Effect of inventory purchase on financial statements & ratio

Because of the possibility that Calliope might open an online bookstore, it is important to understand how inventory would be reported in Calliope’s books and accounts. What are the allowable methods for recording inventory? How does each method affect the expense of cost of goods sold, and consequently, tax expense and net income?

To: Jan Waters, Controller
From:
Subject: Accounting for Inventory of Possible Online Bookstore

Which accounts are affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date.)
Account affected Increase or decrease?
Balance sheet_- current assets increase
Income statement – cogs decrease

How is the balance sheet affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date.)
Account affected Increase or decrease?
Current assets increase
Retain earning increase
Inventory increase
Liabilities increase

How is the income statement affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date.)
Account affected Increase or decrease?
COGS decrease

How is the statement of cash flows (using the direct method) affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date.)
Operating activities (list event) Cash inflow, cash outflow, or no change?
Inventory No change

How are the numerator and denominator of the following ratios affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date. Also assume the ratio is positive before considering the entry.)
Return on Assets Increase, decrease, no effect, or cannot be determined?
Numerator (Net income) increase
Denominator (Average total assets) increase
Total Ratio Depends on the magnitude of change

Return on Equity Increase, decrease, no effect, or cannot be determined?
Numerator (Net income) increase
Denominator (Average total equity) increase
Total Ratio Depends on the magnitude of change

Earnings Per Share Increase, decrease, no effect, or cannot be determined?
Numerator (Net income) increase
Denominator (Weighted average common stock shares outstanding) No effect
Total Ratio increase

Quick Ratio Increase, decrease, no effect, or cannot be determined?
Numerator (Cash, short-term investments, and accounts receivable) No effect
Denominator (Current liabilities) increase
Total Ratio decrease

Gross Margin Increase, decrease, no effect, or cannot be determined?
Numerator (Sales-Cost of goods sold expense) increase
Denominator (Sales) No effect
Total Ratio increase

Debt to Total Assets Increase, decrease, no effect, or cannot be determined?
Numerator (Total liabilities) increase
Denominator (Total assets) increase
Total Ratio Depends on the magnitude

Which accounts are affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense.)

Account affected Increase or decrease?
Balance sheet – liabilites decrease
Income statement -COGS increase

How is the balance sheet affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense.)
Account affected Increase or decrease?
Cash on hand increase
Inventory decrease
liabilities decrease

How is the income statement affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense.)
Account affected Increase or decrease?
COGS increase

How is the statement of cash flows (using the direct method) affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense.)
Operating activities (list event) Cash inflow, cash outflow, or no effect?
Inventory outflow

How are the numerator and denominator of the following ratios affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense. Assume the ratio is positive before considering the entry.)

Return on Assets Increase, decrease, no effect, or cannot be determined?
Numerator (Net income) decrease
Denominator (Average total assets) increase
Total Ratio decrease

Return on Equity Increase, decrease, no effect, or cannot be determined?
Numerator (Net income) decrease
Denominator (Average total equity) increase
Total Ratio decrease

Earnings Per Share Increase, decrease, no effect, or cannot be determined?
Numerator (net income) decrease
Denominator (Weighted average common stock shares outstanding) No effect
Total Ratio decrease

Quick Ratio Increase, decrease, no effect, or cannot be determined?
Numerator (Cash, Short-term investments and Accounts receivable) increase
Denominator (Current liabilities) decrease
Total Ratio increase

Gross Margin Increase, decrease, no effect, or cannot be determined?
Numerator (Sales-Cost of goods sold expense) increase
Denominator (Sales) increase
Total Ratio Depends on magnitude of change

Debt to Total Assets Increase, decrease, no effect, or cannot be determined?
Numerator (Total liabilities) decrease
Denominator (Total assets) increase
Total Ratio decrease

Instructions: There are two steps to Task 2b. First, complete a set of tables (provided below) detailing Calliope’s accounts. Then, write an e-mail to Jan Waters summarizing this information. When you finish both the tables and the e-mail, save the document with your first initial and last name in the file name (e.g., jsmith_task2b.doc). Then send the document to your faculty member using the form on the Task 2b page of the course.

Step 1
Use the tables below to display the requested information for this task. The number of rows in each table is not indicative of the number of accounts affected. Feel free to add or remove rows as necessary.

Step 2
Write a 450-word e-mail to Jan Waters summarizing the information you provided in the tables. The e-mail should describe the allowable inventory valuation methods and their impact on inventory, expense of cost of goods sold, and consequently, on net income and tax expense. If Calliope decides to open a bookstore, inventory will be carried on its accounting books.
Your e-mail should answer the following questions:
? Which accounts are affected when a company purchases merchandise for resale? (Assume a perpetual inventory system. Consider whether the purchase of the merchandise is for cash or on account.)
? Which accounts are affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into expense of cost of goods sold.)
? How are the balance sheet, income statements, and statement of cash flows (using the direct method) affected by the above entries?
? What is the effect of the above entries on the selected ratios in the template tables?
? Evaluate the impact of each entry on the financial statements and ratios of Calliope. For this part of the task, consider the following questions and summarize your analysis in your e-mail.
o How will the financial statements be affected by the entries?
o Which ratios will be affected by the entries?
o How might an investor or creditor be affected with regard to the decision to invest in or lend money to the company, based on your analysis?

