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ACC 250 Lecture Notes - Lecture 7: Income Statement

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School
CBU, Cal Baptist
Department
Accounting
Course
ACC 250
Professor
Elizabeth Kiminski

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Returns and Allowances Accounts
Some businesses, such as large department stores, want detailed information about returns
and allowances. They want to know what proportion of their sales was returned by their
customers. They also want to know what proportion of their purchases they returned to their
suppliers. Businesses that require this specialized information accumulate it in special returns
and allowances accounts.
Purchases Returns and Allowances Accounts
The concept is exactly the same for purchases returns and allowances.
Returns and Allowances on the Income Statement
Both sales returns and allowances and purchases returns and allowances appear on the
income statements of companies that use them. They are treated as deductions from sales and
from purchases, respectively. Their inclusion on the statement makes the statement slightly
more difficult to prepare.
Revised Cost of Goods Sold Formula
To handle all types of business situations, the cost of goods formula is changed slightly. The
revised formula of the net cost of merchandise purchased. This takes into account the
likelihood that there will be come returns and allowances during the period.
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Document Summary

Some businesses, such as large department stores, want detailed information about returns and allowances. They want to know what proportion of their sales was returned by their customers. They also want to know what proportion of their purchases they returned to their suppliers. Businesses that require this specialized information accumulate it in special returns and allowances accounts. The concept is exactly the same for purchases returns and allowances. Both sales returns and allowances and purchases returns and allowances appear on the income statements of companies that use them. They are treated as deductions from sales and from purchases, respectively. Their inclusion on the statement makes the statement slightly more difficult to prepare. To handle all types of business situations, the cost of goods formula is changed slightly. The revised formula of the net cost of merchandise purchased.

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Related Questions

Kara and Scott Baker own a small retail company, BasicRequirements, with one store located in a small college town and awebsite through which customers can make purchases. The store sellstraditional but up-to-date clothing for young women such astee-shirts, jeans, chinos, and skirts. The store has been open for10 years, and the owners added the online shopping capability justlast year. Online business has been slow, but Kara and Scottbelieve that as student customers graduate from the university theywill use the online site to continue to have access to theirfavorite store from their college days.The store’s website has manyfeatures. It classifies clothing by type, and customers can viewitems in various colors. To purchase an item, the user clicks onthe icon depicting the desired product and adds it to an individualonline shopping basket. The customer can view the basket and make apurchase at any time while browsing the site. When checking out atthe site, a new customer must first register, providing billing andshipping information, as well as credit card data. Returningcustomers log in with the identification code and password theycreated when they registered. They also use that method to check onan order status. If a customer forgets their login information,they can simply click on a link to have it emailed to them. Once auser registers, Basic Requirements’ system will automatically addtheir email address to a file that they use to regularly send outemails about sales and other promotions. Kara and Scott areconcerned about internal controls in their business. Theyespecially worry because they know that their web access createssome special risks. They have asked one of their customers who isan accounting student at the university to evaluate the reliabilityof their information system with respect to security, availability,and privacy.

1. Identify two security, availability, and privacy risks thatBasic Requirements faces.

2. For each risk identified above, describe two internalcontrols Basic Requirements should use to protect against theserisks.

3. The accounting student who is evaluating the reliability ofBasic Requirements’ information system is interested in becoming anIT auditor. Describe some of the specific actions an IT auditorwould take to verify that Kara and Scott have adequate controls inplace concerning privacy.

Small business management class.

Please answer the two questions from the article belowplease.

Q1)Which one of the techniques to increase cash inflows is bestillustrated in the article? Explain how you know. ?

Q2)Which one of the techniques to decrease cash outflows is bestillustrated in the article? Explain how you know. ?

The article:

The financial crisis on Wall Street is quickly spiraling down tosmall businesses, making it extremely difficult for them to securefrom large banks the credit they need to start and maintain theiroperations.

Some businesses that currently have good relationships withbanks are getting more scrutiny and higher interest rates -- suchas 15% or more. Riskier borrowers are being denied creditaltogether.

Aside from falling back on friends or family -- or charging upyet another credit card -- here's a look at five alternatives forgetting extra cash to run a business in this economy.

-- Peer-to-Peer Lending Sites

Several Web sites now facilitate loans between individuals whodon't know each other. Typically, the prospective borrowers createprofiles that include how much they need to borrow, what the moneywill be used for and some credit history.

Other individuals can browse the loan requests and make offersthat include payment terms and interest rates. Prospective lendersalso get a risk assessment of the borrower generated by the Website based on the borrower's credit history.

