Chapter 10, Problem 24P

a.

To determine

Show the manner in which the given events would affect the balance sheet, income statement, and statement of cash flows by recording them in a horizontal financial statements model.

Explanation of Solution

Horizontal statements model: The model that represents all the financial statements, balance sheet, income statement, and statement of cash flows in one table in a horizontal form, is referred to as, horizontal statements model.

Prepare horizontal statement model:

Figure (1)

b.

To determine

Explain the reasons behind the Company A’s recognition of cost of goods sold that had no impact on cash flow.

Explanation of Solution

Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

The impact on cash flow occurs when Company A pays for various product costs. The cash outflows incurred by Company A are for materials, labor, and overhead. Thus, the cash flow consequences of these transactions were recognized before the cost of goods sold expense is recognized.

c.

To determine

Prepare a schedule of cost of goods manufactured and sold, a formal income statement, and a balance sheet for the year.

Explanation of Solution

Schedule of cost of goods sold: The schedule which reports all the expenses incurred by a company to sell the goods during the given period.

Prepare schedule of cost of goods manufactured:

Company A
Schedule of Cost of Goods Manufactured and Sold
For the year ended 2014
Particulars	Amount
Beginning raw materials inventory	$51,000
Add: Purchases	$47,000
Raw materials available	$98,000
Less: Ending raw materials inventory	($15,000)
Raw materials used	$83,000
Labor	$91,000
Overhead	$65,000
Total manufacturing costs	$239,000
Add: Beginning work in process inventory	$18,000
Total work in process inventory	$257,000
Less: Ending work in process inventory	($17,000)
Cost of goods manufactured	$240,000
Add: Beginning finished goods inventory	$43,000
Total work in process inventory	$283,000
Less: Ending finished goods inventory	($63,000)
Cost of goods sold	$220,000

Table (1)

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare income statement:

Company A
Income statement
For the year ended 2014
Particulars	Amount
Sales revenue	$420,000
Less: Cost of goods sold (Refer Table (2))	($220,000)
Gross margin	$200,000
Less: Selling and administrative expense	($169,000)
Net income	$31,000

Table (2)

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare balance sheet:

Company A
Balance Sheet
As on 2014
Particulars	Amount
Assets
Cash	$489,000
Raw  materials inventory	$15,000
Work in process inventory.	$17,000
Finished goods inventory	$63,000
Manufacturing  Equipment	$145,000
Office Equipment	$74,000
Total assets	$803,000
Equity
Common stock	$583,000
Retained earnings	$220,000
Total equity	$803,000

Table (3)

d.

To determine

Distinguish between the product costs and the upstream costs that Company A incurred.

Explanation of Solution

Product Costs: Product costs refer to the costs incurred to manufacture a product involving the direct materials, direct labor and overheads. These costs are directly traced in the final product except overheads and is accounted for either as cost of goods sold (for the goods sold in the accounting period) or, as an asset in the form of inventory (for the goods not sold in the accounting period).

Upstream costs: The costs incurred before the manufacturing process begins are known as upstream costs. Research and development expenses are examples of upstream costs.

Downstream costs: The costs incurred after the manufacturing processes are complete, are known as downstream costs. Transportation, packaging expenses are examples of downstream costs.

The distinction among the product costs and upstream (downstream) costs are given below:

• The cost of research and development (Event 1) is incurred before the beginning of the manufacturing process is classified as upstream costs.
• The costs of materials, labor and overhead incurred in Events 3, 5, 9, and 10 are classified as product costs.
• The costs such as inventory holding costs (Event 11), administrative costs and selling costs (Events 4 and 7) are classified as downstream costs.

e.

To determine

Explain the manner in which the company president could be correct and the reasons behind the production manager be biased in the assessment of the option to buy the inventory.

Explanation of Solution

• As the merchandise would be available on demand, Company A might operate a just-in-time inventory system, by eliminating the inventory holding expense $\left(\$10\times 1,000\text{ units}\right)$. Since the additional cost for purchase is $10 per unit $\left(\$230-\$220\right)$, it would cost Company A an additional $10,000 to purchase its product.
• Though, the company would save $70,000 of inventory holding expense. The warehouse supervisor might be biased by the fact that his job would be lost, if the company had purchased its products and the company could eliminate the need for warehousing inventory. The company might not need a warehouse supervisor if Company A does not maintain the inventory.