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Inventory Operations

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Use a 24 hour daycare center profile and operating information.

Identify how a 24 hour daycare uses inventory. What are three different inventories of products or supplies that the 24 hour daycare maintains?

What do you think is the total amount of inventory on average that is maintained in comparison to the annual income of the company?

What do you think are some key methods that 24 hour daycare could use to manage and track inventory, e.g. technology systems, and/or lean methods?

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Solution Preview

First, let's discuss three different inventories of products that a 24 hour daycare would need to maintain.
- Baby changing products. Clearly the daycare would need a steady supply of diapers, cleaning materials, baby powder, and rash cream. It would be a huge disaster if the daycare ran out of these supplies!
- Age-appropriate materials. Toys, books, games, stuffed animals for children of all ages that the daycare serves.
- ...

Solution Summary

Explains how to set-up inventory operations for a day-care.

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Complete Study Guide

(See attached files for full problem description)

Complete SE 5-SE 11 and E1-E13

SE1: Identify each of the following decisions as most directly related to (a) cash flow management, (b) profitability management, (c) choice of inventory system, or (d) control of merchandising operations.

SE2: Using the following data, prepare an income statement for Martin's Hardware for the month ended February 28:

SE3: A dealer buys tooling machines from a manufacturer and resells them to its customers. a. The manufacturer sets a list or catalogue price of $6, 000 for a machine. The manufacturer offers its dealers a 40 percent trade discount. b. Freight charges are FOB shipping point. The cost of shipping a machine is $350. c. The manufacturer offers a sales discount of 2/10, n/30. The sales discount does not apply to shipping costs. What is the net cost of the tooling machine to the dealer, assuming it is paid for within ten days of purchase?

SE4: Record in journal form the following transaction for Jenny's Crafts Store: Apr. 19 A tabulation at the end of the day showed $400 in Visa invoices, which are deposited in a special bank account at full value less 5 percent discount.

SE5: Record in journal form each of the following transactions, assuming the perpetual inventory system used: Aug. 2 Purchase merchandise on credit from Bean Company, invoice dated August 1, shipping point, $2, 300. 3 Received bill from Ace Shipping Company for transportation Costs on August 2, for credit, $360. 7 Returned damaged merchandise received from Bean Company on August 2, for credit, $360 10 Paid in full the amount due to Bean Company for the purchase of August 2, part of which was returned on August 7.

SE6: Record in journal form the following transactions, assuming the perpetual inventory system is used: Aug. 4 Sold merchandise on credit to Konner Company, terms n/30, FOB destination, $1, 200, (Cost = $720) 5 Paid transportation costs for sale of August 4, $110. 9 Part of the merchandise sold on August 4 was accepted back from Konner Company for full credit and returned to the merchandise inventory, $350. (Cost = $210) Sept. 3 Received payment in full from Konner Company for merchandise sold on August 4, less the return on August 9.

SE7: Record in journal for the transactions in SE5, assuming the periodic inventory system is used. Aug. 2 Purchase merchandise on credit from Bean Company, invoice dated August 1, shipping point, $2, 300. 4 Received bill from Ace Shipping Company for transportation Costs on August 2, for credit, $360. 8 Returned damaged merchandise received from Bean Company on August 2, for credit, $360 10 Paid in full the amount due to Bean Company for the purchase of August 2, part of which was returned on August 7.

SE8: Using the following data and assuming cost of goods sold is $230, 000, prepare the cost of goods sold section of a merchandising income statement (periodic inventory system), including computation of the amount of purchases for the month of October: Freight in $12, 000 Merchandise inventory, Sept. 30, 20xx 33, 000 Merchandise inventory, Oct. 31, 20xx 44, 000 Purchases 238, 000 Purchases returns and allowances 9, 000

SE9: Record in journal form the transactions in SE6 using the periodic inventory system. Aug. 4 Sold merchandise on credit to Konner Company, terms n/30, FOB destination, $1, 200, (Cost = $720) 5 Paid transportation costs for sale of August 4, $110. 9 Part of the merchandise sold on August 4 was accepted back from Konner Company for full credit and returned to the merchandise inventory, $350. (Cost = $210) Sept. 3 Received payment in full from Konner Company for merchandise sold on August 4, less the return on August 9.

