Empire Company is a manufacturer of smart phones. Its controller resigned in Oct

Question

Empire Company is a manufacturer of smart phones. Its controller resigned in October 2017. An inexperienced assistant accountant has prepared the following income statement for the month of October 2017

EMPIRE COMPANY
Income Statement
For the Month Ended October 31, 2017

Net loss

Prior to October 2017, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.

1. Inventory balances at the beginning and end of October were:

October 1

October 31

50,000

$(23,000)

Empire Company is a manufacturer of smart phones. Its controller resigned in October 2017. An inexperienced assistant accountant has prepared the following income statement for the month of October 2017

EMPIRE COMPANY
Income Statement
For the Month Ended October 31, 2017

Sales revenue $780,000 Less: Operating expenses Raw materials purchases $264,000 Direct labor cost 190,000 Advertising expense 90,000 Selling and administrative salaries 75,000 Rent on factory facilities 60,000 Depreciation on sales equipment 45,000 Depreciation on factory equipment 31,000 Indirect labor cost 28,000 Utilities expense 12,000 Insurance expense 8,000 803,000

Net loss

Prior to October 2017, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.

1. Inventory balances at the beginning and end of October were:

October 1

October 31

Raw materials $18,000 $29,000 Work in process 20,000 14,000 Finished goods 30,000

50,000

1. This is a letter to the president of a company, who is your friend. The style should be generally formal, but you may relax some requirements. For example, you may call the president by her first name. 2. Executives are very busy. Your letter should tell the president your main results first (for example, the amount of net income). 3. You should include brief explanations so that the president can understand the changes you made in the calculations.

$(23,000)

Explanation / Answer

To President Hi Sam I thank you for the oppurtunity of looking at the accounts of your company. I have found some loopholes/errors in the income statement presented by your accountants. Instead of the company facing a loss there is a profit of $ 2000. I have shown the working of the same below The error lies in the calculation of the cost of goods sold. The impact of opening and closing raw material, Work in progress and finished goods has not been taken into account. The effect of the same is as below : Cost of goods sold opening raw material 18000 Add purchases 264000 less: closing raw material 29000 Total Raw materials used 253000 Direct labor 190000 Manufacturing overheads Rent on factory facilities 60000 Depriciation on factory equipment 31000 Indirect labor cost 28000 119000 opening WIP 20000 closing WIP 14000 6000 Cost of goods manufactured 568000 Add : opening finished goods 30000 less : closing finished goods 50000 -20000 Cost of goods sold 548000 Revised Income Statement Sales Revenue 780000 Less : Cost of goods sold 548000 Gross Profit 232000 Operating expenses Advertising expense 90000 Selling and administrative salaries 75000 Depriciation on sales equipment 45000 utilities expense 12000 Insurance exoense 8000 230000 Net Income 2000

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