Question:
You are the financial officer for N.A.E Fun Store, a retailer that sells toys for kids. The business owner, Abdullah recently reviewed the annual financial statements you prepare and sent you an email stating that he thinks you overstated net income. He explains that although he has invested a great deal in security, he is sure shoplifting and other forms of inventory shrinkage have occurred, but he does not see any deduction for shrinkage on the income statement. The store uses a perpetual inventory system.
Required: Prepare a two paragraphs memorandum that responds to the owner's concerns.
- On May 11, Salam Co. accepts delivery of $30,000 of merchandise it purchases for resale from Hiyyah Corporation. With the merchandise is an invoice dated May 11, with terms of 3/10, n/90, FOB shipping point. The goods cost Hiyyah $20,000.
- On May 11, when the goods are delivered, Salam pays $335 to Express Shipping for delivery charges on the merchandise.
- On May 12, Salam returns $1,200 of goods to Hiyyah, who receives them one day later and restores them to inventory. The returned goods had cost Hiyyah $800.
- On May 20, Salam mails a check to Hiyyah Corporation for the amount owed. Hiyyah receives it the following day.
Required
- Please prepare entries that Salam Co. records for these transactions. (2 marks)(Note: Salam Company and Hiyyah Corporation use a perpetual inventory system.)
Use the following adjusted trial balance of Juffali Trading Est. to answer the below
Juffali Trading Est
Adjusted Trial Balance
For Year Ended December 31, 2016
Account Title Debit Credit
Cash $7,000
Accounts receivable 16,500
Office supplies 2,000
Trucks 170,000
Accumulated depreciation—Trucks . $35,000
Land 75,000
Accounts payable 11,000
Interest payable 3,000
Long-term notes payable 52,000
Common Stock 10,000
Retained Earnings 151,000
Dividends 19,000
Sales Revenue 128,000
Depreciation expense—Trucks 22,500
Salaries expense 60,000
Office supplies expense 7,000
Repairs expense—Trucks _11,000_ ____
Totals $390,000 $390,000
Required:
- Prepare the Single-Step Income Statement as of December 31, 2016.
- Prepare the Classified Balance Sheet as of December 31, 2016.
Answer:
I understand your concern regarding inventory shrinkage caused due to potential thefts of the same. Since, the income statement makes no provision for the same, it is quite understandable to assume that in absence of any provision for the same, the income statement may be overstated.
However, such a provision is not required in the given case as the perpetual inventory system is being used by the company. Perpetual inventory system refers to a continuous inventory system where each of the inventory items is tagged at the time of entry and reflected in various books of account. Further, each item in the inventory system is tracked as it is further processed. As a result, the exact status of a particular inventory item can be ascertained at a given time with precision.
The current system in use by the company is in contract with the periodic inventory system. In such a system, the inventory is measured only at periodic intervals and instances of theft is more common under this regime as there is no tracking of the inventory item and hence detection of any theft would be at the end of a specific period.
This is in contrast with the perpetual inventory system where using requisite software, real time monitoring of inventory is possible. Hence, incidence of theft would be typically limited in the perpetual inventory system being pursued by the company. Further, at the end of the financial year, when financial statements are prepared, there is an inventory audit which also involves a physical count and hence detects any missing inventories. Besides, the inventory account tends to shrink as the raw materials are processed and reflected in the cost of goods sold account. In view of the above, inventory shrinkage typically would be insignificant and would not make any material difference on the income or financial statements as a whole.
The requisite journal entries for Salam Co are as shown below.
|
Date
|
Particular
|
Debit ($)
|
Credit ($)
|
|
May-11
|
Purchases
|
30000
|
|
|
|
Accounts Payable
|
|
30000
|
|
May-11
|
Purchases
|
335
|
|
|
|
Cash
|
|
335
|
|
May-12
|
Accounts Payable
|
1200
|
|
|
|
Purchases
|
|
1200
|
|
May-20
|
Accounts Payable (30000-1200)
|
28800
|
|
|
|
Cash (28800-2% of 28800)
|
|
28224
|
|
|
Purchases (2% of 28800)
|
|
576
|
Based on the given adjusted trial balance, the income statement is indicated below.
|
Particulars
|
Amount ($)
|
|
Sales Revenue
|
1,28,000
|
|
Expenses
|
|
|
Salaries Expense
|
60,000
|
|
Office Supplies Expense
|
7,000
|
|
Depreciation -Trucks
|
22,500
|
|
Repairs Expense - Trucks
|
11,000
|
|
Total expenses
|
1,00,500
|
|
Net income
|
27,500
|
Based on the given adjusted trial balance, the balance sheet is indicated below.
|
ASSETS
|
|
|
|
Current Assets
|
Amount ($)
|
|
Cash
|
7000
|
|
|
Accounts Receivable
|
16500
|
|
|
Office Supplies
|
2000
|
|
|
Total current assets
|
|
25500
|
|
Fixed Assets
|
|
|
|
Land
|
75000
|
|
|
Trucks
|
170000
|
|
|
(_) Accumulated Depreciation
|
35000
|
|
|
Total fixed assets
|
|
210000
|
|
Total assets
|
|
235500
|
|
LIABILITIES
|
|
|
|
Current Liabilities
|
|
|
|
Accounts Payable
|
11000
|
|
|
Interest Payable
|
3000
|
|
|
Total current liabilities
|
|
14000
|
|
Non-current liabilities
|
|
|
|
Long term notes payable
|
52000
|
|
|
Total non-current liabilities
|
|
52000
|
|
Total Liabilities
|
|
66000
|
|
Shareholders' Equity
|
|
|
|
Common Stock
|
10000
|
|
|
Retained Earnings (151000 + 27500 (income) - 19500
|
159500
|
|
|
Total shareholders' equity
|
|
169500
|
|
Total liabilities and equity
|
|
235500
|
