Question

Empire Company is a manufacturer of smart phones. Its controller resigned in October 2020. An inexperienced assistant accountant has prepared the following income statement for the month of October 2020.

EMPIRE COMPANY
Income Statement
For the Month Ended October 31, 2020
Sales revenue               $795,000   
Less:   Operating expenses                  
Raw materials purchases       $264,600           
Direct labor cost       190,200           
Advertising expense       91,000           
Selling and administrative salaries       77,800           
Rent on factory facilities       61,000           
Depreciation on sales equipment       45,800           
Depreciation on factory equipment       32,500           
Indirect labor cost       28,200           
Utilities expense       11,600           
Insurance expense       8,300        811,000   
Net loss               $(16,000)  

Prior to October 2020, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.

1. Inventory balances at the beginning and end of October were:

October 1
October 31
Raw materials       $19,700       $36,000
Work in process       19,400       14,700
Finished goods       29,900       53,500

2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.

Prepare a correct income statement for October 2020.

Answer 1

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