Question No. 2 Contemporary Trends sells paint and paint supplies carpet and wallpaper at a single store location in suburban Baltimore Although the company has been very profitable over the year management has seen very profitable over the year management has seen a significant decline in wallpaper sales and eamings Much of this decline is attributable to the intemet and to companies that advertise deeply discounted prices in magazines and offer customer free shipping and toll free telephone number recent figures follow:

Question No. 2 Contemporary Trends sells paint and paint supplies carpet and wallpaper at a single store location in suburban Baltimore Although the company has been very profitable over the year management has seen very profitable over the year management has seen a significant decline in wallpaper sales and eamings Much of this decline is attributable to the intemet and to companies that advertise deeply discounted prices in magazines and offer customer free shipping and toll free telephone number recent figures follow:

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Exercise 5-25: Awards Etc. carries an inventory of trophies and ribbons for local sports teams and school clubs. The cost of trophies has dropped in the past year, which pleases the company except for the fact that it has on hand considerable inventory that was purchased at the higher prices. The president is not pleased with the lower profit margin the company is earning. “The lower profit margin will continue until we sell all of this old inventory,” he grumbled to the new accountant. “Not really,” said the accountant. “Let’s write down the inventory to the replacement cost this year, and then next year our profit margin will be in line with the competition.” Explain why the inventory can be carried at an amount less than its cost. Which accounts will be affected by the write-down? What will be the effect on income in the current year and future years?