Delta Mountain Supplies has been in business for three months. The company was formed by two outdoor
Question:
Delta Mountain Supplies has been in business for three months. The company was formed by two outdoor enthusiasts to produce high quality sleeping bags, which can used in all kinds of weather conditions. The owners of the company were well skilled in production and had developed an excellent relationship with a boutique store that specializes in selling outdoor equipment. The administration work and the accounting have been managed by the brother of one of the owner’s. The brother had a business degree but no special training in accounting.
The owners had just received the income statement for the latest quarter and were somewhat dismayed by the results. The company had almost reached its productive capacity for producing sleeping bags and most of them had been sold. Still, the income statement, presented in exhibit one, showed an operating loss for the quarter.
Believing something was not correct, the owners have hired you to review the accounting information and to report back to them.
Exhibit One
Delta Mountain Supplies
Income Statement
For the Quarter ended, September 30th Sales (5,000 sleeping bags) | $720,000 |
Operating expenses: | |
Selling and administrative salaries | $63,000 |
Travel for sales purposes | 45,000 |
Advertising | 98,000 |
Indirect labor costs | 100,000 |
Raw materials purchased | 220,000 |
Plant supplies | 5,000 |
Direct labor cost | 75,000 |
Plant maintenance | 38,000 |
Depreciation, office equipment | 13,000 |
Rent (90% for the plant, 10% for sales space) | 50,000 |
Insurance (Plant only) | 6,000 |
Depreciation, Plant equipment | 65,000 |
Utilities (80% plant, 20% for sales operations) | 32,000 |
Total operating expenses | 810,000 |
Operating loss | $(90,000) |
During the quarter, the company completed 7,000 sleeping bags. The owners completed a physical inventory count and valuation on September 30th. The opening and closing inventory values are as follows: | July 1st | |
Raw materials inventory | $0 | $30,000 |
Work-in-process inventory | $0 | $24,000 |
Finished goods inventory | $0 | ? |
1. Describe two conceptual errors that the “accountant” made in preparing the income statement shown in exhibit one
2. Prepare a schedule of the cost of goods manufactured for the quarter ending September 30th.
3. Prepare a corrected income statement for the quarter.
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones