In 2010, Lisa Perry opened Lisa’s Jeans Company, a small store that sold designer jeans in a suburban mall. Lisa Perry worked 14 hours a day and controlled all aspects of the operation. The company was such a success that in 2011, Perry opened a second store in another mall. Because the new shop needed her attention, she hired a manager for the original store.

During 2011, the new store was successful, but the original store’s performance did not match its performance in 2010. Concerned about this, Perry compared the two years’ results for the original store. Her analysis showed the following:

Perry’s analysis also revealed that the cost and the selling price of the jeans were roughly the same in both years, as was the level of operating expenses, except for the new manager’s $25,000 salary. The amount of sales returns and allowances was insignificant in both years.

Studying the situation further, Perry discovered the following about the cost of goods sold:

Still not satisfied, Perry went through all the individual sales and purchase records for 2011. She found that they were correct, but given the unit purchases and sales during the year, the 2011 ending inventory should have been $57,000. After puzzling over all this information, Perry has come to you for accounting help.

1. Using Perry’s new information, compute the cost of goods sold for 2010 and 2011 and account for the difference in income before income taxes between 2010 and 2011.

2. Suggest at least two reasons for the discrepancy in the 2011 ending inventory. How might Perry improve the management of the original store?

Transcribed Image Text:

Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes 2011 $325,000 225,000 $100,000 75,000 25,000 2010 $350,000 225,000 $125,000 50,000 75,000 2011 2010 Purchases $200,000 $271,000 otal purchases allowances Freight-in Physical inventory, end of year 15,000 19,000 32,000 20,000 27,000 53,000