SE10: Forrester Company had beginning merchandise inventory of $14, 800 and ending merchandise inventory of $19, 200. Where would these numbers appear on the work sheet and in the closing entries under (1) the perpetual inventory system and (2) the periodic inventory system? (1) Perpetual inventory system

SE11: On April 15, Farid Company sold merchandise to Smarte Company for $1, 500 on terms of 2/10, n/30. Record the entries in both Farid's and Smarte's records for (1) the sale, (2) a return of merchandise on April 20 of $300, and (3) payment in full on April 25. Assume both companies use the periodic inventory system.

E1: 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 magnetic tag that set off an alarm if the tag is removed from the store before being deactivated

E2: The operating budget and actual performance for the six months ended June 30, 20x3 for Pacific Hardware Company appears 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. Budget Actual Selling expenses Sales salaries expense $90, 000 $102, 030 Rent expense, selling space 2, 000 1, 642 Utilities expense, selling space 18, 000 18, 000 Advertising expense 12, 000 11, 256 Depreciation expense, selling fixtures 15, 000 21, 986 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 Depreciation expense, office equipment 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 and administrative expenses 64, 000 62, 866 Total operating expenses 207, 500 224, 558 Operating Report Budget Actual Difference Selling expenses Sales salaries expense $90, 000 $102, 030 12, 030 Rent expense, selling space 2, 000 1, 642 (358) Utilities expense, selling space 18, 000 18, 000 0 Advertising expense 12, 000 11, 256 (744) Depreciation expense, selling fixtures 15, 000 21, 986 278 Total selling expenses $143, 500 $161, 692 18, 192 General and administrative expenses Office salaries expense $50, 000 $47, 912 (2, 088) Office supplies expense 1, 000 782 (218) Rent expense, office space 4, 000 4, 000 0 Depreciation expense, office equipment 3, 000 3, 251 251 Utilities expense, office space 3, 000 3, 114 114 Postage expense 500 626 126 Insurance expense 2, 000 2, 700 700 Miscellaneous expense 500 481 (19) Total general and administrative expenses 64, 000 62, 866 (1, 134) Total operating expenses 207, 500 224, 558 17, 058 Discuss the results, identifying which differences most likely should be investigated by management. From the operating report, we can see that the total selling expenses are different from the budgeted amount, especially the sales salaries expense and advertising expense. Therefore, the management should investigate the budgeting process for selling expenses.

E3: 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 Goods Sold Gross Margin Operating Expenses Net Income $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 240, 000 80, 000 First, we need to know that the equation for the above is Sales Less: Cost of Goods Gross Margin Less: Operating Expenses Net Income Then, we can replace the information given to find the missing amount. The information given will be shown in bold. Sales 250, 000 336, 000 460, 000 780, 000 Less: Cost of Goods 170, 000 216, 000 360, 000 460, 000 Gross Margin 80, 000 120, 000 100, 000 320, 000 Less: Operating Expenses 56, 000 80, 000 120, 000 240, 000 Net Income 24, 000 40, 000 (2, 000) 80, 000 Therefore, the answer is shown below. Sales Cost of Goods Sold Gross Margin Operating Expenses Net Income $250, 000 $170, 000 $80, 000 $56, 000 $24, 000 336, 000 216, 000 120, 000 80, 000 40, 000 460, 000 360, 000 100, 000 120, 000 (2, 000) 780, 000 460, 000 320, 000 240, 000 80, 000

E4: 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 catalogue price of $1, 000 for a refrigerator. The manufacturer offers its dealers a 30 percent 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. Catalogue 1, 000 Deduct trade discount (1, 000 x 30%) 300 Cost after trade discount 700 Deduct sales discount 2/10 n/30 (700 x 2%) 14 Net cost 686 Trade discount is a producer discount given to retail trade members to assist them in increasing sales of the producer's product. Therefore, the price charged to the dealer is $1, 000 - ($1, 000 x 0.30) = $700 Since the manufacturer offers a sales discount of 2% if the dealers pay within ten days, the net cost of the refrigerator the dealer is $700 - ($700 x 0.02) = $686 Note: The manufacturer sells the machine under terms of FOB destination, which means that the manufacturer bears the transportation cost themselves.

