C_5 – Tanika Jones_Analysis of Merchandising Income Statement

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Description

Analysis
of Merchandising Income Statement

C_5

In
2009, Tanika Jones opened a small retail store in a suburban mall. Called
Tanika’s Jeans Company, the shop sold designer jeans. Tanika Jones worked14
hours a day and controlled all aspects of the operation. All sales were for
cash or bank credit card. Tanika’s Jeans Company was such a success that in
2010, Jones decided to open a second store in another mall. Because the new
shop needed her attention, she hired a manager to work in the original store
with its two existing sales clerks. During 2010, the new store was successful,
but the operations of the original store did not match the first year’s
performance.

Concerned about this turn of events, Jones
compared the two years’ results for the original store. The figures are as
follows:


2010 2009

Net
sales $325,000
$350,000

Cost
of goods sold 225,000 225,000

Gross
margin $100,000 $125,000

Operating
expenses 75,000 50,000

Income
before income taxes $ 25,000 $ 75,000

In
addition, Jones’s analysis revealed that the cost and selling price of jeans
were about the same in both years and that the level of operating expenses was
roughly the same in both years, except for the new manager’s $25,000 salary.
Sales returns and allowances were insignificant amounts in both years.

Studying the situation further, Jones discovered the
following facts about the cost of goods sold:

2010 2009

Purchases
$200,000
$271,000

Purchases
Returns and allowances 15,000 20,000

Freight-in
19,000 27,000

Physical
inventory, end of year 32,000 53,000

Still
not satisfied, Jones went through all the individual sales and purchase records
for the year. Both sales and purchases were verified. However, the 2010 ending
inventory should have been $57,000, given the unit purchases and sales during
the year. After puzzling over all this information, Jones comes to you for
accounting help.

1.
Using Jones’s new information, recompute the cost of goods sold for 2009 and
2010, and account for the difference in income before income taxes between 2009
and 2010.

2.
Suggest at least two reasons for the discrepancy in the 2010 ending inventory.
How might Jones improve the management of the original store?

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