5. Bennett Company was organized on November 1 of the previous year. After ten months of start-up losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the income statement for August also showed a loss. August's income statement follows: James Company Income Statement For the Month Ended August 31 Sales $700,000 Less operating expenses: Selling and administrative services $40,000 Rent on facilities 50,000 Purchases of raw materials 200,000 Insurance 10,000 Depreciation, sales equipment 12,000 Utilities cost 60,000 Indirect labor 120,000 Direct labor 120,000 Depreciation, factory equipment 15,000 Maintenance, factory 8,000 Advertising 100,000 735,000 Net operating loss $(35,000) After seeing the $35,000 loss for August, Bennett’s president stated, "I was sure we'd be profitable within six months, but after ten months we're still spilling red ink. Maybe it's time for us to throw in the towel and accept one of those offers we've had for the company. To make matters worse, I just heard that Linda won't be back from her surgery for at least six more weeks." Linda is the company's controller; in her absence, the statement above was prepared by a new assistant who has had little experience in manufacturing operations. Additional information about the company follows: Only 70% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities. Inventory balances at the beginning and end of the month were as follows: August 1 August 31 Raw materials $17,000 $42,000 Work in process $70,000 $85,000 Finished goods $20,000 $60,000 80% of the insurance and 90% of the utilities cost apply to factory operations; the remaining amounts apply to selling and administrative activities. The president has asked you to check over the above income statement and make a recommendation as to whether the company should continue operations. Required: As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured in August. As a second step, prepare a new income statement for the month. Based on your statements prepared in (1) and (2) above, would you recommend that the company continue operations?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
(20 pts) 5. Bennett Company was organized on November 1 of the previous year. After ten months of start-up losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the income statement for August also showed a loss. August's income statement follows:
James Company
Income Statement
For the Month Ended August 31
Sales $700,000
Less operating expenses:
Selling and administrative services $40,000
Rent on facilities 50,000
Purchases of raw materials 200,000
Insurance 10,000
Utilities cost 60,000
Indirect labor 120,000
Direct labor 120,000
Depreciation, factory equipment 15,000
Maintenance, factory 8,000
Advertising 100,000
735,000
Net operating loss $(35,000)
After seeing the $35,000 loss for August, Bennett’s president stated, "I was sure we'd be profitable within six months, but after ten months we're still spilling red ink. Maybe it's time for us to throw in the towel and accept one of those offers we've had for the company. To make matters worse, I just heard that Linda won't be back from her surgery for at least six more weeks."
Linda is the company's controller; in her absence, the statement above was prepared by a new assistant who has had little experience in manufacturing operations. Additional information about the company follows:
- Only 70% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.
- Inventory balances at the beginning and end of the month were as follows:
August 1 August 31
Raw materials $17,000 $42,000
Work in process $70,000 $85,000
Finished goods $20,000 $60,000
- 80% of the insurance and 90% of the utilities cost apply to factory operations; the remaining amounts apply to selling and administrative activities.
The president has asked you to check over the above income statement and make a recommendation as to whether the company should continue operations.
Required:
- As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured in August.
- As a second step, prepare a new income statement for the month.
- Based on your statements prepared in (1) and (2) above, would you recommend that the company continue operations?
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