Assume that an index of key business ratios in your library shows hardware stores of Claypool's...


Assume that an index of key business ratios in your library shows hardware stores of Claypool's approximate size (in total assets) average net sales of S1 million per year and a gross profit margin of 25 percent.

Is Claypool able to pass its extra transportation costs on to its customers? Does the business appear to suffer or benefit financially from its remote location? Explain your reasoning and support your conclusions with specific accounting data comparing the operations of Claypool Hardware with the industry averages.

Hendry's Boutique is a retail clothing store for women. The store operates out of a rented building in Storm Lake, Iowa. Shown below is the store's adjusted year-end trial balance dated December 31, 2015.

Hendry's Boutique Adjusted Trial Balance December 31, 2015

Cash $15,200
Accounts receivable 2,600
Merchandise inventory 17,500
Prepaid rent 1,800
Office supplies 900
Office equipment 41,000
Accumulated depreciation; office equipment $12,000
Accounts payable 12,750
Sales taxes payable 3,200
Capital stock 18,000
Retained earnings 21,050
Sales 226,000
Sales returns and allowances 2,500
Cost of goods sold 100,575
Purchase discounts lost 250
Utilities expense 4,120
Office supply expense 520
Depreciation expense: office equipment 2,750
Rent expense 6,100
Insurance expense 900
Salaries expense 88,095
Income taxes expense 8,190
$293,000 $293,000

1. Prepare an income statement for Hendry's Boutique dated December 31, 2015.

2. Compute the store's gross profit margin as a percentage of net sales

3. Do the store's customers seem to be satisfied with their purchases? Defend your answer.

Gross Profit Margin:

The difference in total revenue and cost of goods sold is known as cost of goods sold. Cost of goods sold is the sum of direct cost incurred during the production which includes direct material, direct labor and manufacturing overhead.

Answer and Explanation:

1. Preparation of income statement:

Particulars Amount ($) Amount ($)
Sales 226,000
Less: Sales return (2,500)
Net sales 223,500
Less: Cost of goods sold 100,575
Less: Purchase discount 250
Net operating expenses 100,825
Gross margin 122,675
Utilities 4,120
Office supplies expense 520
Depreciation 2,750
Rent expenses 6,100
Insurance expense 900
Salaries expense 88,095
Net operating expenses 102,485
Net income before tax 20,190
Less: tax 8,190
Net income 12,000

2. Calculation of gross profit margin as percentage of net sales:

{eq}\begin {align*}\rm\text{Gross profit margin}&=\dfrac{\rm\text{Gross Profit}}{\rm\text{Net sales}}\\&=\dfrac{\$122,675}{\$223,500}\\&=54.89\% \end{align*} {/eq}

3. The gross profit margin of the industry is 25% while the gross profit margin of the Hendry's Boutique is 54.89%. It shows that boutique is working well because it has more margin than prevalent in the market.

Learn more about this topic:

What Is an Income Statement? - Purpose, Components & Format

from Accounting 101: Financial Accounting

Chapter 2 / Lesson 2

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