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Week 6 · Assignment: Traditional alternative (no AI)

Week 6 — The Bicycle Sale: From Invoice to Gross Profit — Traditional alternative (no AI)

Financial Accounting Free sample edition
Traditional alternative (no AI), unpublished. In the course this is a separate assignment that ships unpublished beside the adaptive assignment: same objective, no AI. An instructor who prefers it publishes it and unpublishes or deletes the adaptive one, as the note at its top says.

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 6 of the term — record the bicycle shop's first purchase and sale of bicycles, work out what the goods cost and what they earned, and set a founder straight about cost of goods sold and gross profit.

This week you met the merchandising operating cycle, perpetual and periodic inventory systems, credit terms and FOB shipping terms, purchase discounts, cost of goods sold, and the multi-step income statement. In this assignment you work four short problems on the bicycle shop's first purchase and sale of bicycles, interpret each one, and explain this week's ideas to someone who has them wrong. This week's lecture tutorial, quiz, discussion, and Accounting Workshop practise the same ideas from other angles. It builds on Week 5, where you prepared the shop's income statement and closed its books.

The task

This week's material is pinned. In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are updated with every purchase and every sale. Credit terms of 2⁄10, n⁄30 offer a 2 percent discount if the invoice is paid within 10 days, with the full amount due within 30 days. Under FOB shipping point, the buyer owns the goods once they are shipped and pays the freight, which becomes part of its inventory cost; under FOB destination, the seller owns the goods until they arrive and pays the freight. A purchase discount lowers the cost recorded in Inventory and is not revenue. Gross profit is sales revenue minus cost of goods sold, gross margin is gross profit divided by sales revenue, and a multi-step income statement shows gross profit, then operating income, then other revenues and expenses, before net income.

The running case is an illustrative, unnamed bicycle repair and sales shop, organized as a corporation by two founders; it describes no real business. In its first purchase and sale of bicycles (Dataset C), it buys 10 bicycles at $400 each on account, terms 2⁄10, n⁄30, FOB shipping point; pays $180 of freight; pays the supplier within 10 days; and then sells 6 of the bicycles at $820 each on account. It uses a perpetual system.

One of the founders (an illustrative person) sends you this message: "We bought 10 bicycles for $4,100, so our cost of goods sold is $4,100. We sold 6 of them for $4,920, so that's what we made this month. And the $80 we saved by paying early is extra revenue." Your job is to answer the way this course would, starting from four small calculations on the shop's books.

Work these four problems, showing your arithmetic:

  1. The bicycle shop owes its supplier $4,000 for 10 bicycles bought on terms of 2⁄10, n⁄30 and pays within 10 days, taking the 2 percent discount. How many dollars of cash does it pay the supplier?
  2. The bicycle shop bought 10 bicycles for $4,000, paid $180 of freight under FOB shipping point, and took an $80 purchase discount. How many dollars did each bicycle cost the shop?
  3. The bicycle shop's 10 bicycles cost it $4,100 in all, and it sells 6 of them. How many dollars is the cost of goods sold for the sale?
  4. The bicycle shop sells 6 bicycles at $820 each, and their cost of goods sold is $2,460. What is its gross margin on the sale, in percent?

Beside each answer, add one brief interpretation:

  • Problem 1: write the payment as a journal entry, debits first and credits second, with equal totals; then say why the $80 discount is not revenue.
  • Problem 2: write the purchase entry and the freight entry; then say who pays the freight under FOB shipping point and who would pay it under FOB destination.
  • Problem 3: write the sale's two entries, the revenue entry and the cost entry; then give the cost of the bicycles still in Inventory.
  • Problem 4: lay out the top of the shop's multi-step income statement for the sale (Sales Revenue, Cost of Goods Sold, and gross profit), name the steps that come below gross profit, and explain why gross profit is not net income.

Explain it to a non-expert

The founder means well and has three things wrong. Write a 3–5 sentence message that explains why cost of goods sold counts only the bicycles sold, why the $4,920 of sales is not what the shop made, and why the $80 discount lowered the bicycles' cost instead of adding revenue. Name one limit, such as that the shop's wages and rent for the period are not part of Dataset C, so its net income cannot be worked out yet, or that this course gives no tax advice. Explain any technical term in everyday words. More than one good answer is possible.

For a different, ungraded example, imagine a friend who resells sneakers and says, "I sold a pair for $150, so I made $150." Model answer: "You took in $150, but the pair cost you $90 to buy, so the shoes themselves earned you $60. That $60 still has to cover the shipping labels and the fees you paid to list them before you know what you really kept. One caveat is fair: if you only count the shoes you sold, the pairs still in your closet are not a loss yet; they are stock you can still sell."

Use that pattern for the founder, with your own wording and evidence.

Show your arithmetic. A reader should be able to reproduce every number you report from the figures in the problems without guessing which figures or steps you used.

Deliverables

Submit a single report containing:

  • the four results, each with the multiplication, subtraction, or division shown and the brief interpretation the task names for that problem;
  • the five journal entries for the purchase, the freight, the payment, and the sale's revenue and cost, each with the debits first, the credits second, and equal totals;
  • the top of the multi-step income statement for the sale, with the steps below gross profit named;
  • your message to the founder, explaining why cost of goods sold counts only the bicycles sold, why the $4,920 of sales is not what the shop made, and why the $80 discount is not revenue, with one limit; and
  • a one-line restatement of the figures you used, so your results are reproducible.

Keep it to roughly one page. Clear and correct beats long.

Choose how you show it. Present your report as written text, or as a recorded audio or video explanation of about three minutes with a transcript, or as a labelled spreadsheet of the entries with a short explanation. Every form is graded by the same scoring criteria. Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

This version is designed to be completed without AI: do the arithmetic, the entries, the interpretations, and the writing yourself. You may use a calculator or a spreadsheet for the arithmetic. Check every entry so that its debits equal its credits, and give no tax or investment advice. Submitting work you did not write as your own, or copying another student's work, is an integrity violation under the course policy.

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