Problem 10 - Accounting

Question

Two items are omitted in each of the following four lists of income statement data. Determine the amounts of the missing items, identifying them by letter. \(\begin{array}{lcccc}\text { Sales } & \$ 250,000 & \$ 600,000 & \$ 1,000,000 & \$(\mathrm{~g}) \\ \text { Sales returns and allowances } & \text { (a) } & 30,000 & (\mathrm{e}) & 7,500 \\ \text { Sales discounts } & 10,000 & 18,000 & 40,000 & 11,500 \\ \text { Net sales } & 225,000 & (\mathrm{c}) & 910,000 & (\mathrm{~h}) \\ \text { Cost of merchandise sold } & \text { (b) } & 330,000 & (\mathrm{f}) & 400,000 \\ \text { Gross profit } & 90,000 & \text { (d) } & 286,500 & 120,000\end{array}\)

Step-by-Step Solution

Answer

The missing values are: (a) 15,000, (b) 135,000, (c) 552,000, (d) 222,000, (e) 50,000, (f) 623,500, (g) 539,000, and (h) 520,000.

Step 1: Calculate Missing Net Sales (c)

Net Sales are calculated by subtracting Sales Returns and Allowances and Sales Discounts from Sales. For the second column, \(\text{Net Sales} = \text{Sales} - (\text{Sales Returns and Allowances} + \text{Sales Discounts})\). Substitute the known values: \( c = 600,000 - (30,000 + 18,000) = 552,000 \). Thus, \( c = 552,000 \).

Step 2: Determine Cost of Merchandise Sold (b)

Gross Profit is calculated as Net Sales minus Cost of Merchandise Sold. For the first column, \(\text{Gross Profit} = \text{Net Sales} - \text{Cost of Merchandise Sold}\). Thus, \(90,000 = 225,000 - b\), leading to \( b = 225,000 - 90,000 = 135,000 \).

Step 3: Calculate Gross Profit (d)

Using the second column, calculate \(\text{Gross Profit} = \text{Net Sales} - \text{Cost of Merchandise Sold}\). Substitute the values: \( d = 552,000 - 330,000 = 222,000 \). Hence, \( d = 222,000 \).

Step 4: Find Sales Returns and Allowances (e)

Using the third column, \(\text{Net Sales} = \text{Sales} - (\text{Sales Returns and Allowances} + \text{Sales Discounts})\). \(910,000 = 1,000,000 - (e + 40,000)\). Solving for \(e\): \(e = 1,000,000 - 910,000 - 40,000 = 50,000\). Thus, \( e = 50,000 \).

Step 5: Compute Cost of Merchandise Sold (f)

In the third column, use \(\text{Gross Profit} = \text{Net Sales} - \text{Cost of Merchandise Sold}\). \(286,500 = 910,000 - f\), leading to \( f = 910,000 - 286,500 = 623,500 \).

Step 6: Calculate Sales (g) from Net Sales (h)

For the fourth column, use \(\text{Net Sales} = \text{Sales} - (\text{Sales Returns and Allowances} + \text{Sales Discounts})\). Solving for \(h\): \(h = g - (7,500 + 11,500)\). Since \(\text{Cost of Merchandise Sold} + \text{Gross Profit} = \text{Net Sales}\), \(400,000 + 120,000 = h \), thus \(h = 520,000\). Finally, \(g - 19,000 = 520,000\) gives \(g = 539,000\).

Key Concepts

Net Sales Calculation

Understanding how to calculate net sales is crucial because it gives a clear picture of the actual revenue a company has made after accounting for returns and allowances. Net sales are derived by subtracting sales returns, allowances, and discounts from the total sales.
When determining net sales for a company, you will perform the following calculation:

1. Start with the total sales.2. Subtract any sales returns and allowances. These are typically items returned by customers or deductions for damaged goods.3. Deduct sales discounts, which are reductions offered for prompt payment or large quantity purchases.

For example, if a company's sales amount to \(600,000, with sales returns and allowances of \)30,000 and sales discounts of \(18,000, the net sales would be calculated as follows:
\[\text{Net Sales} = \text{Sales} - (\text{Sales Returns and Allowances} + \text{Sales Discounts}) = 600,000 - (30,000 + 18,000) = 552,000\]
This result, \)552,000, represents the net sales once the returns and discounts have been accounted for, showing the true income from sales.

Gross Profit Analysis

Gross profit analysis involves understanding the profitability of a company's core activities excluding other expenses like overhead costs, salaries, or taxes.
The gross profit is determined by subtracting the cost of merchandise sold from the net sales.
This analysis is critical because it highlights the efficiency of production and sales processes.

Here's how to calculate gross profit:

1. Start with the net sales amount.2. Subtract the cost of goods sold (COGS), which includes direct costs associated with producing goods (like materials and labor).

Suppose a company has a net sales value of \(552,000, and the cost of merchandise sold is \)330,000.
The gross profit calculation would look like this:
\[\text{Gross Profit} = \text{Net Sales} - \text{Cost of Merchandise Sold} = 552,000 - 330,000 = 222,000\]
This result of $222,000 is the gross profit, indicating how much revenue exceeds production costs before other business expenses are deducted.

Cost of Merchandise Sold

The cost of merchandise sold (COMS) is a key component in calculating a company's gross profit.
This cost includes direct expenses related to the production and sale of goods. Understanding COMS helps in evaluating the cost-effectiveness of production and purchase strategies.

Here's how to calculate the cost of merchandise sold:

1. Calculate the beginning inventory and add purchases made during the period.2. Subtract the ending inventory to find the cost of goods sold.

In the example from the income statement data, if net sales are \(225,000 and the gross profit is \)90,000, you can calculate the cost of merchandise sold as follows:
\[\text{Cost of Merchandise Sold} = \text{Net Sales} - \text{Gross Profit} = 225,000 - 90,000 = 135,000\]
This amount of $135,000 represents the direct cost incurred to generate the net sales, reflecting on the operational efficiency and pricing strategy employed by the entity.