To: Jan Waters, Controller
From: [insert your name here]
Subject: Accounting for Inventory of Possible Online Bookstore
Date: [insert the date here]

Which accounts are affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date.)
Account affected Increase or decrease?

How is the balance sheet affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date.)
Account affected Increase or decrease?

How is the income statement affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date.)
Account affected Increase or decrease?

How is the statement of cash flows (using the direct method) affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date.)
Operating activities (list event) Cash inflow, cash outflow, or no change?

How are the numerator and denominator of the following ratios affected when a company purchases merchandise for resale? (Assume the merchandise is purchased on account and will be paid for at a future date. Also assume the ratio is positive before considering the entry.)
Return on Assets Increase, decrease, no effect, or cannot be determined?
Numerator (Net income)
Denominator (Average total assets)
Total Ratio

Return on Equity Increase, decrease, no effect, or cannot be determined?
Numerator (Net income)
Denominator (Average total equity)
Total Ratio

Earnings Per Share Increase, decrease, no effect, or cannot be determined?
Numerator (Net income)
Denominator (Weighted average common stock shares outstanding)
Total Ratio

Quick Ratio Increase, decrease, no effect, or cannot be determined?
Numerator (Cash, short-term investments, and accounts receivable)
Denominator (Current liabilities)
Total Ratio

Gross Margin Increase, decrease, no effect, or cannot be determined?
Numerator (Sales-Cost of goods sold expense)
Denominator (Sales)
Total Ratio

Debt to Total Assets Increase, decrease, no effect, or cannot be determined?
Numerator (Total liabilities)
Denominator (Total assets)
Total Ratio

Which accounts are affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense.)

Account affected Increase or decrease?

How is the balance sheet affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense.)
Account affected Increase or decrease?

How is the income statement affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense.)
Account affected Increase or decrease?

How is the statement of cash flows (using the direct method) affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense.)
Operating activities (list event) Cash inflow, cash outflow, or no effect?

How are the numerator and denominator of the following ratios affected when a company sells inventory? (Do not consider the sale side of the entry, only the movement of the item out of inventory and into cost of goods sold expense. Assume the ratio is positive before considering the entry.)

Return on Assets Increase, decrease, no effect, or cannot be determined?
Numerator (Net income)
Denominator (Average total assets)
Total Ratio

Return on Equity Increase, decrease, no effect, or cannot be determined?
Numerator (Net income)
Denominator (Average total equity)
Total Ratio

Earnings Per Share Increase, decrease, no effect, or cannot be determined?
Numerator (net income)
Denominator (Weighted average common stock shares outstanding)
Total Ratio

Quick Ratio Increase, decrease, no effect, or cannot be determined?
Numerator (Cash, Short-term investments and Accounts receivable)
Denominator (Current liabilities)
Total Ratio

Gross Margin Increase, decrease, no effect, or cannot be determined?
Numerator (Sales-Cost of goods sold expense)
Denominator (Sales)
Total Ratio

Debt to Total Assets Increase, decrease, no effect, or cannot be determined?
Numerator (Total liabilities)
Denominator (Total assets)
Total Ratio

Following the directions in Step 2 above, answer the other questions for this task. Discuss your overall findings in the space below.

Calculate the price
Make an order in advance and get the best price
Pages (550 words)
$0.00
*Price with a welcome 15% discount applied.
Pro tip: If you want to save more money and pay the lowest price, you need to set a more extended deadline.
We know how difficult it is to be a student these days. That's why our prices are one of the most affordable on the market, and there are no hidden fees.

Instead, we offer bonuses, discounts, and free services to make your experience outstanding.
How it works
Receive a 100% original paper that will pass Turnitin from a top essay writing service
step 1
Upload your instructions
Fill out the order form and provide paper details. You can even attach screenshots or add additional instructions later. If something is not clear or missing, the writer will contact you for clarification.
Pro service tips
How to get the most out of your experience with AssignmentHelpWeb
One writer throughout the entire course
If you like the writer, you can hire them again. Just copy & paste their ID on the order form ("Preferred Writer's ID" field). This way, your vocabulary will be uniform, and the writer will be aware of your needs.
The same paper from different writers
You can order essay or any other work from two different writers to choose the best one or give another version to a friend. This can be done through the add-on "Same paper from another writer."
Copy of sources used by the writer
Our college essay writers work with ScienceDirect and other databases. They can send you articles or materials used in PDF or through screenshots. Just tick the "Copy of sources" field on the order form.
Testimonials
See why 20k+ students have chosen us as their sole writing assistance provider
Check out the latest reviews and opinions submitted by real customers worldwide and make an informed decision.
English 101
Very good job. I actually got an A
Customer 452443, September 25th, 2022
Business Studies
Job well done. Finish paper faster than expected. Thank you!
Customer 452451, October 3rd, 2022
Anthropology
excellent loved the services
Customer 452443, September 23rd, 2022
Nursing
The paper was EXCELLENT. Thank you
Customer 452449, September 23rd, 2022
Anthropology
Excellent services will definitely come back
Customer 452441, September 23rd, 2022
Architecture, Building and Planning
The assignment was well written and the paper was delivered on time. I really enjoyed your services.
Customer 452441, September 23rd, 2022
11,595
Customer reviews in total
96%
Current satisfaction rate
3 pages
Average paper length
37%
Customers referred by a friend
OUR GIFT TO YOU
15% OFF your first order
Use a coupon FIRST15 and enjoy expert help with any task at the most affordable price.
Claim my 15% OFF Order in Chat