Question

Consider the following cost items: 1. Salaries of players on the Boston Red Sox. 2. Year-end completed goods of Levi Strauss jeans. 3. Executive compensation costs at Home Depot. 4. Advertising costs for Sony. 5. Costs incurred during the period to insure a Ford plant against fire and flood losses. 6. Current year’s depreciation on a Carnival Cruise Line ship. 7. The cost of printer ink and paper used during the period by Shutterfly. 8. Assembly-line wage cost incurred at a Kona bicycle plant. 9. Year-end production in process at Lenovo computer manufacturer. 10. The cost of products sold to customers of a Target store. 11. The cost of products sold to distributors of carpet manufacturer Shaw Floors.Required: 1. Evaluate the costs just cited, and determine whether the associated dollar amounts would be found on the firm’s balance sheet, income statement, or schedule of cost-of-goods-manufactured. (Note: In some cases, more than one answer will apply.) 2. What major asset will normally be insignificant for service enterprises and relatively substantial for retailers, wholesalers, and manufacturers? Briefly discuss. 3. Briefly explain the major differences between income statements of service enterprises versus those of retailers, wholesalers, and manufacturers.

Answer 1

Solution:

1.

Evaluation Of Costs
S.No.	Cost Items	Found On
1	Salaries of players on the Boston Red Sox.	Income Statement
2	Year-end completed goods of Levi Strauss Jeans	Balance Sheet, Schedule of cost of goods manufactured
3	Executive compensation costs at Home Depot	Income Statement
4	Advertising costs for Sony	Income Statement
5	Costs incurred during the period to insure a Ford plant against fire and flood losses	Schedule of cost of goods manufactured
6	Current year’s depreciation on a Carnival Cruise Line ship	Income Statement
7	The cost of printer ink and paper used during the period by Shutterfly	Schedule of cost of goods manufactured
8	Assembly-line wage cost incurred at a Kona bicycle plant	Schedule of cost of goods manufactured
9	Year-end production in process at Lenovo computer manufacturer	Balance Sheet, Schedule of cost of goods manufactured
10	The cost of products sold to customers of a Target store	Income Statement
11	The cost of products sold to distributors of carpet manufacturer Shaw Floors	Income Statement

2.

Particulars	Type of Goods/Inventories Maintained	Quantity
Retailers	Finished Goods/Commodities	Large
Distributors	Finished Goods/Commodities	Large
Producers/Manufacturers	Finished Goods/Commodities	Large
	Work In Progress	Large
	Raw Materials	Large
Service Companies	Office Supplies (Treated As Negligible/Insignificant)	Small
Utility Undertakings	Treated As Negligible/Insignificant	Small

Explanation:
In the eyes of retailers, suppliers and wholesalers, the inventory will become a large commodity relatively whereas for utility undertakings the inventory will be negligible. Retailers and distributors will have sufficient supplies of finished goods (Commodities) while producers will have stocks of raw materials, processes and finished goods. The inventories for service companies are very small (For Example Office supplies).

3.

The main difference between service enterprises and those of retailers, suppliers and wholesalers can be seen in the inventory presence. Service businesses do not sell goods but offer service, unlike the manufacturing firms. Another major difference can be found in the cost of goods sold component in the income statements as the service businesses do not carry inventory. A decrease in net income can occur due to a decrease in revenue, rather than an increase in expenses. In a manufacturing firm, a decrease in net income can occur due to an increase in expenses as a decrease in revenues.