Financial Accounting: An Integrated Statements Approach, 2nd Edition

1. Prepare a projected single-step income statement for the year ending March 31, 2007, based
   on the proposal. Assume all sales are collected within the discount period.


2. a. Based on the projected income statement in (1), would you recommend the implemen-
   tation of the proposed changes?
   b. Describe any possible concerns you may have related to the proposed changes described
   in (1).

Assume that you are planning to purchase a 50-inch Plasma television. In groups of three or

four, determine the lowest cost for the television, considering the available alternatives and the

advantages and disadvantages of each alternative. For example, you could purchase locally,

through mail order, or through an Internet shopping service. Consider such factors as delivery

charges, interest-free financing, discounts, coupons, and availability of warranty services.

Prepare a report for presentation to the class.

262 Chapter 5 Accounting for Merchandise Operations

Activity 5-5

Shopping for a television

ANSWERS TO SELF-STUDY QUESTIONS

1. A A debit memorandum (answer A), issued by the
   buyer, indicates the amount the buyer proposes to debit to the
   accounts payable account. A credit memorandum (answer B),
   issued by the seller, indicates the amount the seller proposes
   to credit to the accounts receivable account. An invoice (an-
   swer C) or a bill (answer D), issued by the seller, indicates the
   amount and terms of the sale.


2. C The amount of discount for early payment is $10 (an-
   swer C), or 1% of $1,000. Although the $50 of transportation
   costs paid by the seller is debited to the customer’s account,
   the customer is not entitled to a discount on that amount.


3. B The single-step form of income statement (answer B)
   is so named because the total of all expenses is deducted in
   one step from the total of all revenues. The multiple-step form

(answer A) includes numerous sections and subsections with

several subtotals. The report form (answer D) is a common

form of the balance sheet.

4. C Gross profit (answer C) is the excess of net sales over
   the cost of merchandise sold. Operating income (answer A) or
   income from operations (answer B) is the excess of gross profit
   over operating expenses. Net income (answer D) is the final
   figure on the income statement after all revenues and ex-
   penses have been reported.


5. C Operating income is understated by $25,000 (answer
   C). The cost of merchandise sold is overstated, not under-
   stated (answer A). Gross profit is understated, not overstated
   (answer B). Inventory shrinkage is overstated, not under-
   stated (answer D).