-
Operating Income $ 6,000
5-135
EXERCISE 5-13B b. (cont.)
Carroll Traders
Balance Sheet
Assets
Cash $23,100
Liabilities $ -0-
Equity
c. Even though all of the purchases and cost of goods sold are
recorded when goods are purchased or sold, management
still must take a physical inventory to verify the book
amount. Also, any adjustment will reflect the amount of
lost, broken or spoiled goods for the period.
5-136
EXERCISE 5-14B
Even Even
t t Asset = Liab + S. Rev. − E = Net Cash
No. Type s . Equity xp. Inc. Flow
1. AS + + NA NA NA NA NA
3a. AS + NA + + NA + NA
3b. AU − NA − NA + − NA
5a. AS + NA + + NA + + OA
5b. AU − NA − NA + − NA
7. AU − NA − NA + − − OA
8a. AU − NA − − NA − NA
8b. AE +/− NA NA NA NA NA + OA
9. AU − NA − NA + − − OA
5-137
EXERCISE 5-15B
Beginning Mdse. $ 4,200

Inventory
Plus: Merchandise 21,000
Purchased
Total Available for Sale 25,200
Less: Ending Mdse. (8,800)
Inventory
0
a. Goods Available for Sale $25,200
b. Cost of Goods Sold $16,400
c. Merchandise Inventory on year-end balance sheet

$8,800
5-138
EXERCISE 5-16B
Single-Step Income Statement:
Neighborhood Market
Income Statement
Net Sales $1,600
Expenses
Cost of Goods Sold $900
Interest Expense 140
Salaries Expense 260
Supplies Expense 110
Net Income (Loss) $(210)
Multistep Income Statement:
Neighborhood Market
Income Statement
Net Sales $1,600
Cost of Goods Sold (900)
Gross Margin 700
Operating Expenses
Advertising Expense $400
Salaries Expense 260
Supplies Expense 110
Total Operating Expenses (770)
Operating Income (Loss) (70)
Net Income (Loss) $(210)
EXERCISE 5-17B
a.
5-139
Hill Antiques
Beginning Merchandise Inventory $ 12,000
Plus: Purchases 150,000
Plus: Transportation-in 1,000
Less: Purchase Returns and (5,000)
Allowances
Cost of Goods Available for Sale 158,000
Less: Ending Merchandise Inventory (15,000)
0
b.
Hill Antiques
Income Statement
Revenue
Net Sales Revenue* $397,00
0
0)
Net Income $228,00
0
*Sales, $400,000 − Sales Returns and Allow., $3,000 = Net

Sales, $397,000
5-140
EXERCISE 5-18B
a.
Kay’s Specialties Shop
1. Cash 70,000
Common Stock 70,000
Common Stock 8,000
3. Purchases 90,000
4. Advertising Expense 6,000
Cash 6,000
5. Cash 160,000
6. Salaries Expense 20,000
Cash 20,000
Cash 75,000
8 adj. Cost of Goods Sold* 78,000
(Ending)
Purchases 90,000
(owner
contribution)
*Cost of Goods Sold Calculation:

Beginning Merchandise Inventory$ -0-
Owner Contribution 8,000
Purchases 90,000
Less: Ending Merchandise Inventory(20,000)
5-141
b.
T-Accounts for 2005
Equity
1. 70,000 4. 6,000 7. 75,000 3. 90,000 1. 70,000
5. 160,000 6. 20,000 Bal. 2. 8,000
15,000
7. 75,000 Bal.
78,000
Bal.
129,000
Sales Revenue
Merchandise 5. 160,000
Inventory
2. 8,000 8. 8,000 Bal.
160,000
8. 20,000
Bal. Cost of Goods Sold
20,000
8. 78,000
Bal.78,000
Purchases
3. 90,000 8. 90,000
Bal. -0-
Advertising Expense
4. 6,000
Bal. 6,000
Salaries Expense
6. 20,000
Bal.20,000
5-142
c.
Income Statement
Net Sales $160,000
Gross Margin 82,000
Operating Expenses
Advertising Expense $ 6,000
Total Operating (26,000)
Expenses
5-143

Balance Sheet
Assets
Cash $129,00
0
0
Liabilities
Accounts Payable $15,000
Equity 0


Activities:
0
Activities
Activities
Activities
5-144
0
5-145
d.
General Journal
Closing Entries
cl Sales Revenue 160,000
cl Retained Earnings 104,000
5-146
EXERCISE 5-18B d. (cont.)

