Tanika Jones opened a small retail store in a suburban mall

Tanika Jones opened a small retail store in a suburban mall

Question Analysis of Merchandising Income Statement

 C 5. In 2009, Tanika Jones opened a small retail
store in a suburban mall. Called Tanika’s Jeans Company, the shop sold designer jeans. Tanika
Jones worked14 hours a day and controlled all aspects of the operation. All sales were for cash or
bank credit card. Tanika’s Jeans Company was such a success that in 2010, Jones decided to
open a second store in another mall. Because the new shop needed her attention, she hired a
manager to work in the original store with its two existing sales clerks. During 2010, the new
store was successful, but the operations of the original store did not match the first year’s
Concerned about this turn of events, Jones compared the two years’ results for the original store.

The figures are as follows:
Net sales
Cost of goods sold
Gross margin
Operating expenses
Income before income taxes $ 25,000
$ 75,000

In addition, Jones’s analysis revealed that the cost and selling price of jeans were about the same
in both years and that the level of operating expenses was roughly the same in both years, except
for the new manager’s $25,000 salary. Sales returns and allowances were insignificant amounts
in both years.

Studying the situation further, Jones discovered the following facts about the cost of
goods sold:
Purchases Returns and allowances 15,000
Physical inventory, end of year

Still not satisfied, Jones went through all the individual sales and purchase records for the year.
Both sales and purchases were verified. However, the 2010ending inventory should have been
$57,000, given the unit purchases and sales during the year. After puzzling over all this
information, Jones comes to you for accounting help.
1. Using Jones’s new information, recompute the cost of goods sold for 2009and 2010, and
account for the difference in income before income taxes between 2009 and 2010.
2. Suggest at least two reasons for the discrepancy in the 2010 ending inventory. How might
Jones improve the management of the original store?

Management Issues
E 3. Indicate whether each of the following items is associated with (a) allocating the cost of
inventories in accordance with the matching rule, (b) assessing the impact of inventory decisions,
(c) evaluating the level of inventory, or (d) engaging in an unethical action.

1. Computing inventory turnover
2. Valuing inventory at an amount to meet management’s targeted net income
3. Application of the just-in-time operating environment
4. Determining the effects of inventory decisions on cash flows
5. Apportioning the cost of goods available for sale to ending inventory and cost of goods sold
6. Determining the effects of inventory methods on income taxes
7. Determining the assumption about the flow of costs into and out of the company