Fundamentals of Financial Accounting 4th Edition by Fred Phillips,Robert Libby,Patricia Libby

Exercise 6

Evaluating the Effect of Discounts and Returns on Gross Profit
One of the few companies to ever report the extent of sales discounts and returns was sunglass maker Oakley, Inc. In the Management Discussion and Analysis section of its 2035 annual report, Oakley reported the following information about its Sales Discounts and Returns.

Required:
1. For each year, calculate the percentage of sales discounts and returns by dividing Sales Discounts and Returns by Gross Sales and multiplying by 100. Based on these percentages, explain whether Sales Discounts and Returns have a greater impact in 2005 or 2004.
2. For each year, calculate the gross profit percentage using the formula shown in this chapter (i.e., using net sales). Did Oakley 'S gross profit improve or worsen in 2005, as compared to 2004