Adapted by Sheila Elworthy Neta PowerPoint presentations to accompany Volume 1 Accounting Second Canadian Edition by Warren/Reeve/Duchac/Elworthy/Kristjanson/Tober Adapted by Sheila Elworthy and Tana Kristjanson Copyright © 2014 by Nelson Education Ltd.

Accounting for Merchandising Businesses Chapter 5 Accounting for Merchandising Businesses Copyright © 2014 by Nelson Education Ltd.

Accounting for Merchandising Businesses Distinguish between the activities and financial statements of service and merchandising businesses. Describe and illustrate the accounting for merchandise transactions under the perpetual inventory system. Copyright © 2014 by Nelson Education Ltd.

Accounting for Merchandising Businesses Describe the adjusting process for a merchandising business under the perpetual inventory system. Describe and illustrate the financial statements of a merchandising business under the perpetual inventory system. Describe the closing process for a merchandising business. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Distinguish between the activities and financial statements of service and merchandising businesses. Copyright © 2014 by Nelson Education Ltd.

Nature of Merchandising Businesses Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX Copyright © 2014 by Nelson Education Ltd.

Nature of Merchandising Businesses Merchandising Business Sales $XXX Cost of Goods Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX Copyright © 2014 by Nelson Education Ltd.

When goods are sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of goods sold. Sales – Cost of Goods Sold = Gross Profit Gross Profit – Operating Expenses = Net Income Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Merchandise on hand (not sold) at the end of an accounting period is called inventory. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Example Exercise 5-1 Gross Profit During the current year, merchandise is sold for $250,000 cash and $975,000 on account. The cost of the goods sold is $735,000. What is the amount of the gross profit? Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 5-1 Gross Profit The gross profit is: $490,000 ($250,000 + $975,000 − $735,000) For Practice: PE 5-1 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Describe and illustrate the accounting for merchandise transactions under the perpetual inventory system. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Merchandise Purchase with Cash Under the perpetual inventory system, cash purchases of merchandise are recorded as follows: Copyright © 2014 by Nelson Education Ltd.

Purchase Merchandise on Account We will assume a perpetual inventory system is used throughout the chapter. The periodic inventory system is discussed in Appendix 1. Copyright © 2014 by Nelson Education Ltd.

Purchase Merchandise on Account *Assumes a perpetual inventory system is used. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions pays the amount due, less the discount, on March 22. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. NetSolutions borrows cash at an annual interest rate of 6%. Should the firm borrow cash to pay the invoice within the discount period? Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Yes Discount of 2% on $3,000 $60.00 Interest for 20 days at the rate of 6% on $2,940 – 9.67 Savings from borrowing $50.33 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Discount Taken NetSolutions records the Alpha Technologies invoice and its payment at the end of the discount period: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Discount Not Taken Assume that NetSolutions does not take the discount, but pays the invoice on April 11. Copyright © 2014 by Nelson Education Ltd.

Purchase Returns and Allowances A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. Copyright © 2014 by Nelson Education Ltd.

Purchase Returns and Allowances When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, that is a purchases allowance. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. NetSolutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 (also called a debit memo) is issued to Maxim Systems. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. NetSolutions records the return of the merchandise indicated in the debit memo in Exhibit 5 as follows: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Return Example On May 2, NetSolutions purchased $5,000 of merchandise on account from Delta Data Link, terms 2/10, n/30. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. NetSolutions returned $3,000 of the merchandise purchased from Delta Data Link on May 4. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. On May 12, NetSolutions paid for the purchase of May 2 less the return and discount. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 5-2 Purchase Transactions Rofles Company purchased merchandise on account from a supplier for $11,500, terms 2/10, n/30. Rofles Company returned $3,000 of the merchandise and received full credit. If Rofles Company pays the invoice within the discount period, what is the amount of cash required for the payment? Under a perpetual inventory system, what account is credited by Rofles Company to record the return? Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 5-2 Purchase Transactions $8,330. Purchase of $11,500 less the return of $3,000 less the discount of $170 [($11,500 − $3,000) × 2%]. Inventory For Practice: PE 5-2 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Cash Sales On January 3, NetSolutions sold $1,800 of merchandise for cash. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Cash Sales Using the perpetual inventory system, the cost of goods sold and the decrease in inventory are recorded. The cost of goods sold on January 3 is $1,200. Copyright © 2014 by Nelson Education Ltd.

