Cash flow management and profitability management


Problem 1: The decisions that follow were made by the management of Shanahan Shoe Company. Indicate whether each decision pertains primarily to (a) cash flow management, (b) profitability management, (c) choice of inventory system, or (d) control of merchandise operations.

1. Decided to mark each item of inventory with a magnet tag that sets off an alarm if the tag is removed from the store before being deactivated

2. Decided to reduce the credit terms offered to customers from 30 days to 20 days to spedd up collection of accounts

3. Decided that the benefits of keeping track of each item of inventory as it is bought and sold would exceed the costs of such a system

4. Decided to raise the price of each item of inventory to achieve a higher gross margin to offset an increase in rent expense

5. Decided to purchase a new type of cash register that can be operated only by a person who knows a predetermined code

6. Decided to switch to a new cleaning service that will provide the same service at a lower cost

Problem 2: The operating budget and actual performance for the six months ended June 30, 20x3, for Pacific Hardware Company appear below. (1) Prepare an operating report that shows budget, actual, and difference. (2) Discuss the results, identifying which differences most likely should be investigated by management.

Selling expenses                                                            Budget                      Actual

            Sales salaries expense                                    $ 90,000                      $ 102,030

            Sales supplies expense                                       2,000                             1,642       

            Rent expense, selling space                               18,000                           18,000

            Utilities expense, selling space                           12,000                           11,256

            Advertising expense                                          15,000                           21,986

            Deprec. Expense, selling fixtures                         6,500                             6,778

            Total selling expenses                                   $ 143,500                      $ 161,692

General and Administrative. Expenses

            Office salaries expense                                   $ 50,000                      $ 47, 912

            Office supplies expense                                       1,000                              782

            Rent expense, office space                                  4,000                            4,000

            Deprec. Expense, office space                             3,000                            3,251

            Utilities expense, office space                              3,000                            3,114

            Postage expense                                                   500                               626

            Insurance expense                                              2,000                            2,700        

            Miscellaneous expense                                           500                               481

            Total general & administrative expenses           $ 64,000                        $ 62,866

Total operating expenses                                            $ 207,500                     $ 224,588

Problem 3: Compute the dollar amount of each item indicated by a letter in the following table. Treat each horizontal row of numbers as a separate problem.

Sales                            Cost of                       Gross                   Operating              Net Income

                                    Goods                        Margin                  Expenses                 (Loss)

$250,000                         $a                           $80,000                     $b                      $ 24,000

       c                          216,000                       120,000                   80,000                     40,000

460,000                            d                            100,000                      e                         (2,000)

780,000                            f                                 g                        24,000                     80,000

Problem 4: A household appliance dealer buys refrigerators from a manufacturer and resells them to its customers. What is the net cost of the refrigerator to the dealer, assuming it is paid for within ten days of purchase?

a. The manufacturer sets a list or catalog price of $ 1,000 for a refrigerator. The manufacturer offers its dealers a 30 % trade discount.
b. The manufacturer sells the machine under terms of FOB destination. The cost of shipping is $ 100.
c. The manufacturer offers a sales discount of 2/10, n/30. Sales discounts do not apply to shipping costs.
   
Problem 5: Using the selected account balances at December 31, 20xx, for City Rental that follows, prepare an income statement for the year ended December 31, 20xx. Show the detail of net sales. The company uses the perpetual inventory system, and Freight In hasn’t been included in the Cost of Goods Sold.

Account Name                                                       Debit                     Credit     

Sales                                                                                              $ 237, 500

Sales Return & Allowance                                     $11,750

Costs of Goods Sold                                            140,000

Freight In                                                              6,750

Selling Expense                                                    21,500

General & Administrative Expenses                        43,500

Problem 6: Give the entries to record each of the following transactions under the perpetual inventory system:

a) Purchased merchandise on credit, terms n/30, FOB shipping point, $2,500.
b) Paid freight on the shipment in transaction a, $ 135.
c) Purchased merchandise on credit, terms n/30, FOB destination, $ 1,400.
d) Purchased merchandise on credit, terms n/30, FOB shipping point, $2,600, which includes freight paid by the supplier of $200.
e) Returned part of the merchandise purchased in transaction c, $500.
f) Paid the amount owed on the purchase in transaction a.
g) Paid the amount owed on the purchase in transaction d.
h) Paid the amount owed on the purchase in transaction c, less the return in e.

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Accounting Basics: Cash flow management and profitability management
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