Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 5 Accounting for Merchandise Operations 259

Using the data provided in Cases 5–2 and 5–3, compare the operating performances of Nordstrom

andTarget.

Following are descriptions of two independent situations that involve inventory misstatements.

Saunders Corporation

On December 30, 2006, Saunders Corporation sold merchandise that cost $63,000 for $112,500,

FOB shipping point. During the morning of December 31, 2006, the merchandise was counted

as part of the physical inventory since it was still on hand. Late in the afternoon of December

31, the merchandise was picked up by the freight company hired by the customer to deliver the

merchandise. Saunders Corporation’s accounting department did not record the sale and related

cost of merchandise sold until January 3, 2007. Saunders Corporation did not discover the pre-

ceding errors in 2007, and the customer paid the receivable later in January 2007.

Bjork Jewelry

On December 31, 2006, Bjork Jewelry failed to include in its inventory count $127,500 of its in-

ventory that was out on consignment with other jewelers. Of this amount, $45,000 was sold the

last week of December 2006 for $108,000. Bjork Jewelry was notified of these consignment sales

on January 3, and, as a result, recorded the $108,000 of sales on January 3, 2007. On January 20,

the consignee remitted the $108,000 to Bjork Jewelry. On December 31, 2007, Bjork again failed

to include in its inventory count $115,000 of its inventory that was out on consignment with

other jewelers. None of the jewelry out on consignment on December 31, 2007, had been sold as

of that date. Bjork had not discovered any of the errors.

For each of the companies, indicate the effects of the inventory misstatements on the financial

statements for 2006 and 2007.

Two major consumer electronics retailers are Best BuyandCircuit City Stores, Inc.Recent fis-

cal year-end income statements for both companies for a three-year period shown below and at

the top of page 260.

1. Prepare a graph displaying the years 2002, 2003, and 2004 on the x-axis and the gross profit
   to sales ratio for Best Buy and Circuit City on the y-axis. Connect the ratio for each com-
   pany with a line. Thus, the graph will display two lines, one for each company.


2. Prepare a second graph displaying the years 2002, 2003, and 2004 on the x-axis and the op-
   erating profit to sales ratio for Best Buy and Circuit City on the y-axis. Connect the ratio for
   each company with a line. Thus, the graph will display two lines, one for each company.


3. Interpret your graphs.

Case 5-5

Effects of inventory
misstatements

Case 5-6

Comparative analysis of
operating performance

Case 5-4

Comparative analysis of
operating performance

Best Buy

Income Statements

Fiscal Years Ending 2002, 2003, and 2004

(in millions)

2004 2003 2002

Net sales $27,433 $24,548 $20,943

Cost of merchandise sold 20,938 18,677 15,998

Gross profit $ 6,495 $ 5,871 $ 4,945

Selling, general, and administrative expenses 5,053 4,567 3,935

Operating income $ 1,442 $ 1,304 $ 1,010