Credit Card Sales and Debit Card Sales Sales made to customers using some credit cards or bank debit cards are recorded as cash sales. Assume that NetSolutions paid credit card processing fees of $48 on January 31. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Sales on Account On January 12, NetSolutions sold merchandise on account for $510. The cost of goods sold was $280. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Sales Discounts The terms for when payments for merchandise are to be made, are called credit terms. If payment is required on delivery, the terms are cash or net cash. Otherwise, the buyer is allowed an amount of time, known as the credit period, in which to pay. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Receipts on Account On January 22, NetSolutions receives the amount due, less the 2 percent discount. $1,500 × .02 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Credit Memorandum A credit memorandum, often called a credit memo, authorizes a credit to (decreases) the buyer’s account receivable. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 5-3 Sales Transactions Journalize the following merchandise transactions: Sold merchandise on account, $7,500 with terms 2/10, n/30. The cost of the goods sold was $5,625. Received payment less the discount. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Follow My Example 5-3 Sales Transactions For Practice: PE 5-3 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Freight The terms of sale indicate when ownership (title) of the merchandise passes from the seller to the buyer. This point determines whether the buyer or seller pays the freight costs, and determines which party includes the goods in their inventory count. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier, it is said to be FOB (free on board) shipping point. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Freight Costs and Trade Discounts The buyer bears the freight costs if the shipping terms are FOB shipping point. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. If ownership of the merchandise passes to the buyer when the buyer receives the merchandise, the terms are said to be FOB (free on board) destination. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Exhibit 8 (cont.) Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the goods sold is $480. NetSolutions pays freight of $40. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. On June 20, NetSolutions sells merchandise to Planter Company on account, $800, terms FOB shipping point. NetSolutions paid freight of $45, which was added to the invoice. The cost of the goods sold is $360. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 5-4 Freight Terms Determine the amount to be paid in full settlement of each of invoices (a) and (b), assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 5-4 Freight Terms Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 5-4 Freight Terms $3,863. Purchase of $4,500 less return of $800 less the discount of $37 [($4,500 − $800) × 1%] plus $200 of shipping. $2,450. Purchase of $5,000 less return of $2,500 less the discount of $50 [($5,000 − $2,500) × 2%]. For Practice: PE 5-4 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Trade Discounts When wholesalers offer special discounts to certain classes of buyers who order large quantities, these discounts are called trade discounts. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Dual Nature of Merchandise Transactions Each merchandising transaction affects a buyer and a seller. In the following illustrations, we show how the same transactions would be recorded by both the seller and the buyer. Copyright © 2014 by Nelson Education Ltd.

Dual Nature of Merchandise Transactions July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the goods sold was $4,500. Copyright © 2014 by Nelson Education Ltd.

Scully Company (Seller) Burton Company (Buyer) Accounts Receivable—Burton Co. 7,500 Sales 7,500 Cost of Goods Sold 4,500 Inventory 4,500 Burton Company (Buyer) Inventory 7,500 Accounts Payable—Scully Co. 7,500 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. July 2. Burton Company paid transportation charges of $150 on the July 1 purchase from Scully Company. Copyright © 2014 by Nelson Education Ltd.

Scully Company (Seller) Burton Company (Buyer) No entry. Burton Company (Buyer) Inventory 150 Cash 150 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the goods sold was $3,500. Copyright © 2014 by Nelson Education Ltd.

Scully Company (Seller) Burton Company (Buyer) Accounts Receivable—Burton Co. 5,000 Sales 5,000 Cost of Goods Sold 3,500 Inventory 3,500 Burton Company (Buyer) Inventory 5,000 Accounts Payable—Scully Co. 5,000 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5. Copyright © 2014 by Nelson Education Ltd.

Scully Company (Seller) Burton Company (Buyer) Delivery Expense 250 Cash 250 Burton Company (Buyer) No entry. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. July 13. Scully Company issued Burton Company a credit memorandum for merchandise returned, $1,000. The cost of the merchandise returned was $700. Copyright © 2014 by Nelson Education Ltd.

Scully Company (Seller) Burton Company (Buyer) Sales Returns and Allowances 1,000 Accounts Receivable—Burton Co. 1,000 Inventory 700 Cost of Goods Sold 700 Burton Company (Buyer) Accounts Payable—Scully Co. 1,000 Inventory 1,000 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. July 15. Scully Company received payment from Burton Company for purchase of July 5. Copyright © 2014 by Nelson Education Ltd.

Scully Company (Seller) Burton Company (Buyer) Cash 4,000 Accounts Receivable—Burton Co. 4,000 Burton Company (Buyer) Accounts Payable—Scully Co. 4,000 Cash 4,000 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200. Copyright © 2014 by Nelson Education Ltd.

Scully Company (Seller) Burton Company (Buyer) Accounts Receivable—Burton Co. 12,000 Sales 12,000 Accounts Receivable—Burton Co. 500 Cash 500 Cost of Goods Sold 7,200 Inventory 7,200 Burton Company (Buyer) Inventory 12,500 Accounts Payable—Scully Co. 12,500 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% × $12,000). Copyright © 2014 by Nelson Education Ltd.

