Operating Activities 403
E. An increase in this percentage would indicate that a company is hav-
ing greater difficulty collecting its receivables. A rapid increase might
suggest that a company’s customers are facing financial difficulties
P13-5 Computation of Manufacturing Inventory Costs:
Raw materials inventory:
Beginning balance $ 850,000
Materials purchased during the year 3,550,000
Materials used in production (3,720,000)
404 Chapter 13
P13-6
Part of the
cost of goods
manufactured,
or expense?
Materials,
labor, or
overhead?
a. Salaries of sales office staff
expense
—
b. Electric utilities for the factory area
cost of goods
overhead
c. Office supplies
expense
—
d. Paint and miscellaneous plastic
l. Insurance on the factory
cost of goods
overhead
m. Insurance on the administrative
offices
expense
—
magazines
expense
—
expense
—
p. Rental of storage facilities for ma-
terials
cost of goods
overhead
n. Advertising in trade
ished goods
expense
—
*Depends on how significant they are.
With regard to manufacturing costs, it is relatively easy to distinguish
among materials and labor on the one hand, and factory overhead on the
P13-7 A. “Raw materials and parts” are the physical components that will be-
come part of the firm’s finished products. “Work in process” is costs
cost of goods
e. Depreciation on factory equipment
cost of goods
overhead
expense
—
cost of goods
overhead
cost of goods
materials
j. Plastic sheets used for table tops
cost of goods
materials
assemblers
cost of goods
Operating Activities 405
of partially completed products, including purchased parts, labor, and
overhead. “Finished goods” is costs of completed but unsold goods,
406 Chapter 13
P13-8 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
1
Merchandise Inventory
32,000
4
Cash
12,000
Sales
12,000
Merchandise Inventory
–9,300*
Cost of Goods Sold
(900 units @ $8)
5
Accounts Receivable
Sales Revenue
Merchandise Inventory
Cost of Goods Sold
*53 × 7 = 371
Cash
–31,600
Accounts Payable
–31,600*
*$32,000 – $400 goods
previously returned
7
Cash
Sales Discounts
Accounts Receivable
8
Accounts Receivable
Cash
Sales Revenue
20,800
Merchandise Inventory
Cost of Goods Sold
–12,747
* (1,600 units @ $13) ×
75%
** (53 × 7) + (1,547 × 8)
9
Warranty Expense
Warranty Obligation
Accounts Payable
Accounts Receivable
Sales
Merchandise Inventory
–4,900*
Cost of Goods Sold
*700 units @ $7 each
3
Merchandise Inventory
Accounts Payable
Operating Activities 407
B. Culture Music Company
Income Statement
Month of October
Net Sales ($8,400 + $12,000 + $20,800 − $636 − $155) $40,409
C. −$616
Cost of goods sold under: Sale #1 Sale #2 Return Sale #3 Total
FIFO $4,900 $9,300 ($371) $12,747 $26,576
408 Chapter 13
P13-9 A.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
1
Accounts Receivable
–9,000
Sales Returns
–9,000
Merchandise Inventory
6,300a
Cost of Goods Sold
6,300
a Based on a 30% gross profit ($9,000 × 70% = $6,300 cost of goods sold)
B. $248,440
Schedule:
Net sales $ 1,835,7001
Total operating expenses 987,060
Operating income $ 248,440
1 [$1,855,000 − ($9,000 + $10,300 sales returns)]
2
Merchandise Inventory
Accounts Payable
4
Warranty Expense
Warranty Obligations
5
Service Contracts
Accounts Receivable
Allowance for Returns
Sales Returns
–5,960
–5,960
Operating Activities 409
P13-10 A. Method A = Weighted-average
Method B = FIFO
Method C = LIFO
NOTE: No computations are necessary to answer this part of the
Merchandise Cost of
B. Method A: Weighted average Inventory Goods Sold
March 11 sale −73,500 73,500
Merchandise Cost of
P13-11 A.
