Problem - Finn Music is a retail store specialising in musical instruments and consumables for rock and metal musicians. At the beginning of February 2017, the ledger of Finn Music showed Cash $2,500; Inventory $1,700; and Share Capital $4,200. The following transactions were completed during February:
Feb. 6 Purchased electric guitars from Guitars R Us Ltd $840, terms 3/7, n/30.
7 Paid freight on Guitars R Us Ltd purchase $40.
8 Sold inventory to customers $900, terms n/30. The inventory cost $600.
10 Received credit of $84 from Guitars R Us Ltd for a guitar that was returned.
11 Purchased guitar strings from Strings N Things for cash $300.
13 Paid Guitars R Us Ltd in full.
14 Purchased Guitar straps and leads from Musical Importers Ltd $500, terms 2/7, n/60.
15 Received cash refund of $50 from Strings N Things for damaged inventory that was returned.
17 Paid freight on Musical Importers Ltd purchase $30.
18 Sold inventory to customers $900, terms n/30. The cost of the inventory was $530.
20 Received $500 in cash from customers in settlement of their accounts.
21 Paid Strings N Things Ltd in full.
27 Granted an allowance of $30 to a customer for a guitar strap that was faulty.
28 Received cash payments on account from customers $500.
The chart of accounts for Finn Music includes Cash, Accounts Receivable, Inventory, Accounts Payable, Share Capital, Sales, Sales Returns and Allowances, and Cost of Sales.
Required:
(a) Journalise the February transactions (ignore GST). Narrations ARE required.
(b) Using T-accounts, enter the beginning balances in the ledger accounts and post the February transactions.
(c) Prepare a trial balance on 28 February 2017.
(d) Prepare an income statement up to Gross Profit for period ending 28 February 2017.
(e) The gross profit ratio is generally considered to be more informative than the gross profit amount when expressing the relationship between gross profit and net sales.
(i) Calculate the gross profit ratio for Finn Music for the period ending 28 February 2017
(ii) Interpret the ratio and explain why it is considered more informative than the actual gross profit amount. What other information would assist you in interpreting the ratio for Finn.