Scully Company (Seller) Burton Company (Buyer) Cash 12,260 Sales Discounts 240 Accounts Receivable—Burton Co. 12,500 Burton Company (Buyer) Accounts Payable—Scully Co. 12,500 Inventory 240 Cash 12,260 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 5-5 Transactions for Buyer and Seller Sievert Co. sold merchandise to Bray Co. on account, $11,500, terms 2/15, n/30. The cost of the goods sold is $6,900. Sievert Co. issued a credit memo for $900 for goods returned and later received the amount due within the discount period. The cost of the goods returned was $540. Journalize Sievert Co.’s and Bray Co.’s entries for the payment of the amount due. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 5-5 Transactions for Buyer and Seller For Practice: PE 5-5 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. 3 Describe the adjusting process for a merchandising business under the perpetual inventory system. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory. If the balance of the Merchandise Inventory account is larger than the total amount of the merchandise count, the difference is often called inventory shrinkage or inventory shortage. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. NetSolutions’ inventory records indicate the following on December 31, 2016: Account balance of Inventory $63,950 Physical inventory on hand 62,150 Inventory shrinkage $ 1,800 Dec. 31, 2016 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. At the end of the accounting period, inventory shrinkage is recorded by the following adjusting entry: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 5-6 Inventory Shrinkage Magnolia Company’s perpetual inventory records indicate that $382,800 of merchandise should be on hand on December 31, 2015. The physical inventory indicates that $371,250 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Magnolia Company for the year ended December 31, 2015. Assume that the inventory shrinkage is a normal amount. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 5-6 Inventory Shrinkage Dec. 31 Cost of Goods Sold …….... 11,550 Inventory ................................ 11,550 Inventory shrinkage ($382,800 − $371,250). For Practice: PE 5-6 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Describe and illustrate the financial statements of a merchandising business under the perpetual inventory system. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. The first form of income statement exhibited is the single-step income statement. As shown in the next slide, the income statement for NetSolutions deducts the total of all expenses in one step from the total of all revenues. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Multiple-Step Income Statement The multiple-step income statement contains several sections, subsections, and subtotals. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Exhibit 11 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Net sales is determined by subtracting sales returns and allowances and sales discounts from sales. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Exhibit 11 (cont.) Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Under the perpetual inventory system, each purchase and sale of merchandise is recorded in the inventory and cost of goods sold accounts. With these two accounts continuously being updated, the cost of goods sold appears as a single line on the income statement. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. The users of the merchandiser’s income statement want to be able to identify key financial numbers used as gross profit, sales expenses, or operating expenses. A multi-step statement provides this information. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Gross profit is computed by subtracting the cost of goods sold from net sales. Net sales ‒ Cost of goods = Gross profit Copyright © 2014 by Nelson Education Ltd.

Selling expenses are incurred directly in the selling of merchandise. Sales salaries Store supplies used Amortization of store equipment Delivery expense Advertising Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Administrative expenses, sometimes called general expenses, are incurred in the administration or general operation of the business. Office salaries Amortization of office equipment Office supplies used Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Other income is revenue from sources other than the primary operating activity of a business. Other expense is an expense that cannot be traced directly to the normal operations of the business. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Exhibit 11 (cont.) Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 5-7 Multiple-Step Income Statement Compared with a Single-Step Income Statement Using the following data, determine the Revenues section of the Income Statement in a multiple-step form and in a single-step form. Rent revenue ................................... $ 3,000 Purchase discounts .......................... 2,544 Sales ................................................. 453,991 Cost of goods sold ............................ 221,882 Sales discounts ................................. 2,972 Sales returns and allowances ............ 2,577 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 5-7 Multiple-Step Income Statement Compared with a Single-Step Income Statement For Practice PE 5-7 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Exhibit 13 (cont.) Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. 5 Describe the closing process for a merchandising business. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Step 1: Closing Entries Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Step 2: Closing Entries Credit each temporary account with a debit balance, such as an expense, for the balance and Debit Income Summary. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Step 2: Closing Entries Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Step 3: Closing Entries Debit Income Summary for the amount of its balance (net income) and credit the owner’s equity account. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. NetSolutions’ Income Summary account after the closing entries have been posted is as follows: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Step 4: Closing Entries Debit the owner’s capital account for the balance of the withdrawals account and credit the withdrawals account. Copyright © 2014 by Nelson Education Ltd.

Financial Analysis and Interpretation Gross margin = Gross Profit Net Sales Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 5-8 Gross Profit and Gross Margin Using the information from Example Exercise 5-7 on page 257, calculate the gross margin percentage. Suppose this company’s competitor has a gross margin of 40%. Is this company’s gross margin better or worse than that of its competitor? Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 5-8 Gross Profit and Gross Margin $226,560 / $448,442 = 51% This company has a better gross margin than its competitor. Of each dollar earned, 50 cents is profit before operating expenses are considered. The competitor has higher inventory expense and so it shows profits of only 40 cents on each dollar (before considering operating expenses). For Practice PE 5-8 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.