Analysis of Merchandising Income Statement

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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 performance.

Concerned about this turn of events, Jones compared the two years” results for the original store. The figures are as follows:

2010 2009

Net sales $325,000 $350,000

Cost of goods sold 225,000 225,000

Gross margin $100,000 $125,000

Operating expenses 75,000 50,000

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:

2010 2009

Purchases $200,000 $271,000

Purchases Returns and allowances 15,000 20,000

Freight-in 19,000 27,000

Physical inventory, end of year 32,000 53,000

Still not satisfied, Jones went through all the individual sales and purchase records for the year. Both sales and purchases were verified. However, the 2010 ending 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 2009 and 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?