Inventory System

a)	Input Information
		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
	Further assessment
	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
	Cost of sales	$225,000	$225,000

	Solution
		2014	2013
	Purchases	$200,000	$271,000
	Total purchases allowances	15,000	20,000
	Freight-in	19,000	27,000
	Net Cost of Purchases	$204,000	$278,000
	Opening inventory	53,000
	Cost of Goods Available for Sale	$257,000	$278,000
	Physical inventory, end of year	57,000	53,000
	Cost of sales	$200,000	$225,000

	Revised income statement
		2014	2013
	Net sales	$ 325,000	$ 350,000
	Cost of goods sold	200,000	225,000
	Gross margin	$ 125,000	$ 125,000
	Operating expenses	75,000	50,000
	Income before income taxes	$ 50,000	$ 75,000

	The difference in income before income taxes	$ 25,000	$ –

b)	Two reasons for the discrepancy in the 2014 ending inventory
	1. Error in physical counting
	2. Failure to account for the 2013 end-year inventory, which is the beginning inventory for 2014

	How to improve the management of the original store
	1. Perry should maintain the correct inventory levels at the original store.
	2. Perry should use Inventory management systems designed to manage the stock and ensure the system is backed up regularly.