Merchandising Company

1: Ashton Martin is a student who plans to attend approximately four professional events a year at her college. Each event necessitates a financial outlay of $100 to $200 for a new suit and accessories. After incurring a major hit to her savings for the first event. Ashton developed a different approach. She buys the suit on credit the week before the event, wears it to the event. and returns it the next week to the store for a full refund on her charge card.

(a) Comment on the ethics exhibited by Ashton and possible consequences of her actions.

(b) How does the merchandising company account for the suits that Ashton returns?

2: In comparing the accounts of merchandising company with those of a service company, what additional accounts would the merchandising company likely use, assuming it employs a perpetual inventory system?

3: What items appear in financial statements of merchandising companies but not in the statements of service companies?

4: Golf Depot is a retail sports store carrying golf apparel and equipment. The store is at the end of its second year of operation and is struggling. A major problem is that its cost of inventory has continually increased in the past two years. In the first year of operations, the store assigned inventory costs using LIFO. A loan agreement the store has with its bank, its prime source of financing, requires the store to maintain a certain profit margin and current ratio. The store’s owner is currently looking over Golf Depot’s preliminary financial statements for its second year. The numbers are not favorable. The only way the store can meet the required financial ratios agreed on with the bank is to charge from LIFO to FIFO. The store originally decided on LIFO because of its tax advantages. The owner recalculates ending inventory using FIFO and submits those numbers and statements to the loan officer at the bank for the required bank review. The owner thankfully reflects on the available latitude in choosing the inventory costing method. (a). How does Golf Depot’s use of FIFO improve its net profit margin and current ratio? (b). Is the action by Golf Depot’s owner ethical? Explain.

5: What accounts are used in periodic inventory system but not in a perpetual inventory system?

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