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# Chapter 5 HW Day 2

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```									Chapter 5 HW Day 2

5.     Sales revenue .........................................................................................................       \$100,000
Cost of goods sold...................................................................................................           65,000
Gross profit..............................................................................................................    \$ 35,000

22. Profitability is affected by gross profit (as measured by the gross profit rate) and by
management’s ability to control operating expenses, as measured by the profit margin
ratio.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-9

Net sales .....................................................................                                                     \$620,000
Beginning inventory ..................................................                                    \$ 60,000
Add: Cost of goods purchased* ...............................                                              402,000
Cost of goods available for sale ...............................                                           462,000
Ending inventory .......................................................                                    90,000
Cost of goods sold ....................................................                                                              372,000
Gross profit ................................................................                                                       \$248,000

*Information taken from Brief Exercise 5-8.

BRIEF EXERCISE 5-11

(a) Profit margin ratio = \$70,000 ÷ \$800,000 = .088

The profit margin ratio measures the extent by which selling
price
covers all expenses. In this case, 91.2% of sales revenues cover
all
expenses (cost of goods sold and operating expenses) leaving
8.8% of revenues as net income.

(b) Gross profit rate = (\$800,000 – \$520,000) ÷ \$800,000 = .35

The gross profit rate measures the margin by which selling price
exceeds cost of goods sold. In this case, 35% of sales revenues
remain (after deducting cost of goods sold) to cover operating
expenses and produce net income.
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Chapter 5 HW Day 2

*BRIEF EXERCISE 5-13

(a) Purchases ...........................................................       800,000
Accounts Payable ...................................                               800,000

(b) Accounts Payable ..............................................             110,000
Purchase Returns and Allowances........                                             110,000

(c) Accounts Payable (\$800,000 – \$110,000)..........                            690,000
Purchase Discounts (\$690,000 X 2%) ....                                              13,800
Cash (\$690,000 – \$13,800) ......................                                    676,200

SOLUTIONS TO EXERCISES
EXERCISE 5-9

(a)                              THE CLOROX COMPANY
Income Statement
For the Year Ended June 30, 2007
(amounts in millions)

Net sales .............................................................                 \$4,847
Cost of goods sold .............................................                         2,756
Gross profit.........................................................                    2,091
Operating expenses
Selling and administrative expenses ........                           \$642
Research and development expense ........                               108
Total operating expenses ...................                                    1,224
Income from operations ....................................                                 867
Other expenses and losses
Other expense.............................................               11
Interest expense .........................................              113          124
Income before income taxes .............................                                  743
Income tax expense ...........................................                            247
Net income ..........................................................                   \$ 496

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Chapter 5 HW Day 2

(b) Gross profit rate: \$2,091 ÷ \$4,847 = 43.1%

Profit margin ratio: \$496 ÷ \$4,847 = 10.2%

The gross profit rate indicates that about 57 cents of each dollar
of sales revenue is required to cover the cost of goods sold,
leaving about 43 cents to cover all remaining expenses and
produce net income.

The profit margin ratio indicates that each dollar of sales revenue
results in about 10 cents of net income.

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Chapter 5 HW Day 2

EXERCISE 5-9 (Continued)

(c)                              THE CLOROX COMPANY
Income Statement
For the Year Ended June 30, 2007
(amounts in millions)

Net sales* ............................................................              \$6,059
Cost of goods sold** ..........................................                       3,445
Gross profit.........................................................                 2,614
Operating expenses
Selling and administrative expenses ........                         \$642
Research and development expense ........                             108
Total operating expenses ...................                                 1,564
Income from operations ....................................                            1,050
Other expenses and losses
Other expense.............................................             11
Interest expense .........................................            113         124
Income before income taxes .............................                               926
Income tax expense ...........................................                         324
Net income ..........................................................                \$ 602

Gross profit rate: \$2,614 ÷ \$6,059 = 43.1%

Profit margin ratio: \$602 ÷ \$6,059 = 9.9%

The gross profit rate remained unchanged at 43.1%. This result
would be expected since advertising expenses are not part of
cost of goods sold.
The profit margin ratio decreased from 10.2% to 9.9% because
operating expenses increased \$340 million.
Despite the decline in the profit margin ratio, it appears that the
marketing department’s plan has merit. If the expected increases
in sales materialize, net income will increase \$106 million (\$602 –
\$496).
*\$4,847 + (.25 X \$4,847)
**\$2,756 + (.25 X \$2,756)
***\$474 + \$340
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Chapter 5 HW Day 2

