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 insignificant 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 |
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?
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