Analysis of Merchandising Income Statement C 5. In 2009, Tanika Jones opened a small retailstore in a suburban mall. Called Tanika’s Jeans Company, the shop sold designer jeans. TanikaJones worked14 hours a day and controlled all aspects of the operation. All sales were for cash orbank credit card. Tanika’s Jeans Company was such a success that in 2010, Jones decided toopen a second store in another mall. Because the new shop needed her attention, she hired amanager to work in the original store with its two existing sales clerks. During 2010, the newstore was successful, but the operations of the original store did not match the first year’sperformance.Concerned about this turn of events, Jones compared the two years’ results for the original store.The figures are as follows:20102009Net sales$325,000$350,000Cost of goods sold225,000225,000Gross margin$100,000$125,000Operating expenses75,00050,000Income before income taxes $ 25,000$ 75,000In addition, Jones’s analysis revealed that the cost and selling price of jeans were about the samein both years and that the level of operating expenses was roughly the same in both years, exceptfor the new manager’s $25,000 salary. Sales returns and allowances were insignificant amountsin both years.Studying the situation further, Jones discovered the following facts about the cost ofgoods sold:20102009Purchases$200,000$271,000Purchases Returns and allowances 15,00020,000Freight-in19,00027,000Physical inventory, end of year32,00053,000Still not satisfied, Jones went through all the individual sales and purchase records for the year.Both sales and purchases were verified.

However, the 2010ending inventory should have been$57,000, given the unit purchases and sales during the year. After puzzling over all this information, Jones comes to you for accounting help.1. Using Jones’s new information, recompute the cost of goods sold for 2009and 2010, andaccount for the difference in income before income taxes between 2009 and 2010.2. Suggest at least two reasons for the discrepancy in the 2010 ending inventory. How mightJones improve the management of the original store?Management IssuesE 3. Indicate whether each of the following items is associated with (a) allocating the cost ofinventories in accordance with the matching rule, (b) assessing the impact of inventory decisions,(c) evaluating the level of inventory, or (d) engaging in an unethical action.1. Computing inventory turnover2. Valuing inventory at an amount to meet management’s targeted net income3. Application of the just-in-time operating environment4. Determining the effects of inventory decisions on cash flows5. Apportioning the cost of goods available for sale to ending inventory and cost of goods sold6. Determining the effects of inventory methods on income taxes7. Determining the assumption about the flow of costs into and out of the company