SOLUTIONS TO PROBLEMS

PROBLEM 5-3A

(a)
General Journal
Date         Account Titles                                              Debit                 Credit
Apr. 5       Merchandise Inventory ..................................... 1,500
Accounts Payable......................................                         1,500

7     Merchandise Inventory .....................................             80
Cash ...........................................................                     80

9     Accounts Payable .............................................          200
Merchandise Inventory..............................                              200

10     Accounts Receivable ........................................            910
Sales ...........................................................                910

Cost of Goods Sold...........................................           620
Merchandise Inventory..............................                              620

12     Merchandise Inventory .....................................             830
Accounts Payable......................................                           830

14     Accounts Payable (\$1,500 – \$200) ................... 1,300
Merchandise Inventory (\$1,300 X 3%) ........                                      39
Cash ...........................................................               1,261

17     Accounts Payable .............................................          30
Merchandise Inventory..............................                                  30

20     Accounts Receivable ........................................            810
Sales ...........................................................                810

Cost of Goods Sold...........................................           550
Merchandise Inventory..............................                              550

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Chapter 5 HW Day 2

Date         Account Titles                                                        Debit           Credit
Apr. 21      Accounts Payable (\$830 – 30)                                           800
Merchandise Inventory (\$800x 1%)                                                        8
Cash                                                                                  792

27     Sales Returns and Allowances ........................                    60
Accounts Receivable ................................                                     60

30     Cash ................................................................... 1,100
Accounts Receivable ................................                              1,100

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Chapter 5 HW Day 2

(b)
Cash
4/1 Bal.      2,500 4/7           80
4/30          1,100 4/14       1,261
4/21         792
4/30 Bal.     1,467

Accounts Receivable
4/10       910 4/27          60
4/20       810 4/30       1,100
4/30 Bal.  560

Merchandise Inventory
4/1 Bal.  3,500 4/9         200
4/5       1,500 4/10        620
4/7          80 4/14         39
4/12        830 4/17         30
4/20        550

4/21        8
4/30 Bal.     4,463

Accounts Payable
4/9            200 4/5         1,500
4/14         1,300 4/12          830
4/17            30
4/21           800
4/30 Bal.      0

Common Stock
4/1 Bal.      6,000
4/30 Bal.     6,000

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Chapter 5 HW Day 2

Sales
4/10                  910
4/20                  810
4/30 Bal.           1,720

Sales Returns and Allowances
4/27         60
4/30         60

Cost of Goods Sold
4/10        620
4/20        550
4/30 Bal. 1,170

(c) WICHITA PRO SHOP
Trial Balance
April 30, 2010

Debit       Credit
Cash ........................................................................    \$1,467
Accounts Receivable .............................................                   560
Merchandise Inventory ..........................................                  4,463
Accounts Payable ..................................................                          \$    0
Common Stock .......................................................                          6,000
Sales ........................................................................                1,720
Sales Returns and Allowances ..............................                          60
Cost of Goods Sold ................................................               1,170
\$7,720      \$7,720

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Chapter 5 HW Day 2

(d)                                     WICHITA PRO SHOP
Income Statement (Partial)
For the Month Ended April 30, 2010

Sales revenues
Sales ...................................................................................    \$1,720
Less: Sales returns and allowances ...............................                               60
Net sales .............................................................................      \$1,660
Cost of goods sold ....................................................................           1,170
Gross profit................................................................................     \$ 490

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Chapter 5 HW Day 2

PROBLEM 5-7A

KANE DEPARTMENT STORE
Income Statement (Partial)
For the Year Ended November 30, 2010

Sales revenues
Sales ........................................                                  \$904,000
Less: Sales returns and
allowances ...................                                             20,000
Net Sales..................................                                      884,000
Cost of goods sold
Inventory, Dec. 1, 2009 ...........                                  \$ 42,200
Purchases................................                 \$616,000
Less: Purchase returns
and allowances ............               \$6,760
Purchase discounts.....                    7,000     13,760
Net purchases .........................                    602,240
Cost of goods purchased .......                                       607,300
Cost of goods available for
sale ......................................                        649,500
Inventory, Nov. 30, 2010 .........                                     36,200
Cost of goods sold ...........                                               613,300
Gross profit ....................................                                   \$270,700

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