T-Accounts
Equity
Bal. Bal. Bal.
129,000 15,000 78,000
Retained Earnings
Merchandise cl 104,000 cl 160,000
Inventory
Bal. Bal.
20,000 56,000
Sales Revenue
Bal.
160,000
cl 160,000
Bal. -0-
Cost of Goods Sold

Bal.
78,000
cl 78,000
Bal. -0-
Advertising Expense
Bal. 6,000
cl 6,000
Bal. -0-
Salaries Expense
Bal.
20,000
cl 20,000
Bal. -0-
5-147
e.
Cash $129,000
Common Stock 78,000
Totals $149,000 $149,000
f. A business that may use the periodic method would be

small retailers that do not have the necessary computer
equipment to be able to record the cost of goods as they
are sold. Also, it may be more cost effective for a business
with small amounts of inventory to use the periodic
method.
g. Owners may contribute many types of assets to a business

in exchange for stock in the business. For instance, an
owner may contribute automobiles, office equipment, land,
building or other similar assets that are personally owned
in exchange for stock in a corporation.
5-148
EXERCISE 5-19B
a.
J’s Appliances
1. Cash 100,000
Cash 80,000
4. Cash 28,000
Cash 10,000
6. Interest Expense* 7,000
*$100,000 x 7% = $7,000
5-149
b.
J’s Appliances
T-Accounts
Equity
Cash Notes Payable Sales Revenue
1. 2. 1. 3a.
80,000 100,000 68,000
100,000
4. 28,000 5. Bal. Bal.
10,000 100,000 68,000
Bal.
38,000
Interest Payable Cost of Goods Sold
Accounts 6. 7,000 3b.
Receivable 36,000
3a. 4. Bal. 7,000 Bal.
68,000 28,000 36,000
Bal.
40,000
Operating
Expenses
Mdse. Inventory 5. 10,000
2. 80,000 3b. Bal.
36,000 10,000
Bal.
44,000
Interest Expense
6. 7,000
Bal. 7,000
c.
J’s Appliances
Income Statement
Net Sales $68,00
0
5-150
)
Gross Margin 32,000
Operating Expenses (10,000
)
Net Income $15,00
0
5-151
c.
J’s Appliances
Balance Sheet
Assets
Cash $38,000
0
Liabilities
0
0
Equity 0
Activities:
Activities 0)
Activities
5-152
Activities:
Cash Inflow from Loan 100,000
Ending Cash Balance $
38,000
EXERCISE 5-20B
a. 35 days; Braun will have to pay within 10 days if he takes

the discount, but will have 45 days to pay if he does not
take the discount.
b. Assuming he has no other cash, Braun would have to

borrow the invoice amount less the discount or $65,000 x
.98 = $63,700.
c. Interest cost for 35 days: 63,700 x 8% x 35/365 = $488.66.

Total that would have to be repaid: $63,700 + $488.66 =
$64,188.66.
Savings by borrowing to pay the invoice within 10 days:
$65,000 − $64,188.66 = $811.34.
Memo:
It would be most cost effective for Braun to borrow the
money in order to pay the invoice within the discount
period. Braun would be incurring interest for a period of 35
days at a cost of $488.66. However, he would save $1,300
($65,000 x .02) by paying within the discount period. The
net savings to Braun would be $811.34.
5-153
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 5
PROBLEM 5-21B
T-accounts are provided for the instructor’s use:
Flower Company
T-Accounts 2002, 2003, and 2004
2002 80,000 60,000 2002 2002 8,000
80,000
102,000 40,000 Bal. 8,000
Bal. 82,000 2003 16,000
2003 90,000 Bal. 24,000
146,000
52,000 2004 8,000
Bal. 86,000 Bal. 32,000
2004 130,000
220,000
72,000 Sales Revenue
Bal. cl 102,000 2002
104,000 102,000
Bal. -0-
Merchandise Inv. cl 146,000 2003
146,000
2002 60,000 54,000 Bal. -0-
Bal. 6,000 cl 220,000 2004
220,000
2003 90,000 78,000 Bal. -0-
Bal. 18,000
2004 140,000
130,000
2002 cl 54,000
54,000
Bal. -0-
2003 cl 78,000
78,000
Bal. -0-
2004 cl 140,000
140,000
Bal. -0-
Selling and Adm. Exp.