Some "peer-to-peer" lending sites include LendingClub.com,Prosper.com, RaiseCapital.com and Zopa.com.

On Prosper.com, for instance, 25% of borrowers are individualsrunning or looking to start businesses, says Chief Executive ChrisLarsen. The site facilitates loans between individuals from $1,000to $25,000, and interest rates on those loans right now range from6% for those with the strongest credit ratings to about 30%.

Prosper, which has 800,000 registered users, is seeing moreentrepreneurs with good credit scores signing up. "We're certainlyseeing a steady increase of the quality of borrower coming to oursite," Mr. Larsen says. About 55% of the loans being funded are forborrowers with credit scores above 720, he adds, while only about5% are for those categorized as "subprime" borrowers.

-- Community Banks, Credit Unions

While big banks are being battered by all the financial turmoilon Wall Street, many local banks and credit unions are far morestable.

In fact, community banks continue to expand, although some havesuffered losses on securities issued by troubled mortgage giantsFannie Mae and Freddie Mac, says Camden Fine, chief executive ofthe Independent Community Bankers of America, an industryassociation in Washington.

Still, he says, even the community banks are more hesitant tolend to companies that lack rock-solid balance sheets.

-- Factoring, Asset-Based Loans

Though certainly not a cheap route to capital, some banks andnon- bank financing companies offer financing that is backed by abusiness's assets or accounts receivable.

So-called factoring, where a lender might, say, outright give aborrower 80 cents on the dollar for the company's accountsreceivable, can be a good option for businesses like manufacturersthat are owed a lot of money by customers and that have no betterlending option right now, says Raphael Amit, an entrepreneurshipprofessor at the University of Pennsylvania's Wharton School.

Interest rates on such financing can sometimes run 15% orhigher, so it's best to only resort to this approach when there'sno lower-cost option.

So-called asset-based loans -- loans in which assets such asinventory, equipment or real estate are used as collateral -- canbe good options for companies with lots of assets. But again, ratestend to run much higher than on traditional bank loans. The loanamounts are often capped at a percentage of the assessed value ofthe assets, such as 65%.

Also, even loans backed by assets can be difficult to get forcompanies with less-than-stellar credit ratings. Mark Sunshine,president of First Capital, a West Palm Beach, Fla., financecompany, says he's seeing more demand for loans based on accountsreceivable or assets, but isn't necessarily doing much morebusiness. "There's a reason local banks won't lend them money," hesays of riskier small companies. He says he's sticking to companieswith lots of assets to use as collateral.

-- Negotiating With Customers or Suppliers

Another smart strategy for helping cash flow -- perhaps even ifyou do have access to loans -- is striking better payment termswith customers and suppliers, Prof. Amit says. Especially whenbusiness relationships are strong and long-lasting, many companiesare willing to help each other out in tough economies.

A business that usually gives customers 30 to 60 days to pay thebills, for instance, might require customers to pay upon receipt ofgoods. A supplier, on the other hand, might be willing to extendlengthier payment terms to a business customer if it feels thecustomer is trustworthy and vital to its own business. Somesuppliers also will lend money to their longstanding, most valuedcustomers.

-- Changing Behaviors

Hard times call for small businesses to be nimble andentrepreneurial. Many businesses are using the tough economy toscrutinize their business practices and find creative ways tocreate better cash flow.

Some turn to leasing instead of buying equipment they need.

Others are identifying areas of the business that will tend tobe more lucrative in today's economy and shifting their resourcesin those directions.

Buckshot Electronics is a chain of electronics superstores that is located throughout California. They have 15 locations concentrated primarily in heavily populated areas. They sell thousands of products made by hundreds of different manufacturers. Buckshot sells everything from phones, cameras, DVD players, and video game consoles to large items like televisions.

Sony is one of their larger suppliers. They offer products in nearly every category Buckshot offers to its customers. In fact, Sony sells multiple cell phone models through Buckshot. One such model is the Q9900.

One of Buckshot's San Francisco stores is forecasted to sell about 7800 units of the Q9900 in the coming year. This forecasted demand is about average in terms of Buckshot's 15 other California locations. Presently they order 900 units of the Q9900 every 6 weeks.

Each store fills weekly orders through its Sony Distributor for items like TV's, DVD Players, cameras, and of course, cell phones, in addition to many other items. Orders for cell phones must be made in increments of 100 units. The distributor takes only one order per week, but Buckshot is not obligated to order every item every week. That order is then shipped 2 days later to that individual Buckshot Electronics location by truck.

