Wednesday October 12th Chapter 6 ANSWERS TO QUESTIONS E6 6 Req 1 WOLVERINE WORLD WIDE INC Income Statement For the Year Ended dollars in thousands Sales of merchandise Cost of products sold Gross profit Selling and administrative expense Income from operations Other income expense Interest expense Other income Pretax income Income taxes Net Income 1 220 568 734 547 486 021 345 183 140 838 2 850 839 138 827 44 763 94 064 Earnings per share 94 064 48 888 shares 1 92 Req 2 Gross profit margin 1 220 568 734 547 486 021 Gross profit percentage ratio 486 021 1 220 568 398 or 39 8 Gross margin or gross profit in dollars is the difference between the sales prices and the costs of purchasing or manufacturing all goods that were sold during the period sometimes called the markup that is net revenue minus only one of the expenses cost of goods sold The gross profit ratio is the amount of each net sales dollar that was gross profit during the period For this company the rate was 39 8 which means that 398 of each net sales dollar was gross profit alternatively 39 8 of each sales dollar was gross profit for the period Wolverine World Wide s gross profit percentage was below Deckers s current 2008 percentage of 44 3 Deckers s shoes have a reputation as a rugged product as well as a premium high fashion product This has allowed it to maintain higher prices and higher gross margins In marketing this is called the value of brand equity E6 9 a b Bad debt expense E SE 790 000 x 0 02 15 800 Allowance for doubtful accounts XA A To record estimated bad debt expense Allowance for doubtful accounts XA A Accounts receivable A To write off a specific bad debt 15 800 360 360 E6 10 Assets Liabilities a Allowance for doubtful accounts 15 800 b Allowance for doubtful accounts Accounts receivable E6 11 Req 1 a b Stockholders Equity Bad debt expense 15 800 360 360 Bad debt expense E SE 680 000 x 0 035 23 800 Allowance for doubtful accounts XA A To record estimated bad debt expense 23 800 Allowance for doubtful accounts XA A 2 800 Accounts receivable A To write off a specific bad debt 2 800 Req 2 Transaction a b Net Sales NE NE Gross Profit NE NE Income from Operations 23 800 NE Monday October 17th M6 6 Assets Liabilities a Allowance for doubtful accounts 17 000 b Allowance for doubtful accounts Accounts receivable Stockholders Equity Bad debt expense 17 000 8 000 8 000 M6 7 a Granted credit with shorter payment deadlines b Increased effectiveness of collection methods c Granted credit to less creditworthy customers E6 22 Req 1 The change in the accounts receivable balance 48 066 63 403 15 337 would increase cash flow from operations by 15 337 thousand This happens because the Company is collecting cash faster than it is recording credit sales revenue Req 2 a Declining sales revenue leads to lower accounts receivable because fewer new credit sales are available to replace the receivables that are being collected b Cash collections from the prior period s higher credit sales are greater than the new credit sales revenue Note that in the next period cash collections will also decline P6 8 Req 1 Comparison of deposits listed in the Cash account with deposits listed on the bank statement reveals a 5 200 deposit in transit on August 31 Req 2 Comparison of the checks cleared on the bank statement with a outstanding checks from July and b checks written in August reveals two outstanding checks at the end of August 280 510 790 Req 3 ALLISON COMPANY Bank Reconciliation August 31 2011 Company s Books Ending balance per Cash account Additions Interest collected Deductions Bank service charges Correct cash balance 20 370 2 350 22 720 120 22 600 Bank Statement Ending balance per bank statement Additions Deposits in transit Deductions Outstanding checks Correct cash balance Req 4 1 Cash A 2 350 Interest revenue R SE Interest collected 2 Bank service charge expense E SE Cash A Service charges deducted from bank balance 18 190 5 200 23 390 790 22 600 2 350 120 120 These entries are necessary because of the changes in the regular Cash account that have not yet been recorded by the company The bank already has recorded them in its accounts The Cash account and the other accounts in the entries must be brought up to date for financial statement purposes Req 5 Current Assets Cash 22 600 ANSWERS TO MULTIPLE CHOICE 1 b 6 c 2 b 7 d 3 b 8 b 4 d 9 d 5 c 10 c