Page 276 - Accounting Principles (A Business Perspective)

6. Merchandising transactions

Business decision case B In the Annual report appendix, refer to the consolidated statements of earnings for
The Limited's most recent three years. Calculate the gross margin percentage and write an explanation of what the
results mean for each of the three years.

Annual report analysis C Refer to the consolidated statements of income of The Limited in the Annual
report appendix. Identify the 2000, 1999, and 1998 net sales; cost of goods sold; gross profit; selling,
administrative, and general expenses; and operating income. Do the results present a favorable trend? Comment on
the results.
Ethics case – Writing experience D Based on the ethics case related to World Auto Parts Corporation,
respond in writing to the following questions:
a. Do you agree that the total impact of this practice could be as much as USD 10 million?

b. Are the small suppliers probably better off going along with the practice?
c. Is this practice ethical?
Group project E In teams of two or three students, go to the library (or find an annual report at
www.sec.gov/edgar.shtml) to locate one merchandising company's annual report for the most recent year. Calculate
the company's gross margin percentage for each of the most recent three years. As a team, write a memorandum to
the instructor showing your calculations and commenting on the results. The heading of the memorandum should
contain the date, to whom it is written, from whom, and the subject matter.
Group project F In a team of two or three students, contact a variety of businesses in your area and inquire as
to the types of sales discount terms they offer to credit customers and the types of purchase discount terms they are

offered by their suppliers. Calculate the approximate annual rate of interest implied in several of the more common
discount terms. For instance, the book states that the implied annual rate of interest on terms of 2/10, n/30 is 36
per cent, assuming we use a 360-day year. Present your findings in a written report to your instructor.
Group project G In a team of two or three students, obtain access to several annual reports of companies in
different industries (see www.sec.gov/edgar.shtml.) Examine their income statements and identify differences in
their formats. Discuss these differences within your group and then present your findings in a report to your
instructor.

Using the Internet—A view of the real world
Visit the Fat Brains Toys website at:
http://fatbraintoys.com website
Browse around the site for interesting information. What products do they sell? What journal entries would they
make to record sales of these products? Write a report to your instructor summarizing your experience at this site.

Answers to self-test
True-false
False. Sales discounts, as well as sales returns and allowances, are deducted from gross sales.
True. Under perpetual inventory procedure, the Merchandise Inventory account is debited for each purchase
and credited for each sale.

True. Purchase Discounts and Purchase Returns and Allowances are contra accounts to the Purchases account.
The balances of those accounts are deducted from purchases to arrive at net purchases.

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