Problem 9 - Accounting

Question

The following events took place for LAE Manufacturing Company during March, the first month of its operations as a producer of digital clocks: a. Purchased \(\$ 52,000\) of materials. b. Used \(\$ 40,000\) of direct materials in production. c. Incurred \(\$ 60,000\) of direct labor wages. d. Incurred \(\$ 84,000\) of factory overhead. e. Transferred \(\$ 140,000\) of work in process to finished goods. f. Sold goods with a cost of \(\$ 110,000\). g. Earned revenues of \(\$ 250,000\). h. Incurred \(\$ 64,000\) of selling expenses. i. Incurred \(\$ 28,000\) of administrative expenses. a. Prepare the March income statement for LAE Manufacturing Company. b. Determine the inventory balances at the end of the first month of operations.

Step-by-Step Solution

Answer

1. Net Income for March: \( \$ 48,000 \). 2. Ending Inventory Balances: Raw Materials = \( \$ 12,000 \), Work in Process = \( \$ 44,000 \), Finished Goods = \( \$ 30,000 \).

Step 1: Calculate Cost of Goods Sold (COGS)

The Cost of Goods Sold is the cost related to goods that were sold during the month. This is provided in the problem as \( \$ 110,000 \).

Step 2: Calculate Gross Profit

Gross profit is calculated as Sales Revenue minus Cost of Goods Sold. Given, Sales Revenue is \( \\( 250,000 \) and COGS is \( \\) 110,000 \). \[ \text{Gross Profit} = \\( 250,000 - \\) 110,000 = \$ 140,000 \]

Step 3: Calculate Total Operating Expenses

Operating expenses include both Selling and Administrative Expenses. Given, Selling Expenses are \( \\( 64,000 \) and Administrative Expenses are \( \\) 28,000 \). \[ \text{Total Operating Expenses} = \\( 64,000 + \\) 28,000 = \$ 92,000 \]

Step 4: Calculate Net Income

Net Income is Gross Profit minus Total Operating Expenses. Using the previously calculated values: \[ \text{Net Income} = \\( 140,000 - \\) 92,000 = \$ 48,000 \]

Step 5: Prepare the March Income Statement

1. **Sales Revenue**: \( \\( 250,000 \) 2. **Cost of Goods Sold**: \( \\) 110,000 \) 3. **Gross Profit**: \( \\( 140,000 \) 4. **Operating Expenses**: - Selling Expenses: \( \\) 64,000 \) - Administrative Expenses: \( \\( 28,000 \) 5. **Total Operating Expenses**: \( \\) 92,000 \) 6. **Net Income**: \( \$ 48,000 \)

Step 6: Calculate Ending Raw Materials Inventory

1. Calculate initial purchases and usage: - Purchased Materials: \( \\( 52,000 \) - Used Direct Materials: \( \\) 40,000 \) 2. Ending Inventory of Raw Materials: \[ \text{Ending Raw Materials} = \\( 52,000 - \\) 40,000 = \$ 12,000 \]

Step 7: Calculate Ending Work in Process Inventory

The work in process inventory at the end can be found by considering:1. Direct Materials used: \( \\( 40,000 \)2. Direct Labor incurred: \( \\) 60,000 \)3. Factory Overhead incurred: \( \\( 84,000 \)4. Total Manufacturing Costs: \[ \text{Total} = \\) 40,000 + \\( 60,000 + \\) 84,000 = \\( 184,000 \]5. Less: Work in Process transferred to Finished Goods: - \( \\) 140,000 \)6. Ending Work in Process Inventory: \[ \text{Ending WIP} = \\( 184,000 - \\) 140,000 = \$ 44,000 \]

Step 8: Calculate Ending Finished Goods Inventory

Ending Finished Goods Inventory is calculated based on goods transferred and sold: 1. Work in Process transferred to Finished Goods: \( \\( 140,000 \)2. Goods Sold: \( \\) 110,000 \)3. Ending Inventory of Finished Goods: \[ \text{Ending Finished Goods} = \\( 140,000 - \\) 110,000 = \$ 30,000 \]

Key Concepts

Cost of Goods Sold

The concept of Cost of Goods Sold (COGS) is pivotal when preparing an income statement. It refers to the direct costs attributable to the production of the goods that a company sells. This includes the cost of materials and direct labor. In the case of LAE Manufacturing Company, the COGS for March was given as \( \$110,000 \). This means that the goods actually sold during this period had this associated cost directly tied to their production and sale. It's crucial to accurately calculate COGS because it directly affects the gross profit of a company. The formula for COGS is generally expressed as beginning inventory plus purchases minus ending inventory. Nevertheless, in our scenario, it is directly provided, simplifying our calculations.

Gross Profit

Gross profit represents the financial gain minus the COGS. It's a measure of profitability and efficiency of a company’s core activities. For LAE Manufacturing Company, the Gross Profit for March was calculated by subtracting COGS from Sales Revenue: \( \\(250,000 - \\)110,000 = \$140,000 \). Gross profit is a useful metric as it measures how well a company minimizes production costs in relation to its revenue generation. A higher gross profit could point to better control over production costs and result in more financial health of the organization.

Operating Expenses

Operating Expenses are the costs required for a company to run its primary operations and sell its goods but aren't directly tied to the production of goods. They generally include administrative and selling expenses. For LAE Manufacturing Company, selling expenses are \( \\(64,000 \) and administrative expenses are \( \\)28,000 \). These together form total operating expenses, which amount to \( \$92,000 \). Understanding operating expenses is essential as they are subtracted from the gross profit to identify the Net Income. Maintaining efficiency in operating expenses can transform more of the gross profit into net profit.

Net Income

Net income is essentially the profit left after all operating expenses, interest, taxes, and every other sort of expense or loss have been subtracted from total revenue. For the LAE Manufacturing Company, the Net Income for March is calculated by subtracting the total operating expenses from the Gross Profit: \( \\(140,000 - \\)92,000 = \$48,000 \). This amount demonstrates the profit after covering operating costs, thus reflecting the company’s profitability in its financial standing during that month. A positive net income indicates profitability, whereas a loss indicates more expenses than revenue.

Inventory Balances

Inventory balances highlight various stages of the goods within the production process, such as raw materials, work-in-process (WIP), and finished goods. For March, LAE Manufacturing Company had:

• Raw materials ending inventory was calculated as initial purchases \( \\(52,000 \) minus the used \( \\)40,000 \), resulting in \( \\(12,000 \).
• Ending Work in Process Inventory was found after adding direct materials and other manufacturing costs and then subtracting those transferred to finished goods: \( \\)184,000 - \\(140,000 = \\)44,000 \).
• Ending Finished Goods Inventory, based on goods transferred and goods sold, was \( \\(140,000 - \\)110,000 = \$30,000 \).

These figures are pivotal in assessing how much of the company's resources are tied up in production.