Chapter Review
6-9jCases & Projects
Ethics in Action
Margie Johnson is a staff accountant at ToolEx Company, a manufacturer of tools and equipment. The company is under pressure from investors to increase earnings, and the president of the company expects the accounting department to “make this happen.” Margie’s boss, who has been a mentor to her, is concerned that if earnings do not increase, he will be terminated.
Shortly after the end of the fiscal year, the company performs a physical count of the inventory. When Margie compares the physical count to the balance in the inventory account, she finds a significant amount of inventory shrinkage. The amount is so large that it will result in a significant drop in earnings this period. Margie’s boss asks her not to make the adjusting entry for shrinkage this period. He assures her that they will get “caught up” on shrinkage in the next period, after the pressure is off to reach this period’s earnings goal. Margie’s boss asks her to do this as a personal favor to him.
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What should Margie do in this situation? Why?
Ethics in Action
On April 18, 20Y1, Bontanica Company, a garden retailer, purchased $9,800 of seed, terms 2/10, n/30, from Whitetail Seed Co. Even though the discount period had expired, Shelby Davey subtracted the discount of $196 when he processed the documents for payment on May 1, 20Y1.
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Discuss whether Shelby Davey behaved in a professional manner by subtracting the discount even though the discount period had expired.
Team Activity
In teams, select a public company that interests you. Obtain the company’s most recent annual report on Form 10-K. The Form 10-K is a company’s annually required filing with the Securities and Exchange Commission (SEC). It includes the company’s financial statements and accompanying notes. The Form 10-K can be obtained either (a) by referring to the investor relations section of the company’s website or (b) by using the company search feature of the SEC’s EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html.
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Based on the information in the company’s most recent annual report, determine each of the following for all the years presented:
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Gross profit
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Gross profit rate (Gross profit ÷ Sales) (Round to one decimal place.)
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Income from operations
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Percentage change in income from operations (Round to one decimal place.)
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Net income
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Percentage change in net income (Round to one decimal place.)
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Based solely on your responses to item 1, has the company’s performance improved, remained constant, or deteriorated over the periods presented? Briefly explain your answer.
Communication
Suzi Nomro operates Watercraft Supply Company, an online boat parts distributorship that is in its third year of operation. The following income statement was prepared for the year ended October 31, 20Y2.
Suzi is considering a proposal to increase net income by offering sales discounts of 2/15, n/30 and by shipping all merchandise FOB shipping point. Currently, no sales discounts are allowed and merchandise is shipped FOB destination. It is estimated that the new terms will increase sales by 10%. The ratio of the cost of merchandise sold to sales is expected to be 60%. All selling and administrative expenses are expected to remain unchanged, except for store supplies and miscellaneous selling expenses, which are expected to increase proportionately with increased sales. The amounts of these items for the year ended October 31, 20Y2, were as follows:
Store supplies expense | $12,000 |
Miscellaneous selling expenses | 6,000 |
The interest revenue and expense items will remain unchanged. The shipment of all merchandise FOB shipping point will eliminate all delivery expenses, which for the year ended October 31, 20Y2, were $12,000.
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Write a brief memo to Suzi discussing the potential benefits and limitations of this proposal. Include a determination of the net income that Watercraft Supply could generate for the year ending October 31, 20Y3, under the new proposal, assuming that all sales are collected within the discount period.
Purchases Discounts and Accounts Payable
Rustic Furniture Co. is owned and operated by Cam Pfeifer. The following is an excerpt from a conversation between Cam Pfeifer and Mitzi Wheeler, the chief accountant for Rustic Furniture Co.:
Mitzi, I’ve got a question about this recent balance sheet.
Sure, what’s your question?
Well, as you know, I’m applying for a bank loan to finance our new store in Garden Grove, and I noticed that the accounts payable are listed as $320,000.
That’s right. Approximately $275,000 of that represents amounts due our suppliers, and the remainder is miscellaneous payables to creditors for utilities, office equipment, supplies, etc.
That’s what I thought. But as you know, we normally receive a 2% discount from our suppliers for earlier payment, and we always try to take the discount.
That’s right. I can’t remember the last time we missed a discount.
Well, in that case, it seems to me the accounts payable should be listed minus the 2% discount. Let’s list the accounts payable due suppliers as $314,500 rather than $320,000. Every little bit helps. You never know. It might make the difference between getting and not getting the loan.
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How would you respond to Cam Pfeifer’s request?
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Determining Cost of Purchase
The following is an excerpt from a conversation between Mark Loomis and Krista Huff. Mark is debating whether to buy a stereo system from Tru-Sound Systems, a locally owned electronics store, or Wholesale Stereo, an online electronics company.
Krista, I don’t know what to do about buying my new stereo.
What’s the problem?
Well, I can buy it locally at Tru-Sound Systems for $1,175.00. However, Wholesale Stereo has the same system listed for $1,200.00.
What’s the big deal? Buy it from Tru-Sound Systems.
It’s not quite that simple. Wholesale Stereo charges $49.99 for shipping and handling. If I have Wholesale Stereo send it next-day air, it’ll cost $89.99 for shipping and handling.
So?
But, that’s not all. Tru-Sound Systems will give an additional 2% discount if I pay cash. Otherwise, they will let me use my VISA, or I can pay it off in three monthly installments. In addition, if I buy it from Tru-Sound Systems, I have to pay 9% sales tax. I won’t have to pay sales tax if I buy it from Wholesale Stereo, since they are out of state.
Anything else???
Well … Wholesale Stereo says I have to charge it on my VISA. They don’t accept checks.
I am not surprised. Many online stores don’t accept checks.
I give up. What would you do?
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Assuming that Wholesale Stereo doesn’t charge sales tax on the sale to Mark, which company is offering the best buy?
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What might be some considerations other than price that influence Mark’s decision on where to buy the stereo system?