2002 cl 40,000
40,000
5-154
Bal. -0-
2003 cl 52,000
52,000
Bal. -0-
2004 cl 72,000
72,000
Bal. -0-
5-155
PROBLEM 5-21B (cont.)
Flower Company
Income Statements
2002 2003 2004
Net Sales $102,000 $146,00 $220,00
0 0
Cost of Goods Sold (54,000) (78,000) (140,000
)
Gross Margin 48,000 68,000 80,000
Operating Expenses
Selling and Admin. (40,000) (52,000) (72,000)
Expense
Operating Income $ 8,000 $ $ 8,000
16,000
Balance Sheets
Assets
Cash $82,000 $ $104,00
86,000 0
Merchandise Inventory 6,000 18,000 8,000
Total Assets $88,000 $104,00 $112,00
0 0
Liabilities $ -0- $ -0- $ -0-

Common Stock 80,000 80,000 80,000
Retained Earnings 8,000 24,000 32,000
Total Stockholders’ Equity 88,000 104,000 112,000
Total Liab. and Stkholders’ $88,000 $104,00 $112,00
Equity 0 0
5-156
PROBLEM 5-22B
Event Product Period Costs

Costs
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
PROBLEM 5-23B
Event Freight Costs Period/Product

Paid
a. $300 Product
b. $ -0- NA
c. $ -0- NA
d. $500 Period
5-157
PROBLEM 5-24B
a.
The Jewel Shop
Effect of Transactions on Financial Statements Using Horizontal Statements Model
of
Date Assets = Liab. + Stockholders’ Rev. − Exp. = Net Cash Flows
Equity Inc.
Cash + Acct. + Inv. = Acct. + C. Stk. + Ret.
Rec. Pay. Earn.
5/1 100,00 + NA + NA = NA + 100,00 + NA NA − NA = NA 100,000 FA
0 0
5/1 NA + NA + 60,000 = 60,000 + NA + NA NA − NA = NA NA
5/2 (1,200) + NA + 1,200 = NA + NA + NA NA − NA = NA (1,200) OA
5/4a. NA + 74,000 + NA = NA + NA + 74,000 74,00 − NA =74,000 NA
0
5/4b. NA + NA + (44,000 = NA + NA +(44,000) NA − 44,00 =(44,000 NA
) 0 )
5/4 NA + NA + (5,000) = (5,000) + NA + NA NA − NA = NA NA
5/10a NA + NA + (550) = (550) + NA + NA NA − NA = NA NA
.
5/10b (26,950 + NA + NA =(26,950) + NA + NA NA − NA = NA (26,950) OA
. )
5/13 74,000 +(74,000) + NA = NA + NA + NA NA − NA = NA 74,000 OA
5/31 (27,500 + NA + NA (27,500) +
= NA + NA NA − NA = NA (27,500) OA
)
5/31 (7,800) + NA + NA = NA + NA + (7,800) NA − 7,800 = (7,800) (7,800) OA
Tot. 110,55 + -0- + 11,650 = -0- + 100,00 + 22,200 74,00 − 51,80 =22,200 110,550 NC
0 0 0 0
5-158
b.
The Jewel Shop
General Journal, May 2008
May 1 Cash 100,000
Common Stock 100,000
May 1 Merchandise Inventory 60,000
May 2 Merchandise Inventory 1,200
Cash 1,200
May 4a. Accounts Receivable 74,000
May 4b. Cost of Goods Sold 44,000
May 4 Accounts Payable 5,000
May Accounts Payable 550
10a.
May Accounts Payable 26,950
10b.
Cash 26,950
May 13 Cash 74,000
May 31 Accounts Payable 27,500
Cash 27,500
May 31 Selling and Admin. 7,800
Expenses
Cash 7,800
5-159
c.
The Jewel Shop
T-Accounts, May 2008
Equity
5/1 100,000 5/2 1,200 5/1 5/1
60,000 100,000
5/13 74,000 5/10b. 5/4 5,000
26,950
5/31 27,500 5/10a. 550 Sales Revenue
5/31 7,800 5/10b. 5/4a.
26,950 74,000
Bal. 5/31 27,500 Bal.
110,550 74,000
Bal. -0-
Accounts Receivable Cost of Goods Sold
5/4a. 5/13 74,000 5/4b.
74,000 44,000
Bal. -0- Bal. 44,000
Merchandise Inventory Selling & Adm.

