Financial Accounting: An Integrated Statements Approach, 2nd Edition

260 Chapter 5 Accounting for Merchandise Operations

BUSINESS ACTIVITIES AND RESPONSIBILITY ISSUES

On December 1, 2006, Cardinal Company, a garden retailer, purchased $20,000 of corn seed,

terms 2/10, n/30, from Iowa Farm Co. Even though the discount period had expired, Sandi

Kurtz subtracted the discount of $400 when she processed the documents for payment on

December 15, 2006.

Discuss whether Sandi Kurtz behaved in a professional manner by subtracting the discount,

even though the discount period had expired.

The Video Store Co. is owned and operated by Todd Shovic. The following is an excerpt from

a conversation between Todd Shovic and Susan Mastin, the chief accountant for The Video Store.

Todd:Susan, I’ve got a question about this recent balance sheet.

Susan:Sure, what’s your question?

Todd:Well, as you know, I’m applying for a bank loan to finance our new store in Three

Forks, and I noticed that the accounts payable are listed as $110,000.

Susan:That’s right. Approximately $90,000 of that represents amounts due our suppliers,

and the remainder is miscellaneous payables to creditors for utilities, office equipment,

supplies, etc.

Todd:That’s what I thought. But as you know, we normally receive a 2% discount from our

suppliers for earlier payment, and we always try to take the discount.

Susan:That’s right. I can’t remember the last time we missed a discount.

Todd:Well, in that case, it seems to me the accounts payable should be listed minus the 2%

discount. Let’s list the accounts payable due suppliers as $88,200, rather than $90,000.

Every little bit helps. You never know. It might make the difference between getting the

loan and not.

How would you respond to Todd Shovic’s request?

The following is an excerpt from a conversation between Brad Hass and Terry Mann. Brad is

debating whether to buy a stereo system from Radiant Sound, a locally owned electronics store,

or Audio Pro Electronics, a mail-order electronics company.

Brad:Terry, I don’t know what to do about buying my new stereo.

Terry:What’s the problem?

Brad:Well, I can buy it locally at Radiant Sound for $395.00. However, Audio Pro Electronics

has the same system listed for $399.99.

Terry:So what’s the big deal? Buy it from Radiant Sound.

Brad:It’s not quite that simple. Audio Pro said something about not having to pay sales tax,

since I was out-of-state.

Activity 5-1

Ethics and professional

conduct in business

Activity 5-2

Purchases discounts and

accounts payable

Activity 5-3

Determining cost of

purchase

Circuit City Stores, Inc.

Income Statements

Fiscal Years Ending 2002, 2003, and 2004

(in millions)

2004 2003 2002

Net sales $10,472 $9,857 $9,953

Cost of merchandise sold 7,903 7,573 7,603

Gross profit $ 2,569 $2,284 $2,350

Selling, general, and administrative expenses 2,457 2,278 2,329

Operating income $ 112 $ 6 $ 21