Fundamental Accounting Principles
Fundamental Accounting Principles
23rd Edition
ISBN: 9781259536359
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 5, Problem 5APSA
To determine

Concept Introduction:

Adjusting entries: Adjustment entries are like the journal entries only and are basic for accounting. They are made in the closing period to adjust the expenses and incomes in the period in which they occurred. To show the true and fair financial position, it is essential to pass the adjustment entries. This includes the adjustments for the depreciation expense, inventory shrinkage expense and prepaid expenses.. They can be termed as the closing entries as well from the accounting perspective.

Multiple-step income statement: It is one of the most commonly used methods to derive the net income as it uses multiple subtractions under multiple heads. It gives more and appropriate information to the users of the financial statement.

Single-step income statement: It is one of the simple methods to derive the net income as it uses just one subtraction. It takes all the revenues together and deducts all the expenses in one shot without bifurcating them under different heads.

Current ratio: It is also known as the working capital ratio and it is an efficiency ratio used to compute the company’s ability to pay current liabilities or short term liabilities out of its current assets. It covers all the current assets including inventory and prepaid expenses.

Acid test ratio: It is also known as the liquidity ratio and it is used to compute the ability of a company to pay its immediate liabilities out of its current assets. Current assets exclude inventory and prepaid expenses.

Gross margin ratio: It depicts the margin that a business is earning from its operating activities in terms of percentage of net sales.

To Prepare/Determine:

  1. Adjusting journal entries at year end for the given merchandise activities.
  2. Multiple-step income statement for fiscal year 2017.
  3. Single-step income statement for fiscal year 2017.
  4. The different ratios like current ratio, acid- test ratio and gross margin ratio.

Expert Solution & Answer
Check Mark

Explanation of Solution

  1. Adjusting journal entries-
S. No. Particulars Debit Credit
a Store supplies expense $4,050  
  To Store supplies account   $4,050
b Insurance expense account $1,400  
  To Prepaid insurance account   $1,400
c Depreciation expense account- Store equipment $1,525  
  To Accumulated Dep- Store equipment   $1,525
D Inventory shrinkage expense account $1,600  
  To Inventory account   $1,600
  1. The multiple-step income statement-
Income Statement of
Nelson company
Sales Revenue:    
Gross Sales $111,950  
Less: Sales discount $(2,000)  
Less: Sales returns and allowances $(2,200)  
Net sales   $107,750
Less: COGS   $38,400
Less: Inventory shrinkage expense   $1,600
Gross Profit   $67,750
Operating Expenses    
Selling Expenses:    
Depreciation expense- Store equipment $1,525  
Advertising expense $9,800  
Store supplies expense $4,050  
Administrative expenses:    
Salaries expense $35,000  
Insurance expense $1,400  
Rent expense $15,000  
Total Operating expense   $66,775
Net income   $975
  1. The single-step income statement-
Income Statement of
Nelson company
Revenue:  
Sales Revenue $107,750
Expenses  
COGS $38,400
Inventory shrinkage expense $1,600
Depreciation expense- Store equipment $1,525
Advertising expense $9,800
Salaries expense $35,000
Insurance expense $1,400
Rent expense $15,000
Store supplies expense $4,050
Net Income $975
  1. The current ratio, acid test ratio and gross margin ratio

Current Ratio=Current assets÷Current liabilities=($1,000+$10,900+$1,750+$1,000)÷$10,000=1.46Acid test ratio=(C.A.-Inventory-Prepaid expenses)÷Current liabilities=($1,000+$1,750)÷$10,000=0.27Gross Margin ratio=Gross Profit÷Net sales×100=$67,750÷$107,750×100=62.88%

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Chapter 5 Solutions

Fundamental Accounting Principles

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