Expenses
5/1 60,000 5/4b. 44,000 5/31 7,800
5/2 1,200 5/4 5,000 Bal. 7,800
5/10a. 550
Bal. 11,650
5-160
d. & e.
The Jewel Shop
For the Month Ended May 31, 2008
Income Statement
Net Sales $74,000
Gross Margin 30,000
Operating Expenses
Selling and Adm. Expenses (7,800)

Cash Flows From Oper.
Activities:
Inflow from Customers $
74,000
Outflow for Inventory
(55,650)
Outflow for Selling and Adm. (7,800)
Exp.
Act.
Activities
Cash Flows From Fin.
Activities:
Act.
5-161
0
f. The difference between net income and net cash flow

from operating activities is due entirely to unsold
inventory ($22,200 − $10,550 = $11,650) that has already
been paid for.
5-162
PROBLEM 5-25B
a.
M & M Enterprises
Effect of Events on the Financial Statements for 2006
Event Even Balance Sheet Income Statement Statement of
t
No. Type Assets = Liab. + S. Rev. − Exp. = Net Inc. Cash Flows
Equity
1a. AS + + NA NA NA NA NA
1b. AE +− NA NA NA NA NA − OA
Disc.
Pay.
4a. AS + NA + + NA + NA
Sale
4b. AU − NA − NA + − NA
Cost
5a. AU − NA − − NA − − OA
Ret.
5b. AS + NA + NA − + NA
Ret.
6. AU − NA − NA + − − OA
7a. AU − NA − − NA − NA
Disc.
7b. AE +− NA NA NA NA NA + OA
Coll.
8. AU − NA − NA + − NA
5-163
b.
M & M Enterprises General Journal
1a. Merchandise Inventory 5,600
Cash 500
Cash 5,096
Sales Revenue 9,000
Cash 840
Cost of Goods Sold 520
Cash 600
7b. Cash 8,820
8. Cost of Goods Sold (Inventory 316
Loss)
5-164
c.
M & M Enterprises
T-Accounts for 2006
Assets = Liabilities + Stockholders’ Equity

B 8,400 1b 500 2. 400 1a 5,600 Bal 8,000
al. . . .
7b. 8,820 3b 5,096 3a. 104
.
5a 840 3b. 5,096
.
6. 600 Bal. -0- Retained Earnings
B 10,184 Bal 2,400
al. .
cl 6,396 cl 7,980
Bal 3,984
.
Merchandise
Inventory
B 2,000 Sales Revenue
al.
1a. 5,600 2. 400 5a. 840 4a. 9,000
1b. 500 3a 104 7a. 180
.
5b. 520 4b 6,000 Bal 7,980
. .
8. 316 cl 7,980
B 1,800 Bal -0-
al. .
Cost of Goods Sold

4b. 6,000
Accounts 8. 316 5b. 520
Receivable
4a. 9,000 7a 180 B 5,796
. al.
7b. 8,820 cl 5,796
B -0- B -0-
al. al.
Transportation-out
6. 600
B 600
al.
cl 600
B -0-
al.
5-165
5-166
PROBLEM 5-25B
d.
M & M Enterprises
Income Statement
Net Sales $7,980
Gross Margin 2,184
Operating Expenses

Earnings
5-167
PROBLEM 5-25B d. (cont.)
M & M Enterprises
Balance Sheet
Assets
Cash $10,184
Total Assets $11,98
4
Liabilities $
-0-
Equity 4

Activities:
Net Cash Flow from Operating $
Activities 1,784
Activities
Activities
5-168
4
5-169
e.
Closing Entries
Dec. Sales Revenue 7,980
31
Dec. Retained Earnings 6,396
31
See T-Accounts in part c. for closing entries.
M & M Enterprises
December 31, 2006
Cash $10,184
Totals $11,984 $11,984
5-170
PROBLEM 5-26B
a.
Martin Farm Co.
Beginning Merchandise $ 5,075