E5: Using the selected account balances at December 31, 20xx, for City Rental that follow, 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 has not been included in Cost of Goods Sold. Account Name Debit Credit Sales $237, 500 Sales Returns and Allowances $11, 750 Cost of Goods Sold 140, 000 Freight In 6, 750 Selling Expenses 21, 500 General and Administrative Expenses 43, 500 City Rental Income Statement For the year Ending on December 31, 20xx Sales $237, 500 Less: Sales Returns and Allowances $11, 750 Cost of goods sold $140, 000 Freight In $6, 750 $158, 500 Gross Margin $79, 000 Less: Selling expenses $21, 500 General and administrative expenses $43, 500 Total Expenses $65, 000 Net Income $14, 000 We need to deduct sales returns and allowances, cost of goods sold, and freight in from sales in order to get the gross profit. Then, we can deduct the other expenses for net income.

E6: 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. a) Purchased merchandise on credit, terms n/30, FOB shipping point, $2, 500. Inventory $2, 500 Accounts Payable $2, 500 Because the company uses perpetual inventory system, we need to debit inventory account and credit accounts payable because they purchased on credit. b) Paid freight on the shipment in transaction a, $ 135. Inventory $135 Cash $135 With FOB shipping point, the buyer is responsible for paying shipping costs. The cost of transportation is debited to the inventory account c) Purchased merchandise on credit, terms n/30, FOB destination, $ 1, 400. Inventory $1, 400 Accounts Payable $1, 400 d) Purchased merchandise on credit, terms n/30, FOB shipping point, $2, 600, which includes freight paid by the supplier of $200. Inventory $2, 600 Accounts Payable $2, 600 Under the terms of "FOB shipping point, " the title of the goods passes to the buyer at the shipping point. In some cases the seller might arrange for shipping as a convenience to the buyer even though the seller's terms are FOB shipping point. In this case, the seller would add transportation costs to the invoice. The buyer would include the transportation costs in the payment to the seller instead of a shipping company. The cost of transportation is debited to inventory account. a. Inventory $2, 500 Accounts Payable $2, 500 b. Inventory $135 Cash $135 c. Inventory $1, 400 Accounts Payable $1, 400 d. Inventory $2, 600 Accounts Payable $2, 600 e. Accounts Payable 500 Inventory 500 f. Accounts Payable 2, 500 Cash 2, 500 g. Accounts Payable 2, 600 Cash 2, 600 h. Accounts Payable 900 Cash 900 ($1, 400 - $500 = $900)

E7: On June 15, Tunnale Company sold merchandise for $1, 300 on terms of n/30 to Whist Company. On June 20, Whist Company returned some of the merchandise for a credit of $300, and on June 25, Whist paid the balance owed. Give Tunnale's entries to record the sale, return, and receipt of payment under the perpetual inventory system. The cost of the merchandise sold on June 15 was $750, and the cost of the merchandise returned to inventory on June 20 was $175. June 15 Accounts Receivable 1, 300 Sales 1, 300 Terms n/30 Cost of goods sold 750 Merchandise Inventory 750 20 Sales Returns and Allowances 300 Accounts Receivable 300 Merchandise Inventory 175 Cost of goods sold 175 25 Cash 1, 000 Accounts Receivable 1, 000 (1, 300 - 300 returned = 1, 000)

E8: Using the selected year-end account balances at December 31, 20x4, for the Atlanta General Store shown below, prepare a 20x4 income statement. Show the detail of net sales. The company uses the periodic inventory system. Beginning merchandise inventory was $52, 000; ending merchandise inventory is $44, 000. Account Name Debit Credit Sales 594, 000 Sales Returns and Allowances 30, 400 Purchases 229, 600 Purchases Returns and Allowances 8, 000 Freight In 11, 200 Selling Expenses 97, 000 General and Administrative Expenses 74, 400 Atlanta General Store Income Statement For the year Ending on December 31, 20x4 Sales $594, 000 Less: Sales returns and allowances 30, 400 Net sales 563, 600 Merchandise inventory, beginning 52, 000 Add: Purchases 229, 600 Less: Purchases returns and allowances 8, 000 Add: Freight in 11, 200 Net cost of purchases 232, 800 Goods available for sale 284, 800 Less: Merchandise inventory, ending 44, 000 Less: Cost of goods sold 240, 800 Gross margin 322, 800 Less: Selling expenses 97, 000 Less: General and administrative expenses 74, 400 Total operating expenses 171, 400 Net income 151, 400

