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Assume You Work As An Accountant in The Merchandising Division PDF

The document describes a scenario where the assistant works as an accountant for a merchandising division of a large company. The division manager's pay is based on gross profit percentage and net income. The manager is advising the accountant to classify sales returns and discounts as expenses rather than contra-revenues, which would increase reported gross profit. However, this classification would not be in accordance with GAAP.

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Hassan Jan
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73 views1 page

Assume You Work As An Accountant in The Merchandising Division PDF

The document describes a scenario where the assistant works as an accountant for a merchandising division of a large company. The division manager's pay is based on gross profit percentage and net income. The manager is advising the accountant to classify sales returns and discounts as expenses rather than contra-revenues, which would increase reported gross profit. However, this classification would not be in accordance with GAAP.

Uploaded by

Hassan Jan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Assume you work as an accountant in the merchandising

division #2749
Assume you work as an accountant in the merchandising division of a large public company that
makes and sells athletic clothing. To encourage the merchandising division to earn as much
profit on each individual sale as possible, the division manager’s pay is based, in part, on the
division’s gross profit percentage. To encourage control over the division’s operating
expenses, the man-ager’s pay also is based on the division’s net income.You are currently
preparing the division’s financial statements. The division had a good year, with sales of $
100,000, cost of goods sold of $ 50,000, sales returns and allowances of $ 6,000, sales
discounts of $ 4,000, and salaries and wages expenses of $ 30,000. (Assume the division does
not report income taxes.) The division manager stresses that “it would be in your personal
interest “to classify sales returns and allowances and sales discounts as selling expenses
rather than as contra-revenues on the division’s income statement. He justifies this “friendly
advice” by saying that he’s not asking you to fake the numbers— he just believes that those
items are more accurately reported as expenses. Plus, he claims, being a division of a larger
company, you don’t have to follow GAAP. Required:1. Prepare an income statement for the
division using the classifications shown in this chapter. Using this income statement, calculate
the division’s gross profit percentage.2. Prepare an income statement for the division using the
classifications advised by the manager. Using this income statement, calculate the division’s
gross profit percentage.3. What reason (other than reporting “more accurately”) do you think is
motivating the man-ager’s advice to you?4. Do you agree with the manager’s statement that
“he’s not asking you to fake the numbers”?5. Do you agree with the manager’s statement
about not having to follow GAAP?6. How should you respond to the division manager’s
“friendly advice”?View Solution:
Assume you work as an accountant in the merchandising division

ANSWER
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