The above defines the expenditure incurred by the company on selling goods. They are known to
be direct and part of the finished products in the manufacturing industry, for example, processed
sugar in sugar industries (Morgera, 2011, p330). The process of computing this expenditure will
entail the following accounting values (Ebert et al, 2011, p515)
Opening inventory- This is simply the opening stock of a given accounting
Purchases- These are the value-added within the accounting period to the existing
Ending Inventory-This is the closing stock of that particular accounting period.
The applicable formula will be
(Opening stock + Purchases) – Closing stock.
Consider factors that affect purchases before computation:
Freight in cost 20,000
Purchase returns and allowances (22,000)
Purchase discount (18,000)
Net purchases $500,000
MONTGOMERY RETAIL OUTLET STORES COST OF GOODS SOLD FOR THE
YEAR ENDED 31/12/2014.
Opening inventory 90,000
(Add) Purchases 500,000
Goods available for sale $590,000
(minus) Closing inventory (104,000)
Cost of Goods Sold. $ 486,000
5. Income statement
This particular financial statement represents the performance of a business within a given
accounting period. It is computed by only taking the total revenue(sales) of the company less all
the expenses incurred to generate the sales (Bhattacharya, 2018)
Sales – sales discount = Total Revenue.
Total revenue – cost of goods sold (direct expenses) = Gross profit
Gross profit- indirect expenses = Net income/Loss
MONTGOMERY RETAIL OUTLET STORE INCOME STATEMENT FOR THE YEAR
(sales discount) —–
Total Revenue 40,000
(Cost of Goods Sold) (486,000)
Gross profit $154,000
General and administrative cost 64,000
Building depreciation 8400
Shipping of merchandise to customer 4000
Marketing and advertising cost 48000
(deduct)Total expense $124,400
Net Income $ 29,600
6. Determination of the value of opening inventory to be shown on January 1, 2015,
Merchandising inventory is a current liability, and it's the cost of the product at hand to be
sold at any given period. To analyze the cost incurred in selling the goods, the following
information is required (Ebert et al, 2011, p534)
The beginning inventory – the price of the product on hand beginning of the period.
The net cost of purchases
The closing inventory-the cost of products in hand at the end of the period
Note that the ending list of the previous financial period (2014) is the opening stock of the
next accounting period (2015). Hence the opening inventory for the accounting period
January 1, 2015, will be 104,000
7. 5 steps in the Critical thinking process.
This is the systematic process of collecting, analyzing, evaluating, and testing information to
arrive at the best choice. It’s a strategic-processes used by managers in making business
decisions to increase profits. The first step is that managers should identify and define the
business problem. They need to identify those factor that causes low net income, which could be
the use of higher indirect expense at a given accounting period (Morgera, 2011, p335).
The next step in critical thinking is finding an effective and efficient solution for the
defined problem. In our case, the manager should share his conclusion with the employees or the
management to find a way in which they can boost the net-income (Morgera, 2011, p336).
The third step is analyzing the effective solution defined by the manager and the
management. They attempt to explain the solutions proposed with the aim of creating a potential
plan. In our case, the strategic plan should be oriented on the steps of improving business
activities to facilitate increase profits (Bhattacharya, 2018).
The next step in the critical thinking process is implementing the potential
business plans selected. Managers ensure that the essential steps defined above are
followed keenly and applied accordingly, in our case, the manager should try to reduce
the cost of production and the cost of indirect expenses to operate at a low fee (Morgera,
The final step involves a re-evaluation of the implemented measures and
monitoring to assess them to test their functionality. If the manager finds no relevant
impact on them, then the process starts from the top (Bhattacharya, 2018).
8. Guidelines of a business brief.
The brief business guideline is a short document containing information on the
promotion of products and services, conventional solutions to specific problems in
industries, objectives, and goals of the business (Bhattacharya, 2018). Montgomery retail
outlets store operates at higher direct and indirect costs leading to low net income (net
profit). The solution to this particular problem should be solved by reducing the operating
cost of products and services.
The factors leading to higher operating cost in this store are, higher marketing and
advertising cost which should be reduced at least by 30%, general and administration fee,
and finally the shipping cost. In reducing them, the business will be in an excellent
position to achieve the objectives.
To implement the methods as mentioned above in boosting the profits and
reducing expenses, it is important to note that that direct costs are always fixed while
indirect are not. An increase in incidental expenses is inversely proportioned to the net
income in a given accounting period. Therefore, by attempting to reduce the operating
cost, the net income will increase gradually.
The factors that affect net income are the cost of goods sold (direct expense) are
considered to be in the list of the finished products. Cost of goods sold when higher
reduces the revenue much more and can easily result in a deficit. The other factors that
affect net profit are Indirect expenses, which are Cost of rent, cost of labor, and
transportation cost. A sales discount is another factor that reduces the net profit.
Therefore, Montgomery retail outlets store manager should adopt and give guidelines to
employees to employee the discussed business brief.
1) Ebert, R. J., Griffin, R. W., Starke, F. A., & Dracopoulos, G. (2011). Business essentials.
NJ: Prentice Hall.
2) Morgera, E. (2011). OECD Guidelines for Multinational Enterprises. In Handbook of
Transnational Governance (pp. 314-322). Polity.
3) Bhattacharya, R. (2018). Financia lstatement Analysis.