Ontario Inc Had the Following Data for 2012 and 2013

question 77

Essay

Ontario Inc had the following data for 2012 and 2013: $$\begin{array} { l r r } & \underline { 2012 } & \underline { 2013 } \\\text { Opening inventory } & \$ 250,250 & \$ 275,000 \\\text { Purchases } & \$ 1,675,000 & \$ 1,837,000 \\\text { Ending inventory, cost } & \$ 275,000 & \$ 302,500 \\\text { Sales } & \$ 2,825,000 & \$ 3,074,200\end{array}$$ Required:
A) Calculate the gross margin and gross margin percentage for each year.
B) If the 2012 ending inventory had a replacement cost of $262,500 and Ontario used replacement cost as their definition of market when applying the lower of cost or market, what is the effect on the gross margin and gross margin percentage for 2012 and 2013?
C) What accounting principle is the lower of cost and market based on? What is its effect in this case?
D) Based on your findings in parts A and B, how might management use the lower of cost or market to manipulate earnings?

• A) Calculate the gross margin and gross margin percentage for each year.
• B) If the 2012 ending inventory had a replacement cost of $262,500 and Ontario used replacement cost as their definition of market when applying the lower of cost or market, what is the effect on the gross margin and gross margin percentage for 2012 and 2013?
• C) What accounting principle is the lower of cost and market based on? What is its effect in this case?
• D) Based on your findings in parts A and B, how might management use the lower of cost or market to manipulate earnings?

---

Definitions:

Scatterplot

A graph in which the values of two variables are plotted along two axes, allowing for the visualization of relationships or patterns between them.

Graphical Tool

Visual instruments like charts, graphs, and plots used for analysis and data presentation.

Variables

Elements or features that can vary among individuals or over time and are measured or controlled in scientific research.

IUPAC

The International Union of Pure and Applied Chemistry, an organization that sets standards for chemical nomenclature, terminology, and measurements.