14 May DESCRIBE TWO CONCEPTUAL ERRORS THAT THE “ACCOUNTANT” MADE IN PREPARING THE INCOME STATEMENT SHOWN IN EXHIBIT ONE
Assignment on Cost Terms and Classifications
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, December 31st
Sales (6,000 sleeping bags)
Operating expenses:
Selling and administrative salaries
Travel for sales purposes
Advertising
Indirect labour costs
Raw materials purchased
Plant supplies
Direct labour cost
Plant maintenance
Depreciation, office equipment
Rent (90% for the plant, 10% for sales space)
Insurance (Plant only)
Depreciation, Plant equipment
Utilities (80% plant, 20% for sales operations)
Total operating expenses
Operating loss
$750,000
$63,000
45,000
98,000
97,000
225,000
5,000
70,000
38,000
13,000
50,000
6,000
60,000
32,000
802,000
$(52,000)
During the quarter, the company completed 8,000 sleeping bags. The owners completed a physical
inventory count and valuation on March 31st. The opening and closing inventory values are as follows:
Raw materials inventory
Work-in-process inventory
Finished goods inventory
October 1st
$0
$0
$0
December 31st
$30,000
$24,000
?
Required:
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 December 31 st.
3. Prepare a corrected income statement for the quarter.
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