Units
Sold
Revenue
Cost of Goods Sold
Gross
Profit
Gross Profit
per Unit
20,000
20,000 × $55 =
$1,100,000
20,000 × $36 = $720,000
$380,000
$19.00
410 Chapter 13
B. To minimize the effect of taxes: produce 36,000 units
If Rousseau produced 36,000 units during the current year, it would
To maximize the effect of taxes: produce 20,000 units
By producing only 20,000 units, Rousseau would be forced to sell off
C. Gross profit can be adjusted by controlling the number of units pro-
duced during the current year. The more units produced (up to
P13-12 A. Current Alternate
Methods Methods
Sales revenue $ 12,000,000 $ 12,000,000
Cost of goods sold 3,500,000 4,300,000
Net income $ 3,010,000 $ 2,100,000
B. The only cash flow effect of the choice in accounting methods is the
Operating Activities 411
P13-13 A. Sold = 5,200 units
Ending inventory = 900 units
B. Perpetual Periodic
Cost of Goods Sold $63,800 $65,400
Ending inventory $10,600 $ 9,000
Proof of perpetual system amounts (cost is determined separately for
each sale):
$10,600
Proof of periodic system amounts (cost is determined only at the end
of year):
Cost of goods sold: Under LIFO, the cost of goods sold is the cost of
the 5,200 units most recently purchased
C. Net income when the perpetual method is used would be:
Sales Revenue $ 85,000
412 Chapter 13
Net income when the periodic method is used would be:
For the two methods, net income differs by $1,600 and is lower if the
periodic method is used. This happens because when determining
D. Advantages of the perpetual method are that more timely information
is available. Also, if there are any inventory losses during the year,
Operating Activities 413
P13-14 Lawson Company
Income Statement
For the Year Ended December 31, 2007
(In millions)
Sales revenue $ 318.6
Gain on sale of securities 7.4
Income from continuing operations before taxes 46.7
Provision for income taxes (35%) 16.3
Income from continuing operations 30.4
Discontinued operations (net of tax effect of $4.3) (8.0)
P13-15 A. The gross profit on product sales is $806 million ($3,355 − $2,549). On
industries engaged in sales of similar products or services.
B. A “provision for restructuring” is the estimated cost of a plan that
414 Chapter 13
C. Yes, moving interest expense below would have made income from
operations positive in 2008 and 2007, but not in 2006.
F. Income from operations probably assists more in assessing the fu-
ture of the company. The discontinued operations have nothing to do
with the future of the company; the accounting change is a one-time
event.
G. The discontinued segment and the change in accounting principle are
the relationship between income and tax for this company.
P13-16 A. Pelican Enterprises
Income Statement (In thousands)
Year Ended June 30, 2007
Sales revenue $ 6,930
Service revenue 3,382
Income tax expense (30%) 1,077
Income before extraordinary item 2,513
Extraordinary gain on extinguishment of debt,
net of $12 tax 28
Net income $ 2,541
Operating Activities 415
Earnings per share:
B. No. The closing entries have not been made because the revenue and
D. Each of these stops along the income statement reports additional in-
formation that would not be available if all the information were just
added together and a single number reported. When you start com-
bining items and netting them against each other, eventually all you
416 Chapter 13
P13-17 A. B.
Minimum Maximum
Net Income Net Income
Sales revenue $13,680,000 $13,680,000
Cost of goods sold1 3,930,000 3,710,000
Cumulative effect of accounting
change net of tax savings of $374,000 (726,000) 0
Net income (loss) $ (609,378) $ 1,463,126
Earnings per share:
Income before cumulative effect
2Doubtful accounts expense:
Maximum expense — 4% × $10 million = $400,000
Minimum expense — 3% × $10 million = $300,000
3Depreciation expense:
Maximum Double-declining balance over minimum life
Operating Activities 417
C. The results of parts (a) and (b) suggest that one must be very careful
when comparing the net incomes of two or more companies. The
numbers (and comparisons) may be meaningless unless one is aware
of the different accounting choices that were made in obtaining the
P13-18 a. Merchandise was sold to customers at a price of $18,000. The cost to
the seller of the merchandise sold was $14,600.
b. Merchandise the company had purchased on credit for $33,000 was
returned to the supplier.
c. Cash was received from a customer in payment on account. The custom–
418 Chapter 13
P13-19 A. This disclosure reveals that Half Moon Inc. has an investment in the
common stock of Able Company and that the size of the investment is
B. This disclosure reveals that Half Moon controls Baker Company.
Usually this means that Half Moon owns a majority of Baker’s com-
mon stock. Further, this disclosure reveals that Half Moon does not
C. Projected benefit obligation: The amount of pension benefits earned
by employees as of the balance sheet date.
promised and the assets set aside to fund them.