Inventory
Purchases 40,000
Allowances
Cost of Goods Available for 45,350
Sale
Less: Ending Merchandise (4,050)
Inventory
5-171
b.
Martin Farm Co.
Income Statement
Revenue
Allowances
Net Sales $67,095
Gross Margin 25,795
Operating Expenses
Rent Expense 5,000
Depreciation Expense 710
Total Operating Expenses (17,360)
Non-Operating Items
Net Income Before Income 8,075
Tax
Income Taxes (3,700)
Net Income $ 4,375
5-172
PROBLEM 5-26b (cont.)
c.
Martin Farm Co.
Income Statement
Revenue
Allowances
Net Sales $67,095
Operating Expenses
Rent Expense 5,000
Depreciation Expense 710
Interest Expense 360
Income Taxes 3,700
Net Income $ 4,375
5-173
PROBLEM 5-27B
a.
John’ s Jungle
1a. Land 20,000
Cash 20,000
1b. Building 90,000
Cash 10,000
2. Purchases 126,000
3. Transportation-in 1,000
Cash 1,000
Allow.
5. Cash 86,000
6. Accounts Receivable 120,000
7a. Accounts Payable 1,224
Purchase Discounts 1,224
Cash 121,176
8. Selling Expenses 11,600
Cash 11,600
9a. Sales Discounts ($50,000 x 1,000
2%)
9b. Cash ($110,000 − $1,000) 109,000
5-174
PROBLEM 5-27B a. (cont.)
John’s Jungle
10. Interest Expense ($80,000 x 6,400
8%)
Cash 6,400
11. Notes Payable 10,000
Cash 10,000
12. Depreciation Expense1 2,250
Accumulated Depreciation 2,250
13. Cost of Goods Sold2 144,576
Purchase Discounts 1,224
Allowances
Purchases 126,000
($50,000 − $27,600)
1
$90,000 ÷ 40 = $2,250 per year.
2
Cost of Goods Sold:Beginning Merchandise Inventory $
50,000
Purchases 126,000
Purchase Ret. and Allow.(3,600)
Purchase Discounts (1,224)
Cost of Goods Available172,176
Less: Ending Merchandise Inventory
(27,600)
5-175
b.
John’s Jungle
B 26,000 1a. 20,000 4. 3,600 Bal 4,000 B 37,000
al. . al.
5. 86,000 1b. 10,000 7a. 1,224 2. 126,00
0
9b. 109,00 3. 1,000 7b 121,17 Retained Earnings
0 . 6
7b. 121,17 Bal 4,000 B 33,000
6 . al.
8. 11,600
10. 6,400 Notes Payable Sales Revenue
11. 10,000 11.10,000 Bal 6,000 5. 86,000
.
B 40,824 1b. 80,000 6. 120,000
al.
Bal 76,000 B 206,000
. al.
Accounts Receivable
B 4,000 9a. 1,000 Sales Discounts
al.
6. 120,00 9b. 109,00 9a. 1,000
0 0
B 14,000
al.
Purchases
Merchandise Inventory 2. 126,00 13 126,000
0.
B 50,000 13. 22,400 B -0-
al. al.
B 27,600
al.
Purchase Returns &
Allow.
Building 13. 3,600 4. 3,600
1b. 90,000 B -0-
al.
B 90,000
al.
Purchase Discounts
Accumulated Depr. 13. 1,224 7a. 1,224
12. 2,250 B -0-
al.
Bal 2,250
.
Transportation-in
Land 3. 1,000 13. 1,000
5-176
1a. 20,000 B -0-
al.
B 20,000
al.
Cost of Goods Sold
13. 144,57
6
Interest Expense
10. 6,400
Selling Expenses
8. 11,600
Depreciation Expense
12. 2,250
5-177
c.
John’s Jungle
Beginning Inventory $50,000
1/1/2008
Purchases 126,000
Purchase Discounts (1,224)
Allow.
Cost of Goods Available for $172,17
Sale 6
Ending Merchandise (27,600)
Inventory
6
5-178
PROBLEM 5-27B c. (cont.)
John’s Jungle
Income Statement
Revenue
Net Sales $205,000
)
Gross Margin 60,424
Operating Expenses
Selling Expenses 11,600
Total Operating Expense (13,850)
Non-Operating Expense
Net Income $ 40,174

Ending Common Stock $ 37,000
Earnings
5-179
John’s Jungle
Balance Sheet
Assets
Cash $40,824
Building $90,00
0
Accumulated Depreciation (2,250) 87,750
Land 20,000
4
Liabilities
Total Liabilities $ 80,000
Common Stock 37,000
Equity 4
5-180
John’s Jungle
Activities:
Outflow for Inventory (122,176
)
Activities 4
Cash Flows From Investing
Activities:
Outflow for Purchase of Bldg. (30,000)
and Land
Net Cash Flow from Investing (30,000
Activities )
Activities:
Outflow for Loan Payment (10,000)
Net Cash Flow from Financing (10,000
Activities )
4
5-181
PROBLEM 5-28B
Madison Company
2002 % 2003 %
Net Sales $74,507 100 $80,000 100
Cost of Goods Sold (28,317) (38) (34,400) (43)
Gross Margin 46,190 62 45,600 57
Operating Expenses
Selling and Adm. Exp. (43,210) (58) (40,800) (51)
Net Income $ 2,980 4 $ 4,800 6
Based on the common size income statements, the claims