E9: Determine the missing data for each letter in the following three income statements for Leominister Wholesale Paper Company (in thousands): 20x4 20x3 20x2 Gross sales $ o $ h $286 Sales returns and allowances 24 19 a Net sales p 317 b Merchandise inventory, beginning q i 38 Purchases 192 169 c Purchases returns and allowances 31 j 17 Freight in r 29 22 Net cost of purchases 189 k d Goods available for sale 222 212 182 Merchandise inventory, ending 39 l 42 Cost of goods sold s 179 e Gross margin 142 m 126 Selling expenses t 78 f General and administrative expenses 39 n 33 Total operating expenses 130 128 g Net income u 10 27 In order to make it calculate easier, I have separated the income statement for each year. The answer is in green. I also summarize the answer into the table shown in the last table. 20x2 Gross sales $286 Less: Sales returns and allowances 20 Net sales 266 Merchandise inventory, beginning 38 Add: Purchases 139 Less: Purchases returns and allowances 17 Add: Freight in 22 Net cost of purchases 144 Goods available for sale 182 Less: Merchandise inventory, ending 42 Less: Cost of goods sold 140 Gross margin 126 Less: Selling expenses 66 Less: General and administrative expenses 33 Total operating expenses 99 Net income 27 20x3 Gross sales $336 Less: Sales returns and allowances 19 Net sales 317 Merchandise inventory, beginning 42 Add: Purchases 169 Less: Purchases returns and allowances 28 Add: Freight in 29 Net cost of purchases 170 Goods available for sale 212 Less: Merchandise inventory, ending 33 Less: Cost of goods sold 179 Gross margin 138 Less: Selling expenses 78 Less: General and administrative expenses 50 Total operating expenses 128 Net income 10 20x4 Gross sales $301 Less: Sales returns and allowances 24 Net sales 325 Merchandise inventory, beginning 33 Add: Purchases 192 Less: Purchases returns and allowances 31 Add: Freight in 28 Net cost of purchases 189 Goods available for sale 222 Less: Merchandise inventory, ending 39 Less: Cost of goods sold 183 Gross margin 142 Less: Selling expenses 91 Less: General and administrative expenses 39 Total operating expenses 130 Net income 12 20x4 20x3 20x2 Gross sales $301 $336 $286 Less: Sales returns and allowances 24 19 20 Net sales 325 317 266 Merchandise inventory, beginning 33 42 38 Add: Purchases 192 169 139 Less: Purchases returns and allowances 31 28 17 Add: Freight in 28 29 22 Net cost of purchases 189 170 144 Goods available for sale 222 212 182 Less: Merchandise inventory, ending 39 33 42 Less: Cost of goods sold 183 179 140 Gross margin 142 138 126 Less: Selling expenses 91 78 66 Less: General and administrative expenses 39 50 33 Total operating expenses 130 128 99 Net income 12 10 27

E10: Using the data in E6- give the entries to record each of the transactions under the periodic inventory system. For periodic inventory system, when they purchase the inventory on credit, they have to debit purchases account and credit accounts payable. Then, if there is a return of the purchased inventory, then they have to debit accounts payable and credit purchase returns. a. Purchases $2, 500 Accounts Payable $2, 500 b. Freight In $135 Cash $135 c. Purchases $1, 400 Accounts Payable $1, 400 d. Purchases $2, 400 Freight In $200 Accounts Payable $2, 600 e. Accounts Payable 500 Purchase Returns 500 f. Accounts Payable 2, 500 Cash 2, 500 g. Accounts Payable 2, 600 Cash 2, 600 h. Accounts Payable 900 Cash 900 ($1, 400 - $500 = $900)

E11: Using the relevant data in E7, give the entries to record each of the transactions under the periodic inventory system. The entries would be similar except that there is no entries for cost of goods sold and merchandise inventory accounts. June 15 Accounts Receivable 1, 300 Sales 1, 300 Terms n/30 20 Sales Returns and Allowances 300 Accounts Receivable 300 25 Cash 1, 000 Accounts Receivable 1, 000 (1, 300 - 300 returned = 1, 000)

