B & B Manufacturing Co. was organized on January 1 of the current year. Outside investors who financed the business stipulated that the company must show a profit by the sixth month or the financing will be stopped. B & B reported losses for the first four months, but expected to show a profit in the fifth (the current) month. After reviewing the income statement for the fifth month (May), the president, Craig, was disappointed with the performance and called an employee meeting. At the meeting, Craig informed the employees that based on the performance for the first five months and in particular the month of May, he saw very little hope of a profit by the sixth month. He also informed the employees that they should prepare to close the business. After the meeting, the controller quit, leaving you in charge of the accounting function. The latest financial information is as follows:

Seventy-five percent of utilities, depreciation, insurance, and rent are related to production operations, whereas 25 percent of those costs are related to selling and administrative activities.

A. Prepare the income statement for May based on the information provided previously. (Include a statement of cost of goods manufactured and a statement of cost of goods sold.)
B. Do you agree with the president’s assessment of the situation? Why or why not?
C. How will you explain to the investors why your income statement is different from the one prepared by thecontroller?

  • CreatedMarch 11, 2015
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