Customer refunds and returns Assume the following data for Alpine Technologies f

Question

Customer refunds and returns Assume the following data for Alpine Technologies for the year ending July 31, 20Y2 Sales Estimated percent of seles expected to be $900,000 1.5% refunded or issued an allowance in 20Y3 Estimated cost of inventory expected to be returned in 20Y3 $6,000 ndicato tho offects of tho adjustment for estimated customer rafunds and roturns on tha liquidity metric working capital and profitability matric gross profit percent. Enter amounts that decroase nat incomo as negativo values. Round parcontago values to 1 docimal place. Metric Effects Liquidity Profitability Ability to Achieve Gross Profit Porcont of 300o Transaction Working Capital July 31 , -13,500 1x Decrease. d 13) x%) Chock Wy Work The Estimated Retums Inventory is reported on the balance sheet as a currant asset, whereas the Customer Refunds Payable is reported on the balance sheet as a current liability. Working capital is defined as currant assets minus current liabilities The formula to compute gross profit percent is Gross Profit divided by Sales.

Explanation / Answer

1. Sales Return on one hand will reduce working capital due to reduction in cash (cash sale) or accounts receivable(credit sale) and on the other hand will increase working capital due to increase in inventory. So net impact on working capital is calculated as under:

Reduction in Working Capital due to sales return (9,00,000 x 1.5%) = -13,500

Increase in working capital due to increase in inventory = 6,000

Net impact on working capital (-13,500 +6,000) = 7,500

Thus overall working capital will reduce by $7,500 on account of adjustment for sales returns.

2. Impact on Gross Profit Percent is calculated as under:

Gross profit before adjustment = 900,000 x 30% =270,000

Net sales after adjusting returns = 900,000 - 13,500 = 886,500

Again, reduction in sales will decrease gross profit but at the same time increase in closing inventory wil increase the gross profit. Therefore gross profit after adjusting returns will be

= 270,000 - 13,500 + 6,000

= 262,500

New Gross Profit Percent = 262,500 / 886,500 = 29.61%

Thus there will be a slight reduction in Gross Profit Percent from 30% to 29.61% on account of adjustment for returns.

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