made by the president appear to be true. The dollar
amount of the sales increased from $74,507 to $80,000,
but the gross margin percentage decreased from 62% to
57%. The lower gross margin percentage shows that the
company is charging less for its goods compared to the
cost of the goods. Operating expenses in 2003 were
lower, as a percentage of sales, than in 2002. These
factors combined to give the company a higher return-on-
sales percentage in 2003.
5-182
ATC 5-1
a.
(All amounts are in thousands)
Gross Profit ÷ Sales = Gross Profit %
2000 $5,218 ÷ $25,265 = 20.65%
2001 $6,443 ÷ $31,888 = 20.21%
b.
Net Income ÷ Sales = Return on Sales
%
2000 $1,666 ÷ $25,265 = 6.59%
2001 $2,177 ÷ $31,888 = 6.83%
c. Dell’s gross profit percentage in 2000 was 0.44 points

higher than it was in 2001 (20.65% − 20.21%). Ignoring
taxes, an additional 0.44% of gross profit would have
increased Dell’s 2001 net income by just over $140
million. (Sales of $31,888 x .0044 = $140.3)
5-183
ATC 5-2
a. (1)
Calculate cost of goods sold:
First Second Third Fourth
Quarter Quarter Quarter Quarter
Sales $1,481,60 $2,260,38 $2,891,23 $774,674
5 8 7
Less gross (561,247) (855,353) (1,107,323 (295,970)
margin )
Cost of goods $ 920,358 1,405,035 $1,783,91 $478,704
sold 4
Calculate operating expenses:

Gross margin $561,247 $855,353 $1,107,32 $295,970
3
Less net income (52,279) (21,138) (43,321) (36,645)
Operating $508,968 $834,215 $1,064,00 $259,325
expenses 2
Multistep income statements

Sales $1,481,60 $2,260,38 $2,891,23 $774,674
5 8 7
Less Cost of
goods sold (920,358) (1,405,035 (1,783,914 (478,704)
) )
Gross margin 561,247 855,353 1,107,323 295,970
Less operating
expenses (508,968) (834,215) (1,064,002 (259,325)
)
Net income $ 52,279 $ 21,138 $ 43,321 $ 36,645
a. (2)
Gross margin percentage:
5-184
Quarter Gross Margin ÷ Sales = Gross margin %
First $561,247 ÷ $1,481,605 = 37.88%
Second $855,353 ÷ $2,260,388 = 37.84%
Third $1,107,323 ÷ $2,891,237 = 38.30%
Fourth $295,970 ÷ $774,674 = 38.21%
5-185
ATC 5-2 a. (cont.)
a. (3)
Cost of goods sold percentage:
Quart 1 − Gross margin = Cost of goods sold
er % %
First 1.00 − .3788 = 62.12%
Secon 1.00 − .3784 = 62.16%
d
Third 1.00 − .3830 = 61.70%
Fourth 1.00 − .3821 = 61.79%
b. Some points the students may mention include:

The sales increase in the third quarter can be
attributed to sales for the Christmas season.
Gross margin may drop in the last quarter if the
company is trying to increase sales for year end and
sell old merchandise.
5-186
ATC 5-3
The correct matching of the four companies with their

related financial data can be achieved with only the gross
margin percentage ratio, plus other factors. However, on
the assumption that many students will compute all the
ratios for which there were sufficient data, the return-on-
assets and return-on-sales ratios are presented here as
well.
(Dollar amounts are in millions.) A B C

D
Sales $20,175 $1,688.1 1,668.1
$1,161.7
Cost of Goods Sold 14,497 1,063.4 719.6 327.4
Gross Margin $ 5,678 $ 624.7 $ 948.5 $ 834.3
Company
RATIO: A B C D
28.1% = 37.0% = 56.9% 71.8%=

=
Gross Margin $ 5,678 $ 624.7 $ $ 834.3
948.5
$20,175 $1,688. $1,668. $1,161.7
1 1
5.2% = 7.1% = 11.4%= 4.3% =

Return-on-Sales $ 1,053 $ 120.2 $190.6 $ 49.5
$20,175 $1,688. $1,668. $1,161.7
1 1
3.7% = 16.1%= 12.2% 2.9% =

=
5-187
Return-on- $ 1,053 $ 120.2 $ 190.6 $ 49.5
Assets
$28,464 $ 746.9 $1,568. $1,712.3
3
5-188
ATC 5-3 (cont.)
The four companies relate to the financial information as

follows:
Caterpillar is company “A”

Dollar Tree is company “B”
Tiffany is company “C”
Novell is company “D”
It is entirely coincidental that the alphabetical ordering of

the companies matches the decreasing magnitude of their
respective sales.
Rational for matching companies with financial information:
Dollar Tree can be matched with company “B” data because

it is the only company that did not have any accounts
receivable. Most students will probably know that discount
stores do not usually make sales on account.
Novell can be matched with company “D” due to its high

gross margin percentage. The big expense for a software
company is the cost of developing programs. Once
developed, it is easy and cheap to produce more copies.
There are a couple of clues suggesting that company “A” is

