Question

BTN 4-6 Official Brands’s general ledger and supplementary records at the end of its current period reveal the following.

Sales, gross	\(600,000	Merchandise inventory	\)98,000
Sales return and allowances	20,000	Invoice cost of merchandise purchases	360,000
Sales discount	13,000	Purchase discount received	9,000
Cost of transportation-in	22,000	Purchase return and allowances	11,000
Operating expenses	50,000	Merchandise inventory (end of period)	84,000

Required

1. Each member of the team is to assume responsibility for computing one of the following items. You are not to duplicate your teammates’ work. Get any necessary amounts to compute your item from the appropriate teammate. Each member is to explain his or her computation to the team in preparation for reporting to the class.

1. Net sales d. Gross profit
2. Total cost of merchandise purchases e. Net income
3. Cost of good sold

2. Check your net income with the instructor. If correct, proceed to step

3. Assume that a physical inventory count finds that actual ending inventory is $76,000. Discuss how this affects previously computed amounts in step 1.

Short answer

1. Net income of the business entity is$141,000.
2. Net income will decrease, and the cost of goods sold will increase due to changes in the value of closing inventory.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of Income Statement

A statement prepared by an accountant that represents the net benefits generated by a business entity by reporting the expenses and revenue of the business, is known as an income statement.

Calculation of various line items

Calculation of net sales:

Particulars	Amount $
Gross sales	$600,000
Less: sales return and allowances	(20,000)
Less: Sales discount	(13,000)
Net sales	567,000

Calculation of total cost of merchandise purchases:

Particulars	Amount $
Invoice cost of merchandise purchased	$360,000
Add: transportation-in	22,000
Less: Purchase discount	(9,000)
Less: Purchase return and allowances	(11,000)
Total cost of merchandise purchased	$362,000

Calculation of cost of goods sold:

Particulars	Amount $
Total cost of merchandise purchased	$362,000
Add: Beginning inventory	98,000
Less: Closing inventory	(84,000)
Cost of goods sold	$376,000

Calculation of gross profit:

Particulars	Amount $
Net sales	$567,000
Less: Cost of goods sold	(376,000)
Gross profit	$191,000

Calculation of Net income:

Particulars	Amount $
Net sales	$567,000
Less: Cost of goods sold	(376,000)
Gross profit	191,000
Less: Operating expenses	(50,000)
Net income	$141,000

Re-calculation of line items

Calculation of net sales:

Particulars	Amount $
Gross sales	$600,000
Less: sales return and allowances	(20,000)
Less: Sales discount	(13,000)
Net sales	567,000

Calculation of total cost of merchandise purchases:

Particulars	Amount $
Invoice cost of merchandise purchased	$360,000
Add: transportation-in	22,000
Less: Purchase discount	(9,000)
Less: Purchase return and allowances	(11,000)
Total cost of merchandise purchased	$362,000

Calculation of cost of goods sold:

Particulars	Amount $
Total cost of merchandise purchased	$362,000
Add: Beginning inventory	98,000
Less: Closing inventory	(76,000)
Cost of goods sold	$384,000

Calculation of gross profit:

Particulars	Amount $
Net sales	$567,000
Less: Cost of goods sold	(384,000)
Gross profit	$183,000

Calculation of Net income:

Particulars	Amount $
Net sales	$567,000
Less: Cost of goods sold	(384,000)
Gross profit	183,000
Less: Operating expenses	(50,000)
Net income	$133,000