Problem 1-19BProduct versus general, selling, and administrative costs
Qazi Manufacturing Company was started on January 1, 2007, when it acquired $134,000 cash by issuing common stock. Qazi immediately purchased office furniture and manufacturing equipment costing $20,000 and $38,000, respectively. The office furniture had a four-year useful life and a zero salvage value. The manufacturing equipment had a $2,000 salvage value and an expected useful life of six years. The company paid $14,000 for salaries of administrative personnel and $18,000 for wages of production personnel. Finally, the company paid $24,000 for raw materials that were used to make inventory. All inventory was started and completed during the year. Qazi completed production on 8,000 units of product and sold 6,000 units at a price of $14 each in 2007. (Assume that all transactions are cash transactions.)
Required
Determine the total product cost and the average cost per unit of the inventory produced in 2007.
Determine the amount of cost of goods sold that would appear on the 2007 income statement.
Determine the amount of the ending inventory balance that would appear on the December 31, 2007, balance sheet.
Determine the amount of net income that would appear on the 2007 income statement.
Determine the amount of retained earnings that would appear on the December 31, 2007, balance sheet.
Determine the amount of total assets that would appear on the December 31, 2007, balance sheet.
Determine the amount of net cash flow from operating activities that would appear on the 2007 statement of cash flows.
Determine the amount of net cash flow from investing activities that would appear on the 2007 statement of cash flows.
Problem 1-20BEffect of product versus general, selling, and administrative costs on financial statements
Tyndal Company experienced the following accounting events during its first year of operation. With the exception of the adjusting entries for depreciation, all transactions were cash transactions.
Acquired $99,000 cash by issuing common stock.
Paid $18,750 for the materials used to make its products. All products started were completed during the period.
Paid salaries of $7,500 to selling and administrative employees.
Paid wages of $11,250 to production workers.
Paid $15,000 for furniture used in selling and administrative offices. The furniture was acquired on January 1. It had a $1,875 estimated salvage value and a seven-year useful life.
Paid $27,500 for manufacturing equipment. The equipment was acquired on January 1. It had a $2,500 estimated salvage value and a five-year useful life.
Sold inventory to customers for $53,750 that had cost $31,250 to make.
Required
Explain how these events would affect the balance sheet, income statement, and statement of cash flows by recording them in a horizontal financial statements model as indicated here. The first event is recorded as an example. In the Cash Flow column, indicate whether the amounts represent financing activities (FA), investing activities (IA), or operating activities (OA).
Problem 1-21BProduct versus general, selling, and administrative costs
The following transactions pertain to 2008, the first year of operations of Pinion Company. All inventory was started and completed during the accounting period. All transactions were cash transactions.
Acquired $56,000 of contributed capital from its owners.
Paid $9,600 for materials used to produce inventory.
Paid $4,400 to production workers.
Paid $5,000 rental fee for production equipment.
Paid $1,500 to administrative employees.
Paid $3,200 rental fee for administrative office equipment.
Produced 1,900 units of inventory of which 1,500 units were sold at a price of $17.40 each.
Required
Prepare an income statement, balance sheet, and statement of cash flows.
Problem 1-22BService versus manufacturing companies
Voger Company began operations on January 1, 2007, by issuing common stock for $75,200 cash. During 2007, Voger received $61,600 cash from revenue and incurred costs that required $72,000 of cash payments.
Required
Prepare an income statement, balance sheet, and statement of cash flows for Voger Company for 2007, under each of the following independent scenarios.
Voger is an employment agency. The $72,000 was paid for employee salaries and advertising.
Voger is a trucking company. The $72,000 was paid to purchase two trucks. The trucks were purchased on January 1, 2007, had five-year useful lives and no expected salvage value. Voger uses straight-line depreciation.
Voger is a manufacturing company. The $72,000 was paid to purchase the following items:
Paid $14,400 cash to purchase materials used to make products during the year.
Paid $22,400 cash for wages to production workers who make products during the year.
Paid $3,200 cash for salaries of sales and administrative employees.
Paid $32,000 cash to purchase manufacturing equipment. The equipment was used solely for the purpose of making products. It had a six-year life and a $3,200 salvage value. The company uses straight-line depreciation.
During 2007, Voger started and completed 2,600 units of product. The revenue was earned when Voger sold 2,200 units of product to its customers.
Refer to Requirement c. Could Voger determine the actual cost of making the 500th unit of product? How likely is it that the actual cost of the 500th unit of product was exactly the same as the cost of producing the 501st unit of product? Explain why management may be more interested in average cost than in actual cost.
Russo Company was started when it acquired $70,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $40,000. Russo also incurred $20,000 of product development costs. There was a debate regarding how the product development costs should be classified. Advocates of Option 1 believed that the costs should be included in the general, selling, and administrative cost category. Advocates of Option 2 believed it would be more appropriate to classify the product development costs as product costs. During the first year, Russo made 10,000 units of product and sold 8,000 units at a price of $14 each. All transactions were cash transactions.
Required
Prepare an income statement, balance sheet, and statement of cash flows under each of the two options.
Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors.
Assume that Russo provides an incentive bonus to the company president that is equal to 8 percent of net income. Compute the amount of the bonus under each of the two options. Identify the option that provides the president with the higher bonus.
Assume a 35 percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the option that minimizes the amount of the company’s income tax expense.
Comment on the conflict of interest between the company president as determined in Requirement c and the stockholders of the company as indicated in Requirement d. Describe an incentive compensation plan that would avoid conflicts between the interests of the president and the owners.
Problem 1-24BUsing JIT to reduce inventory holding costs
Cole Automobile Dealership, Inc. (CAD), buys and sells a variety of cars made by Great Motor Corporation. CAD maintains about 30 new cars in its parking lot for customers’ selection; the cost of this inventory is approximately $320,000. Additionally, CAD hires security guards to protect the inventory from theft and a maintenance crew to keep the facilities attractive. The total payroll cost for the guards and maintenance crew amounts to $80,000 per year. CAD has a line of credit with a local bank that calls for a 15 percent annual rate of interest. Recently, Ron Nader, the president of CAD, learned that a competitor in town, Smartt Dealership, has been attracting some of CAD’s usual customers because Smartt could offer them lower prices. Mr. Nader also discovered that Smartt carries no inventory at all but shows customers a catalog of cars as well as pertinent information from online computer databases. Smartt promises to deliver any car that a customer identifies within three working days.
Required
Based on the information provided, determine CAD’s annual inventory holding cost.
Name the inventory system that Smartt uses and explain how the system enables Smartt to sell at reduced prices.
Problem 1-25BUsing JIT to minimize waste and lost opportunity
Laurie’s Hamburger is a small fast-food shop in a busy shopping center that operates only during lunch hours. Laurie Kemp, the owner and manager of the shop, is confused. On some days, she does not have enough hamburgers to satisfy customer demand. On other days, she has more hamburgers than she can sell. When she has excess hamburgers, she has no choice but to dump them. Usually, Ms. Kemp prepares about 160 hamburgers before the busy lunch hour. The product cost per hamburger is approximately $0.75; the sales price is $2.50 each. Ms. Kemp pays general, selling, and administrative expenses that include daily rent of $50 and daily wages of $40.
Required
Prepare an income statement based on sales of 100 hamburgers per day. Determine the cost of wasted hamburgers if 160 hamburgers were prepared in advance.
Prepare an income statement assuming that 200 customers attempt to buy a hamburger. Since Ms. Kemp has prepared only 160 hamburgers, she must reject 40 customer orders because of insufficient supply. Determine the amount of lost profit.
Suppose that hamburgers can be prepared quickly after each customer orders. However, Ms. Kemp must hire an additional part-time employee at a cost of approximately $20 per day. The per unit cost of each hamburger remains at $0.75. Prepare an income statement under the JIT system assuming that 100 hamburgers are sold. Compare the income statement under JIT with the income statement prepared in Requirement a. Comment on how the JIT system would affect profitability.
Assume the same facts as in Requirement c with respect to a JIT system that requires additional labor costing $20 per day. Prepare an income statement under the JIT system, assuming that 200 hamburgers are sold. Compare the income statement under JIT with the income statement prepared in Requirement b. Comment on how the JIT system would affect profitability.
Explain how the JIT system might be able to improve customer satisfaction as well as profitability.
Problem 1-26BThe fraud triangle, ethics, and the Sarbanes-Oxley Act
The CEO and the CFO of Automation Company were both aware that the company’s controller was reporting fraudulent revenues. Upper level executives are paid very large bonuses when the company meets the earnings goals established in the company’s budgets. While the CEO had pushed the CFO and controller to “make the numbers,” he had not told him to “make up the numbers.” Besides, he could plead ignorance if the fraud was ever discovered. The CFO knew he should prohibit the fraudulent reporting but also knew the importance of making the numbers established in the budget. He told himself that it wasn’t just for his bonus but for the stockholders as well. If the actual earnings were below the budgeted target numbers, the stock price would drop and the shareholders would suffer. Besides, he believed that the actual revenues would increase dramatically in the near future and they could cover for the fraudulent revenue by underreporting these future revenues. He concluded that no one would get hurt and everything would be straightened out in the near future.
Required
Explain why the internal control practice of separation of duties failed to prevent the fraudulent reporting.
Identify and discuss the elements of the fraud triangle that motivated the fraud.
Explain how the provisions of the Sarbanes-Oxley Act would serve to deter this type of fraudulent reporting.
Review the standards of professional conduct shown in Exhibit 1.15. Identify and comment on which of the standards were violated by the CFO.
Julie Woodley visited her personal physician for treatment of flu symptoms. She was greeted by the receptionist, who gave her personal history and insurance forms to complete. She needed no instructions; she completed these same forms every time she visited the doctor. After completing the forms, Ms. Woodley waited for 30 minutes before being ushered into the patient room. After waiting there for an additional 15 minutes, Dr. Bohn entered the room. The doctor ushered Ms. Woodley into the hallway where he weighed her and called her weight out to the nurse for recording. Ms. Woodley had gained 10 pounds since her last visit, and the doctor suggested that she consider going on a diet. Dr. Bohn then took her temperature and asked her to return to the patient room. Ten minutes later, he returned to take a throat culture and draw blood. She waited another 15 minutes for the test results. Finally, the doctor returned and told Ms. Woodley that she had strep throat and bronchitis. Dr. Bohn prescribed an antibiotic and told her to get at least two days of bed rest. Ms. Woodley was then ushered to the accounting department to settle her bill. The accounting clerk asked her several questions; the answers to most of them were on the forms that she had completed when she first arrived at the office. Finally, Ms. Woodley paid her required copayment and left the office. Three weeks later, she received a bill indicating that she had not paid the copayment. She called the accounting department, and, after a search of the records, the clerk verified that the bill had, in fact, been paid. The clerk apologized for the inconvenience and inquired as to whether Ms. Woodley’s health had improved.
Required
Identify at least three value-added and three nonvalue-added activities suggested in this scenario.
Provide logical suggestions for how to eliminate the nonvalue-added activities.