Caterpillar and company “C” is Tiffany. First, company “A”
is a lot larger company than company “C” in terms of both
sales and total assets. Many students will probably expect
Caterpillar to be the larger company. Second, once it is
determined that the discount retailer, company “B” has a
gross margin percentage of 37%, students would expect
Tiffany’s gross profit margin to be higher. This would
eliminate company “A” from being Tiffany.
It is worth noting that even though the discount store

company, Dollar Tree, had a lower gross margin percentage
and return-on-sales ratio than Tiffany’s, it still had a higher
5-189
return-on-assets ratio. A company that charges the lowest
prices does not necessarily earn the least profit for the
amount of assets invested.
5-190
ATC 5-4
a. Gross Margin Percentages:
Richard: 45% ($14,670 ÷ $32,600)

Jennifer: 25% ($21,550 ÷ $86,200)
Return-on-Sales Ratios:
Richard: 5% ($1,630 ÷ $32,600)

Jennifer: 3% ($2,590 ÷ $86,200)
Both of these ratios, but especially the gross margin

percentages, show that Richard is the “high-end retailer.”
Richard is obviously marking up the price of merchandise by a
greater percentage than Jennifer.
b. Return-on-Equity Ratios:
Richard: 10.1% ($1,630 ÷ $16,200)

Jennifer: 12.7% ($2,590 ÷ $20,400)
From the viewpoint of the owners, Jennifer was more profitable.
5-191
ATC 5-5
a.
Karen % Patrick %
Sales $1,000,000 100.0 $1,000,000 100.0
Cost of Goods Sold (650,000) (65.0) (550,000) (55.0)
Gross Margin 350,000 35.0 450,000 45.0
Operating Expenses (250,000) (25.0) (375,000) (37.5)
Net Income $ 100,000 10.0 $ 75,000 7.5
b. Karen Company:
Return on assets: $100,000 ÷ $1,200,000 = 8.3%

Return on equity: $100,000 ÷ $ 450,000 = 22.2%
Patrick Company:
Return on assets: $75,000 ÷ $1,200,000 = 6.3%

Return on equity: $75,000 ÷ $ 300,000 = 25.0%
c. Patrick Co., because it has the higher return-on-equity

percentage.
d. Patrick Co. appears to be the high-end retailer because it has the

higher gross margin percentage. Karen Co. appears to be the
discounter because it has the lower gross margin percentage.
5-192
ATC 5-6
a.
This writing assignment tests both analytical and writing skills.
Some of the analytical amounts that should be included are:
For 2005:
Sales are overstated by $146,800.
Cost of goods sold is overstated by $94,623.
Gross profit is overstated by $52,177 ($146,800 − $94,623).
Net income is overstated by $52,177.
Assets are overstated by $52,177.
Equity is overstated by $52,177.
For 2006 the opposite result occurs:

Sales are understated by $146,800.
Cost of goods sold is understated by $94,623.
Gross profit is understated by $52,177.
Net income is understated by $52,177.
b. The president of the company may want to show a higher net

income and higher sales for 2005 for the purpose of making a loan
or securing other capital. Also, if the president receives a bonus
that is based on net income, delaying the recognition of the sales
return will act to increase his 2005 bonus. However, reporting
more income in 2005 will increase the amount of income tax paid.
c. Yes, it will violate rules II, IV & V.
d. If this is an indication of the character of the president and

consequently the company, you may want to find other
employment. Usually, if a person violates one set of rules, then
others may also be violated.
5-193
ATC 5-7
a. An immediate write off would result in a $600,000

inventory loss reported under unusual items on the
company’s income statement. This loss would be
subtracted from income from continuing operations.
Accordingly, net income would decline. The write-off
would decrease assets (i.e., inventory) and equity (i.e.,
retained earnings) on the balance sheet. Cash flow
would not be affected. These computations ignore the
effects resulting from tax savings.
b. Since Ms. Fontanez’s bonus is based on net income, her

bonus would be reduced by $30,000 [$600,000 loss in
profit x .05 bonus].
c. The loss would be recognized on the 2006 income

statement if Ms. Fontanez refused to have it recognized
in 2005. This would reduce the new president’s bonus.
Even if the loss is not taken in 2005 and the new
president can sell the damaged goods at a reduced
price, profits would still be adversely affected and his
bonus would suffer from an event that happened in the
prior period.
d. Given that the damaged inventory is worthless, it