Buckshot's Central Procurement is looking to save money by investigating order sizes and subsequent order frequency. You are being asked to create a recommendation for order size and time between orders for the Q9900 based on the numbers for this San Francisco location. Answer the questions that follow in order to create a detailed report for your supervisor.

Below are some the key figures important in your analysis:

Q9900 Wholesale Price $ 325.00

Q9900 Retail Price $ 399.00

Annual Per Unit Holding Costs are estimated at 35% of the wholesale cost of the Q9900.

Costs associated with each order include: Order Placement Fees (Documentation, Network Support) $ 250.00 Delivery

(Fuel, Driver, Truck, etc.) $ 350.00

Packaging $ 150.00

Receiving (Inspection, Documentation, etc.) $ 150.00

Labor ( 5 hours @ $10.00/hr) Stocking, Misc. $ 50.00

Questions:

Using Present Lot Size (Q = 900)

According to the information supplied, what is the present annual inventory cost? (In other words, using their present lot size what is the annual inventory cost?) Also, separately identify, the annual cost of purchasing the inventory, the annual holding cost (AHC) and annual ordering cost (AOC).

7. What is the annual cost to purchase the items? (Q = 900) (Choose the closest answer)

8. What is the annual ordering cost, AOC? (Q = 900) (Choose the closest answer)

9. What is the annual holding cost, AHC? (Q = 900) (Choose the closest answer)

10. What is the total annual cost of inventory, TC? (Q = 900) (Choose the closest answer)

Using the Economic Order Quantity (Q=EOQ)

11. What is the EOQ? (Choose the closest answer)

12. Using the calculated EOQ, how often will orders be placed? All answers are in weeks. (Choose the closest answer)

According to the information supplied, what would be the annual inventory cost if they used the calculated EOQ? Also, separately identify the annual holding cost (AHC) and annual ordering cost (AOC).

13. Using the calculated EOQ, what is the annual holding cost (AHC)? (Choose the closest answer)

14. Using the calculated EOQ, what is the annual ordering cost (AOC)? (Choose the closest answer)

15. What is the total annual cost of inventory, TC? (Q = EOQ) (Choose the closest answer)

16. If they could order the EOQ instead of 900, how much would this one store stand to save annually?

17. Why is this not possible for this company to use the calculated EOQ as their order size?

PROPER ORDER SIZE The store must decide how often they want to order. • Remember, the weekly demand is 150 units. • If they order weekly, the store will require at minimum 200 units per week. • If they order every other week, the store will require at minimum 300 units to get to the next ordering period. (150 units per week, 2 weeks.)

18. If they order every 3 weeks, what will be the minimum required order size? Remember, you must abide by the Sony Distributor’s ordering rules.

19. Assume they sell exactly 150 units each week during the three-week period. Based on the appropriate answer to the previous question, how many extra units will they have left at the end of each three-week period?

20. Based on the ordering scenario where orders are placed every 3 weeks, over a 52-week year, how much extra inventory will this store have accumulated? (Take your answer to #19, divide by 3, and then multiply by 52)

21. If they instead order every 2 weeks what will be the minimum required order size? Remember, you must abide by the Sony Distributor’s ordering rules.

22. Assume they sell exactly 150 units per week. Based on the appropriate answer to the previous question, how many extra units will they have left at the end of the 2-week period?

23. Based on the weekly ordering scenario, over a 52-week year, how much extra inventory will this store have accumulated? (Take your answer to #22, divide by 2, and then multiply by 52)

24. Realistically, which of the following options is most attractive? An attractive option is one where the order size is close or equal to the EOQ, abides by the distributor’s ordering rules, and minimizes the amount of unnecessary inventory. (We will call this Q*)

According to the appropriate recommendation you provided in #24, what would be the Total Annual Inventory cost? Also, separately identify, the annual holding cost (AHC) and annual ordering cost (AOC).

25. Using the Q*, what is the annual holding cost (AHC)? (Choose the closest answer)

26. Using the Q*, what is the annual ordering cost (AOC)? (Choose the closest answer)

27. What is the total annual cost of inventory, TC? (Q = Q*) (Choose the closest answer)

28. The total annual savings for this one store using our recommendation (Q*) versus the present lot size of 900, would be:

TOTAL SAVINGS ALL STORES

29. Without store-by-store information it is difficult to say how much this would save the corporation. Nonetheless, using only the numbers for this store it can be said that if the numbers for the other 14 stores are similar there is a potential to save a total of about…Remember, there are 15 stores, total!

Thanks so much in advance! Much appreicated