E12: Below are selected account balances of Linley Company for the year ended December 31, 20xx. Prepare closing entries, assuming that the owner of Linley Company, Sandra Linley, withdrew $40, 000 for personal expenses during the year. Account Name Debit Credit Sales $297, 000 Sales Returns and Allowances $15, 200 Cost of Goods Sold 113, 000 Freight In 5, 600 Selling Expenses 48, 500 General and Administrative Expenses 37, 200 After deducting all expenses, the Net Income will be $77, 500. The purpose of closing entries is to close out the temporary accounts (revenue, expenses, and withdrawals) into the owner's Equity. This process is facilitated by the use of a temporary account known as Income Summary account. It is used to collect All of the revenue and expenses of the company, which is eventually close to the capital account. To close revenue account, which has credit balance, we need to debit revenue account and credit income summary. To close expenses accounts, which have debit balance, we need to debit income summary and credit expenses accounts. For withdrawals, it has a debit balance. Therefore, it will be closed into owner's equity by debiting owner's equity and credit withdrawals. Finally, we will close the balance of income summary into the owner's equity account. If the balance is in the credit side, then the company incurs net income. If the balance is in the debit side, then the company incurs net loss. This problem is net income. So, we will debit income summary and credit the owner's equity account. Sales 297, 000 Income Summary 297, 000 Income Summary 15, 200 Sales Returns and Allowances 15, 200 Income Summary 113, 000 Cost of Goods Sold 113, 000 Income Summary 5, 600 Freight In 5, 600 Income Summary 48, 500 Selling Expenses 48, 500 Income Summary 37, 200 General and Administrative Expenses 37, 200 Owner's Equity 40, 000 Withdrawals 40, 000 Income Summary 77, 500 Owner's Equity 77, 500

E13: Selected account balances of the Lakeside Grocery Store for the year ended December 31, 20xx, follow Account Name Debit Credit Sales $297, 000 Sales Returns and Allowances $11, 000 Sales Discounts 4, 200 Purchases 114, 800 Purchases Returns and Allowances 1, 800 Purchases Discounts 2, 200 Freight In 5, 600 Selling Expenses 48, 500 General and Administrative Expenses 37, 200 Beginning merchandise inventory was $26, 000, and ending merchandise inventory is $22, 000. Prepare closing entries, assuming that the owner of Lakeside Grocery, John Grover, withdrew $34, 000 for personal expenses during the year. 20xx Sales $297, 000 Less: Sales Returns and Allowances 11, 000 Sales Discounts 4, 200 Net sales 281, 800 Merchandise inventory, beginning 26, 000 Add: Purchases 114, 800 Less: Purchases Returns and Allowances 1, 800 Purchases Discounts 2, 200 Add: Freight in 5, 600 Net cost of purchases 116, 400 Goods available for sale 142, 400 Less: Merchandise inventory, ending 22, 000 Less: Cost of goods sold 120, 400 Gross margin 161, 400 Less: Selling expenses 48, 500 Less: General and administrative expenses 37, 200 Total operating expenses 85, 700 Net income 75, 700 For the beginning balance of the account, we need to debit income summary and credit merchandise inventory. Then, the purchases is closed by crediting the account, and debiting income summary. For the ending inventory, we need to debit merchandise inventory and credit income summary account. Sales 297, 000 Income Summary 297, 000 Income Summary 11, 000 Sales Returns and Allowances 11, 000 Income Summary 4, 200 Sales Discounts 4, 200 Income Summary 26, 000 Merchandise Inventory 26, 000 Income Summary 114, 800 Purchases 114, 800 Merchandise Inventory 22, 000 Income Summary 22, 000 Purchases Returns and Allowances 1, 800 Income Summary 1, 800 Purchases Discounts 2, 200 Income Summary 2, 200 Income Summary 5, 600 Freight In 5, 600 Income Summary 48, 500 Selling Expenses 48, 500 Income Summary 37, 200 General and Administrative Expenses 37, 200 Owner's Equity 34, 000 Withdrawals 34, 000 Income Summary 75, 700 Owner's Equity 75, 700

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