You have been hired recently as an accountant by Apex, a small chain of stores that sells wireless products. One of your first activities is to review the accounting system for Apex. In your review, you discover that the company determines selling prices by adding a standard markup on cost of 10 percent (i.e., cost plus 10 percent of cost) to the cost of all products. The company uses a perpetual inventory system. You also discover that your predecessor, a bookkeeper, had set up the accounting system so that all purchase discounts and purchase returns and allowances were accumulated in an account that was treated as “other income” for financial statement purposes because he believed that they were financing items and not related to operations.
Sarah Hussey, owner of Apex, uses modern decision-making techniques in running Apex. Two ratios she particularly favours are the gross margin percentage and .
Required
1. What is a possible effect of the accounting system described on the pricing of products and thus operations of Apex stores?
2. What is the effect of the accounting system instituted by your predecessor on the two ratios Ms. Hussey favours?
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