Question

QUESTION 2 (35 POINTS) Farm Safe, Inc. sells agribusiness related clothing that is fashionable, yet meets safety guidelines for agribusiness use. The store is based in Morgantown, WV, and has a fan base of young women in agriculture, that want to look trendy but also be safe while they work. Below is the store's adjusted year-end trial balance dated December 31, 2018. FARM SAFE, INC. ADJUSTED TRIAL BALANCE DECEMBER 31. 2018 Accounts receive Merchandise inventory Prepaid rent Office supplies Office equipment Accumulated depreciation office equipment Accounts payable Sales taxes payable Capital stock Retained earnings Sales Sales returns and allowances Cost of goods sold Purchase discounts lost Utilities en pense Office supply expense Depreciation expense office equipment Rowen Insurance expense Salaries expense Income tax per 189 156 LOND 1.800 180.000 Instructions Using the information above, prepare an income statement for Farm Safe, Inc. dated December 31, 2018 Using the information in (a) above, compute Farm Safe's gross profit margin as a percentage of net sales. c. Based on this information above, do you think the store's customers seem to be satisfied with their purchases? Please explain your answer. Does Farm Safe, Inc. record its inventory purchases net of any purchase discounts? How can you tell; explain your answer. e. Based on the information previously, Farm Safe reports sales taxes payable of $6,000 in its adjusted trial balance, but there does not seem to be any sales tax expenses recorded. Is this an error, should the business report any sales taxes expense?

Answer 1

Solution.

a) Income Statement
Farm Safe Inc.
Income Statement
For the Month Ended December 31, 2018
Sales	$    460,800
Less: Sales Return & Allowance	$        4,800
Net Sales		$      456,000
Less: Cost of Goods Sold		$      189,156
Gross Profit Margin		$      266,844
Less: Expenses
Rent Expense	$      12,000
Salaries Expense	$    180,000
Utilities Expense	$        8,400
Office supplies expense	$        1,080
Insurance Expense	$        1,800
Depreciation Expense	$        5,640
Purchase discount lost	$           480
Total Expense		$      209,400
Net Income before Tax		$        57,444
Less: Income Tax expense		$        16,680
Net Income (after tax)		$        40,764
b) Gross Profit Margin = 266,844/ 456,000 = 52.52%
c) Based on the information Sales Return and Allowance
Sales, the sales return and Allowance is only approximately 1%.
Therefore, it can be said that store's customer are satisfied
with their purchases.
d) Yes, Farm Safe Inc., records its inventory purchase net of
purchase discount. This is clear from Purchase discount lost
given in trial balance. When Farm Safe Inc. failed to pay its
invoice price within discount period, it has recorded the
purchase discount lost.
e) No, there is no error. Sales Tax is collected on sales of
merchandising on the behalf of government and it is liabilities
of the business that is payable to government. It is not
expenses of business.
f) Operating cycle means the time required for merchandising
firm to convert it merchandising stock into cash from credit
cash and credit sales/customer. Account receivable is part of
Farm Safe operating cycle.