Empire Company is a manufacturer of smart phones. Its controller resigned in Oct
ID: 2467891 • Letter: E
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
Sales revenue$780,000
Less:Operating expenses
Raw materials purchases$264,000
Direct labor cost190,000
Advertising expense90,000
Selling and administrative salaries75,000
Rent on factory facilities60,000
Depreciation on sales equipment45,000
Depreciation on factory equipment31,000
Indirect labor cost28,000
Utilities expense12,000
Insurance expense8,000 803,000
Net loss$(23,000)
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
2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.
Prepare a letter to the president of the company, Shelly Phillips, describing the changes you made. Explain clearly why net income is different after the changes. Keep the following points in mind as you compose your letter.
October 1
October 31
Raw materials $18,000 $29,000 Work in process 20,000 14,000 Finished goods 30,000 50,000Explanation / Answer
Hi,
There is no change in net income and it is same (23,000). I will explain the reason why we are at loss is it regarding gross profit issue or operating expenses issue.
Cost of goods manufactured= direct material+direct labour+overhead+opening work in proggress-closing work in progress
Direct material = Beg raw material+purchase-ending raw mat
=18,000+264,000-29,000=253,000
=253,000+190,000+28,000+20,000-14,000=$477,000
Cost of goods sold= Beg finished goods+cost of goods manf-ending finished goods
=30000+477,000-50,000=$$457,000
utility exp=75%*12,000=9000
insurance exp=60%*8000=4800
ad exp=90,000
sG&A=75000+3000+3200=80,200
rent on facilty=60000
Dep on sales equip=45000
Dep on fac equp=31000
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