Assume you work as an accountant in the merchandising division of a large public company that makes and sells athletic clothing. To encourage the merchandising division to earn as much profit on each individual sale as possible, the division managers pay is based in part on the divisions gross profit percentage. To encourage control over the divisions operating expenses, the managers pay also is based on the divisions net income. You are currently preparing the divisions financial statement. The division had a good year with sales of $100000 cost of goods sold of $50000, sales returns and allowances of $60000, sales discounts of $4000, and other selling expenses of $30000. (Assume the division does not report income taxes). The division manager stresses that "It would be in your own personal interest" to classify sales returns and allowances and sales discounts as selling expenses rather than as contra-revenues on the divisions income statement. He justifies this "friendly advice" by saying that hes not asking you to fake the numbers - he just believes that those items items are more accurately reported as expenses. Plus, he claims,being a division of a larger company, you don't have to follow GAAP.
Requirement:
A) Prepare an income statement for the division using the classifications shown in this chapter. Using this income statement, calculate the divisions gross profit percentage.
B) What reasondo you think is motivating the managers advise to you