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Chapter 16: Q16-7SE (page 887)

Computing cost of goods sold and operating income, merchandising company

Consider the following partially completed income statements for merchandising companies and compute the missing amounts:

Smith, Inc. Allen, Inc.

Net Sales Revenue \( 101,000 \) (d )

Cost of Goods Sold:

Beginning Merchandise Inventory (a) 29,000

Purchases and Freight In 50,000 (e)

Cost of Goods Available for Sale (b) 89,000

Ending Merchandise Inventory (2,200) (2,200)

Cost of Goods Sold 61,000 (f)

Gross Profit 40,000 114,000

Selling and Administrative Expenses (c ) 84,000

Operating Income \( 12,000 \) (g)

Short Answer

Expert verified

The required income statement is completed as per the given data.

Step by step solution

01

Computation Net sales revenue

Net Sales Revenue=COGS+Gross Profit

=$86,800+$114,000

=$200,800

02

Income statement

Income Statement

Smith Inc ($)

Allen Inc ($)

Net Sales Revenue (86,800+114,000)

$101,000

D $200,800

Cost of Goods Sold:

Beginning Merchandise Inventory (63,200-50,000)

A $13,200

$29,000

Purchases and Freight In (89,000-29,000)

$50,000

E $60,000

Cost of goods available for sale (61,000+2,200)

B $63,200

$89,000

Ending Merchandise Inventory

-$2,200

-$2,200

Cost of goods sold (89,000-2,200)

$61,000

F $86,800

Gross profit

$40,000

$114,000

Selling and administrative expenses (40,000-12,000)

C $28,000

$84,000

Operating Income (114,000-84,000)

$12,000

G $30,000

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Most popular questions from this chapter

Preparing an income statement and calculating unit cost for a service company

The Glass Doctors repair chips in car windshields. The company incurred the following operating costs for the month of July 2018:

Salaries and wages \( 10,000

Windshield repair materials 4,100

Depreciation on truck 500

Depreciation on building and equipment 900

Supplies used 450

Utilities 4,550

The Glass Doctors earned \)25,000 in service revenues for the month of July by repairing 250 windshields. All costs shown are considered to be directly related to the repair service.

Requirements

1. Prepare an income statement for the month of July.

2. Compute the cost per unit of repairing one windshield, rounded to the nearest cent.

3. The manager of The Glass Doctors must keep unit operating cost below $80 per windshield in order to get his bonus. Did he meet the goal?

List the three inventory accounts used by manufacturing companies, and describe each.

Question:Determining flow of costs through a manufacturer’s inventory accounts

Root Shoe Company makes loafers. During the most recent year, Root incurred total manufacturing costs of \(26,300,000. Of this amount, \)2,000,000 was direct materials used and \(19,800,000 was direct labor. Beginning balances for the year were Direct Materials, \)700,000; Work-in-Process Inventory, \(1,500,000; and Finished Goods Inventory, \)400,000. At the end of the year, balances were Direct Materials, \(800,000; Work-in-Process Inventory, \)1,200,000; and Finished Goods Inventory, $600,000.

Requirements Analyze the inventory accounts to determine:

1. Cost of direct materials purchased during the year.

2. Cost of goods manufactured for the year.

3. Cost of goods sold for the year.

Power Switch, Inc. designs and manufactures switches used in telecommunications. Serious flooding throughout North Carolina affected Power Switch’s facilities. Inventory was completely ruined, and the company’s computer system, including all accounting records, was destroyed.

Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory. He is standing in what is left of the accounting department with Paul Lopez, the cost accountant.

“I didn’t know mud could smell so bad,” Paul says. “What should I be looking for?”

“Don’t worry about beginning inventory numbers,” responds Stephen, “we’ll get them from last year’s annual report. We need first-quarter cost data.”

“I was working on the first-quarter results just before the storm hit,” Paul says. “Look, my report is still in my desk drawer. All I can make out is that for the first quarter, direct material purchases were \(476,000 and direct labor, manufacturing overhead, and total manufacturing costs to account for were \)505,000, \(245,000, and \)1,425,000, respectively. Wait! Cost of goods available for sale was \(1,340,000.”

“Great,” says Stephen. “I remember that sales for the period were approximately \)1,700,000. Given our gross profit of 30%, that’s all you should need.”

Paul is not sure about that but decides to see what he can do with this information. The beginning inventory numbers were:

• Direct Materials, \(113,000

• Work-in-Process, \)229,000

• Finished Goods, $154,000

Requirements

1. Prepare a schedule showing each inventory account and the increases and decreases to each account. Use it to determine the ending inventories of Direct Materials, Work-in-Process, and Finished Goods.

2. Itemize a list of the cost of inventory lost.

Identifying product costs and period costs Classify each cost of a paper manufacturer as either a product cost or a period cost:

c. Cost of electricity at the paper mill
See all solutions

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