D. Service cost: The amount of pension benefits that employees have
earned during the current fiscal period.
P13-20 The Book Wermz
Inventory of Webster’s Dictionary
August 31, 2007
FIFO Basis
Cost of Goods Sold
Ending Inventory
Date Purchased
Units
Available
Cost per Unit
Units
Cost
Units
Cost
12-Apr-07
245
$27.00
245
$ 6,615.00
0
—
360
360
0
—
842
$43,999.00
LIFO Basis
Cost of Goods Sold
Ending Inventory
Date Purchased
Units
Available
Cost per Unit
Units
Cost
Units
Cost
12-Apr-07
245
$27.00
87
$ 2,349.00
158
$4,266.00
360
360
$44,789.00
158
$4,266.00
Tax Savings from LIFO
LIFO Cost $ 44,789.00
If 545 units were purchased in April and the May purchase cost $31.00 per unit:
FIFO Basis
Cost of Goods Sold
Ending Inventory
Date Purchased
Units
Available
Cost per Unit
Units
Cost
Units
Cost
12-Apr-07
545
$27.00
545
$14,715.00
360
360
11,160.00
542
17,344.00
458
$43,219.00
458
(continued)
420 Chapter 13
LIFO Basis
Cost of Goods Sold
Ending Inventory
Date Purchased
Units
Available
Cost per
Unit
Units
Cost
Units
Cost
12-Apr-07
545
$27.00
87
$ 2,349.00
458
$12,366.00
Totals
1905
1447
$45,509.00
458
$12,366.00
Tax Savings from LIFO
LIFO Cost $ 45,509.00
P13-22
1
2
3
4
5
6
7
8
9
10
11
12
13
d
a
b
b
a
c
b
a
b
CASES
C13-1 A. About 72% ($765 million out of $1,063 million total) of General Mills’
negligible impact on fiscal 2003 and 2002 earnings.
B. The allowance for doubtful accounts declined from $28 million in 2003
C. From the statement of cash flows, we learn that General Mills record-
360
360
1000
1000
Operating Activities 421
C13-2 (NOTE: There are many different solution approaches that students might
take. The discussion and numerical information provided below are illus-
trative. The most important lesson of this case is that different accounting
be very useful.
To better understand and compare the results of the two companies, it is
necessary to apply the same accounting methods and procedures to each
firm. That step is particularly appropriate here because the two firms op-
erate in the same industry, sell the same products, and have many of the
same customers. While either firm’s income statement might be held con-
stant and the other modified to conform using the same accounting meth-
ods, it probably makes the most sense here to hold Sunlight’s income
On two other choices, Moonbeam simply made different estimates. Re-
garding uncollectible accounts, Moonbeam thought they would be low;
Sunlight thought they would be higher. Regarding warranty costs, Moon-
beam thought they would be immaterial, Sunlight thought differently. With
the companies being in the same line of business, selling the same prod-
422 Chapter 13
(a) (b) (c)
Sunlight Moonbeam Moonbeam
Income Statements for Year 2007 Inc. (as reported) (restated)
Sales revenue* $ 31,000 $ 31,000 $ 26,542
Cost of goods sold** 20,000 18,600 16,700
Gross profit $ 11,000 $ 12,400 $ 9,842
Operating expenses:
Depreciation 1,100 1,100 1,100
Proofs of restated items
*Sales revenue: Originally
$31,000
Less: allowance for sales discounts 113
When the financial results of the two companies are prepared using the
same set of assumptions, a very different picture appears. It is Sunlight
Incorporated that is the more profitable firm (at least during the first year).