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Preparing a Multistep Income statement with Sales Discounts

E7-4 Albina attached.

P7-3A Hanlon attached.

PA6-3

Preparing a Multistep Income statement with Sales Discounts and Sales Returns and Allowances and computing the Gross Profit Percentage.

Big corporation is a local grocery store organized seven years ago as a corporation. The store is in an excellent location, and sales have increased each year. At the end of 2006, the bookkeeper prepared the following statement (assume that all amounts are correct, but note the incorrect terminology and format)

Big Corporation
Profit and Loss
December 31, 2006

Debit credit
Sales $420,000
Cost of goods sold $279,000
Sales returns and allowances 10,000
Sales discounts 6,000
Selling expense 58,000
Administrative expense 16,000
General expenses 1,000
Income tax expense 15,000
Net Profit 35,000
________________ ________________

Totals $420,000 $420,000
======= =============

Required:
1. Prepare a multistep income statement that would be used for internal reporting purpose.
Treat sales discounts as a contra-revenue.
2. Prepare a multistep income statement that would be used for external reporting purposes, beginning with the amount for the net sales.
3. Compute the gross profit percentage and explain its meaning.

Attachments

Solution Preview

E7-4 The following control procedures are used in Albina's Boutique Shoppe for cash disbursements.
1. Each week Albina leaves 100 company checks in an unmarked envelope on a shelf behind the cash register.
2. The store manager personally approves all payments before signing and issuing checks.
3. The company checks are unnumbered.
4. After payment, bills are "filed" in a paid invoice folder:
5. The company accountant prepares the bank reconciliation and reports any discrepancies to the owner.

Instructions
a) For each procedure, explain the weakness in internal control and identify the internal control principle that is violated.
b) For each weakness, suggest a change in the procedure that will result in good internal control.

a)
1. There is high risk that the company checks could have been stolen and results in a huge damage for the company.
This violates the physical, mechanical, and electronic controls principle.
2. The store manager personally approves all payments before signing and issuing checks. This may tempt the store manager to misuse the company's fund. This violates the segregation of duties.
3. When the company checks are unnumbered, the company will not be able to track how many transactions occurred and whether or not they have all been recorded because all documents should be accounted for. This violates the documentation procedures.
4. After payment, bills are "filed" in a paid invoice folder. This may result in misunderstanding as to whether the company has already paid the bill or not. This violates the documentation procedures.
5. The company accountant prepares the bank reconciliation and reports any discrepancies to the owner.
The accountant may manipulate the documents and records. This violates the independent internal ...

Solution Summary

This solution is comprised of a detailed explanation to explain the weakness in internal control and identify the internal control principle that is violated and for each weakness, suggest a change in the procedure that will reuslt in good internal control, prepare the bank reconciliation and the necessary adjusting entries, and prepare a multistep income statement that would be used for internal reporting purpose and compute the gross profit percentage and explain its meaning.

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