Reference no: EM13884729

Decision Analysis: Analysis of a Merchandising Income statement

In 2013, Lisa Perry opened Lisa's Jeans Company, a small store that sold designer jeans in a suburban mall. Perry worked 14 hours a day and controlled all aspects of the operation. The company was such a success that in 2014, Perry opened a second store in another mall. Because the new shop needed her attention, she hired a manager for the original store.

During 2014, the new store was successful, but the original store's performance did not match its performance in 2013. Concerned about this, Perry compared the two years' results for the original store. Her analysis showed the following:

	2014	2013
Net sales	$325,000	$350,000
Cost of goods sold	225,000	225,000
Gross margin	$100,000	$125,000
Operating expenses	75,000	50,000
Income before income taxes	$  25,000	$  75,000

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 insig- nificant in both years.

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

	2014	2013
Purchases	$200,000	$271,000
Total purchases allowances	15,000	20,000
Freight-in	19,000	27,000
Physical inventory, end of year	32,000	53,000

Still not satisfied, Perry went through all the individual sales and purchase records for 2014. She found that they were correct, but given the unit purchases and sales dur- ing the year, the 2014 ending inventory should have been $57,000. After puzzling over all this information, Perry has come to you for accounting help.

Required:

1. Using Perry's new information, compute the cost of goods sold for 2013 and 2014 and account for the difference in income before income taxes between 2013 and 2014.

2. Suggest at least two reasons for the discrepancy in the 2014 ending inventory. How might Perry improve the management of the original store?