would be unethical for Ms. Fontanez to refuse to
recognize it in the period the loss was incurred.
Fairness would dictate that Ms. Fontanez accept the
loss because it occurred in a period under her
management control. It was her management team
that exposed the company to the risk of self insurance.
Funds saved on insurance expense must be weighed
against the losses that a company is likely to incur. Not
only is the deferral of the loss unethical, it is in
violation of GAAP. The willful failure to report a
material loss is an act of fraud. Accordingly, Ms.
Fontanez and Mr. Smith could face criminal charges if
they fail to report the loss in the financial statements.
e. Mr. Smith must refuse to go along with Ms. Fontanez

even if it means he loses his job. If he willfully
5-194
participates in fraudulent reporting practices, he may
face criminal prosecution. My boss made me do it, is
not a valid justification for fraud in the eyes of the law.
5-195
ATC 5-8
NOTE: This solution was accurate as of December 15, 2001.

However, the EDGAR database is subject to update at any
time, so this solution will likely be “dated” at the time you
assign this case to your students.
a.& b. Amounts in millions.
2000 1999
Sales $22,936 $16,323
Cost of goods sold 17,342 12,536
Gross margin $ 5,594 $ 3,787
Gross margin percentage 24.4% 23.2%
c. Net earnings in 2000 were $1,484. Return on sales was:
$1,484 ÷ $22,936 = 6.5%
d. Total sales in 2000 were $22,936; sales in the USA were $15,487
Domestic operations accounted for 67.5% of sales.
e. These companies are not in the same industry and cannot be

compared. You need to compare companies in the same industry
to determine which is better managed.
5-196

Chapter 05 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

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ANSWERS TO QUESTIONS - CHAPTER 5

1. The term “inventory” includes a supply of goods that is

2. Merchandise inventory is finished goods that are held for

3. Product costs are costs associated with goods for resale,

4. Cost of goods available for sale is the total of inventory on

6. Period costs are expensed in the period they are incurred

Cost of Goods Available for Sale$450,000

8. Under a perpetual inventory system, the balance in the

A physical inventory should be taken regardless of the

9. a. Assets increase, stockholders’ equity increases - The

b. Assets increase, stockholders’ equity increases - This is

10. Assets would both increase and decrease (cash increases

11. Shipping cost of goods shipped F.O.B. shipping point will

12. Transportation-in is the cost of freight and shipping

13. The $80 transportation-in is a product cost and is debited

14. When allowances are granted it is usually because the

15. 2/10, n/30 means that a 2% discount may be taken off of

16. If the $5,000 is for the purchase of inventory, this is an

18. Transportation-out is the freight or shipping cost on goods

19. Purchase returns refer to the situation where the buyer of

21. The multistep income statement provides more

22. When using the periodic method of accounting for

25. The return on sales ratio is the amount of net income

SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 5

Total Liab. and Stockholders’ $14,80

Cash Flows From Investing -0-

Cash Flows From Financing

Net Increase in Cash 14,800

University Book Mart

University Book Mart

University Book Mart

Cash Flows From Investing -0-

Cash Flows From Financing

Net Increase in Cash 13,050

b. Darwin Consulting is a service business and has service

c. The only difference in the balance sheets of the two

d. The cash flows from operating activities section of the

d. Total assets: $32,000 (Cash $27,000 + Inventory $5,000).

Beg. Bal. 48,000 NA NA NA 48,000 NA NA NA NA NA

f. Net income is $12,000 and net cash flow from operating

The Gift Shop

Balance Sheet Income Statement Statement

1. Stock 2,500 + NA + NA = NA +2,500 + NA NA − NA = NA 2,500 FA

Gross amount due $10,000

c. $10,000; he would not be eligible for the discount.

d. The Glass Exchange would be willing to give a discount for

d. Upton Company would grant an allowance to Jones for

Assets = Liab. + Stkholders’ Income Statement Statement

1. Stock 60,000 + NA + NA = NA + 60,00 + NA NA − NA = NA 60,000 FA

e. Cash discounts are given to encourage prompt payment of

f. Stone Sales will get a 2% discount if the account is paid

Retail Sales Company

Retail Sales Company

c. Lost, stolen, or damaged inventory may not have been

Beginning Mdse. $ 1,050

a. Goods Available for Sale

b. Cost of Goods Sold

c. Merchandise Inventory on year-end balance sheet

Single-Step Income Statement:

Multistep Income Statement:

*Sales, $680,000 − Sales Returns and Allow., $6,370 = Net

*Cost of Goods Sold Calculation: