SOLUTIONS MANUAL
to accompany
Fundamental Accounting Principles
17th Canadian Edition
by Larson/Dieckmann/Harris
Revised for the 17th Edition by:
John Harris, Seneca College
Technical checks by: Rhonda Heninger, SAIT
,Chapter 5 Accounting for
Merchandising Activities
Chapter Opening Critical Thinking Challenge Questions*
Why do many retail stores, such as large grocery chains, invest additional resources in
technology that supports using a perpetual inventory system? Why would a retail store
choose a perpetual inventory system over a periodic inventory system? Is the periodic
inventory system acceptable under GAAP?
A perpetual inventory system allows real-time information, meaning that at any
given time it is known what has been sold and what is in inventory to a high level
of detail. The better the information, the better planning and control. Yes, the
periodic inventory system is acceptable under GAAP.
*The Chapter 5 Critical Thinking Challenge questions are asked at the beginning of this chapter.
Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge
questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge
questions are available here in the Solutions Manual and accessible to students in the print and
ebook.
Knowledge Check-Up Questions
1. a) 2. c) 3. c) 4. b) 5. c) 6. a) 7. b) 8. b) 9. d) 10. a) 11* a) 12* a)
,Concept Review Questions
1. Recipe Unlimited Corporation is a Canadian company that operates several restaurant
chains, as well as major food distribution for correctional facilities, educational facilities and
other large operations. It manufactures food and packages these for delivery to clients. It
therefore has revenue from these products as well as through delivery and sale of them.
2. A detailed calculation of the cost of goods sold is not provided but some minor additional
information is available in Note 7 to the financial statements.
3. Additional accounts of a merchandising company include Merchandise Inventory, Sales,
Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances.
4. Only merchandising companies present merchandise inventory on the balance sheet. Only
merchandising companies present sales and cost of goods sold on the income statement.
5. Mason, I disagree with you. Gross profit is calculated by Sales less cost of goods sold.
Profit is calculated by taking gross profit and further deducting operating expenses.
Therefore, a company can have a positive gross profit and a loss if its operating expenses
are greater than its gross profit from sales of merchandise.
6. Volume purchase discounts (trade discounts) are deducted from the list or catalogue price to
determine the purchase price. Trade discounts are not recorded in the accounting records.
Early payment (cash discounts) are granted in return for early payment and reduce the
amount paid below the negotiated price.
7. A company’s manager is concerned about the quantity of its purchase returns because the
company incurs costs in receiving, inspecting, identifying, and returning the merchandise.
Therefore, more returns create more expenses. By knowing more about the returns, the
manager can decide if there is a problem.
8. FOB shipping point is when the ownership of merchandise inventory transfers from the seller
to the buyer when the inventory is shipped from the seller’s place of business. The buyer is
responsible for paying shipping costs and bears the risk of damage or loss when goods are
in transit. FOB destination is the ownership of merchandise inventory transfers from the
seller to the buyer at the buyer’s place of business. The seller is responsible for paying
shiping charges and bears the risk of damage or loss in transit. The following is a sample
diagram.
9. Spin Master should attempt to negotiate the shipping terms to FOB destination. Title will pass after th
, 10. The sender of a debit memo records a debit and the recipient records a credit.
11. Sales discount is a term used by a seller to describe a cash discount granted to a customer.
Purchase discount is a term used by a purchaser to describe a cash discount received from
a supplier.
12. In today’s business world, organizations must concentrate on meeting their customers’ needs
and avoiding the possibility of their dissatisfaction. If the needs aren’t met and dissatisfaction
grows, the customers will deal with other companies or entities.
One measure of the dissatisfaction of a merchandiser’s customers is the amount of sold
goods that is later returned by those customers. Their dissatisfaction needs to be
understood and then dealt with promptly to encourage them to remain loyal to the company.
The reasons for the return also need to be determined to allow the problem to be avoided in
the future. For example, the returns might arise from product defects, shipping damage,
misleading information provided at the time of sale, or fickle customers.
An important early step in controlling returns is to have information about their dollar
amount. In addition, managers can set goals for reducing the dollar amount of sales returns.
Both purposes can be helped by having the company’s accounting system record the sales
value of returned goods in a separate contra account instead of the Sales account.
Although this information can be gathered in other ways, this approach captures the
information at the time of the return and allows it to be easily reported.
Although a company’s sales return record can be highly important for managers, there is
relatively little value in the information for external decision makers because they are not
concerned with day-to-day operating details. Although management might choose to report
the amount of sales returns as evidence of the effectiveness of a program to reduce them,
their amount is virtually never reported in financial statements provided to investors,
creditors, and other external users.
13. Inventory shrinkage is determined by taking a physical count of the inventory on hand and
comparing the cost of that inventory with the amount recorded in the Merchandise Inventory
account.
14. The single-step format presents the cost of goods sold and operating expenses in one list,
totals the list, and subtracts the total from net sales in one step. The multiple-step format
presents intermediate totals, including gross profit (the difference between net sales and
cost of goods sold).
15. Disagree. A 50% mark-up percentage on a cost of $20 gives a selling price of $30 ($20 x
(1+0.50) = 30). A 50% target gross margin on a cost of $20 gives a selling price of $40 ($20
/ (1-0.50)) = $40.
to accompany
Fundamental Accounting Principles
17th Canadian Edition
by Larson/Dieckmann/Harris
Revised for the 17th Edition by:
John Harris, Seneca College
Technical checks by: Rhonda Heninger, SAIT
,Chapter 5 Accounting for
Merchandising Activities
Chapter Opening Critical Thinking Challenge Questions*
Why do many retail stores, such as large grocery chains, invest additional resources in
technology that supports using a perpetual inventory system? Why would a retail store
choose a perpetual inventory system over a periodic inventory system? Is the periodic
inventory system acceptable under GAAP?
A perpetual inventory system allows real-time information, meaning that at any
given time it is known what has been sold and what is in inventory to a high level
of detail. The better the information, the better planning and control. Yes, the
periodic inventory system is acceptable under GAAP.
*The Chapter 5 Critical Thinking Challenge questions are asked at the beginning of this chapter.
Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge
questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge
questions are available here in the Solutions Manual and accessible to students in the print and
ebook.
Knowledge Check-Up Questions
1. a) 2. c) 3. c) 4. b) 5. c) 6. a) 7. b) 8. b) 9. d) 10. a) 11* a) 12* a)
,Concept Review Questions
1. Recipe Unlimited Corporation is a Canadian company that operates several restaurant
chains, as well as major food distribution for correctional facilities, educational facilities and
other large operations. It manufactures food and packages these for delivery to clients. It
therefore has revenue from these products as well as through delivery and sale of them.
2. A detailed calculation of the cost of goods sold is not provided but some minor additional
information is available in Note 7 to the financial statements.
3. Additional accounts of a merchandising company include Merchandise Inventory, Sales,
Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances.
4. Only merchandising companies present merchandise inventory on the balance sheet. Only
merchandising companies present sales and cost of goods sold on the income statement.
5. Mason, I disagree with you. Gross profit is calculated by Sales less cost of goods sold.
Profit is calculated by taking gross profit and further deducting operating expenses.
Therefore, a company can have a positive gross profit and a loss if its operating expenses
are greater than its gross profit from sales of merchandise.
6. Volume purchase discounts (trade discounts) are deducted from the list or catalogue price to
determine the purchase price. Trade discounts are not recorded in the accounting records.
Early payment (cash discounts) are granted in return for early payment and reduce the
amount paid below the negotiated price.
7. A company’s manager is concerned about the quantity of its purchase returns because the
company incurs costs in receiving, inspecting, identifying, and returning the merchandise.
Therefore, more returns create more expenses. By knowing more about the returns, the
manager can decide if there is a problem.
8. FOB shipping point is when the ownership of merchandise inventory transfers from the seller
to the buyer when the inventory is shipped from the seller’s place of business. The buyer is
responsible for paying shipping costs and bears the risk of damage or loss when goods are
in transit. FOB destination is the ownership of merchandise inventory transfers from the
seller to the buyer at the buyer’s place of business. The seller is responsible for paying
shiping charges and bears the risk of damage or loss in transit. The following is a sample
diagram.
9. Spin Master should attempt to negotiate the shipping terms to FOB destination. Title will pass after th
, 10. The sender of a debit memo records a debit and the recipient records a credit.
11. Sales discount is a term used by a seller to describe a cash discount granted to a customer.
Purchase discount is a term used by a purchaser to describe a cash discount received from
a supplier.
12. In today’s business world, organizations must concentrate on meeting their customers’ needs
and avoiding the possibility of their dissatisfaction. If the needs aren’t met and dissatisfaction
grows, the customers will deal with other companies or entities.
One measure of the dissatisfaction of a merchandiser’s customers is the amount of sold
goods that is later returned by those customers. Their dissatisfaction needs to be
understood and then dealt with promptly to encourage them to remain loyal to the company.
The reasons for the return also need to be determined to allow the problem to be avoided in
the future. For example, the returns might arise from product defects, shipping damage,
misleading information provided at the time of sale, or fickle customers.
An important early step in controlling returns is to have information about their dollar
amount. In addition, managers can set goals for reducing the dollar amount of sales returns.
Both purposes can be helped by having the company’s accounting system record the sales
value of returned goods in a separate contra account instead of the Sales account.
Although this information can be gathered in other ways, this approach captures the
information at the time of the return and allows it to be easily reported.
Although a company’s sales return record can be highly important for managers, there is
relatively little value in the information for external decision makers because they are not
concerned with day-to-day operating details. Although management might choose to report
the amount of sales returns as evidence of the effectiveness of a program to reduce them,
their amount is virtually never reported in financial statements provided to investors,
creditors, and other external users.
13. Inventory shrinkage is determined by taking a physical count of the inventory on hand and
comparing the cost of that inventory with the amount recorded in the Merchandise Inventory
account.
14. The single-step format presents the cost of goods sold and operating expenses in one list,
totals the list, and subtracts the total from net sales in one step. The multiple-step format
presents intermediate totals, including gross profit (the difference between net sales and
cost of goods sold).
15. Disagree. A 50% mark-up percentage on a cost of $20 gives a selling price of $30 ($20 x
(1+0.50) = 30). A 50% target gross margin on a cost of $20 gives a selling price of $40 ($20
/ (1-0.50)) = $40.
