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Part One

Grace’s Rugs are holding a two-week carpet sale at Will’s Club, a local warehouse store. Grace’s Rugs plan to sell carpets for $500 each. The company will buy the carpets from a local distributor for $350 each, with the privilege of returning any un-sold units for a full refund. Will’s Club has offered Grace’s Rugs two payment alternatives for use of space.

Option One: A fixed payment of $5,000 for the sale period

Option Two: 10% of total revenues earned during the sale period

Assume Grace’s Rugs will incur no other costs.


A. Compute the breakeven point in units for (a) option 1 and (b) option 2.

B. At what level of revenues will Grace’s Rugs earn the same operating income under either option.

a) What range of unit sales will Grace’s rugs prefer option 1.

b) What range of unit sales will Grace’s rugs prefer option 2.

C. Briefly elucidate and interpret your answer to requirement 2.

D. Grace’s Rugs predict that 30 carpets each day will be sold on the first three days of the two week sale. The sale starts on a Sunday. On the subsequent 11 days of the sale, sales of carpets will diminish by 10% each day. Prepare a sales budget showing the sales of carpets each day in units and dollars. (Note that Grace’s Rugsis conservative and will round down if the percentage calculation results in a fraction.)

E. To meet these sales projections customers have been offered a ‘purchases now pay later’ scheme. Under this scheme it is estimated that 70% of customers will pay in full on the day of purchase for a 10% discount, 20% will pay half instantly and the remaining amount on last day of the sale for a 5% discount (given on the last day for the total amount), 8% will delay any payment instantly and will pay fully on the last day of the sale and 2% will be bad debts. These bad debts will be sold to a debt collection agency for 50% of the debt value on last day of sale. You are needed to present the cash collections schedule for the duration of sale.

F. A friend has contacted Grace’s Rugs and asked if they could use some of the local warehouse space throughout the same two week period to sell their household decorator items. The warehouse store is 200 square meters and they would like to rent 50 square meters from Grace’s Rugs. The cost of the local warehouse space for the two week period is $10,000.

a) Outline what issues Grace’s Rugs should consider in deciding whether to let 50 square meters to her friend.

b) If the warehouse space cost is allocated based on square meters what cost Will be charged to Grace’s Rugs and to her friend.

G. Compute the budgeted profit/loss for Grace’s Rugs assuming that the 50 square meters was left to her friend and that the expected sales as outlined above was not affected.

Part Two

1. Provide for a general definition of income statement, its purpose as well as its relation to Balance Sheet and Cash Flow statements?

2. What is an accumulation principle and what is the most common alternative to one?

3. Under which conditions (e.g. for whom/why/and so forth.) would you generate a deal-based Profit & Loss vs. periodical Profit & Loss?

4. What is the differentiation between a Debit Note and a Credit Note?

5. What are the Inco terms and how do they relate to the issues of accounting?

6. What is an open sales order?

7. Can you tell if a sales order can be considered open if delivery has happened but payment has not been done yet?

8. What is a back order and how would you link the concepts of a “backorder” and a “customer service”?

9. How would you measure the customer value?

10. What is the life time value of a customer? What advice would you give to a sales person based on the list of such values for a given sample of our customers?

11. How would you compute the amount of VAT that is owed to (by) the Tax Office by (to) the Company?

12. Give a number of exs for Payment terms as well as describe their meaning? Under which conditions would you make use of which terms?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M91624

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