Question

Describe the additional accounts and procedures used in manufacturing companies. In addition, explain the computation of goodwill for a business acquisition.

Answer 1

A manufacturing company has to prepare in addition the accounts of a trading company

1. RAW MATERIALS STOCK ACCOUNT
2. WORK IN PROGRESS STOCK ACCOUNT
3. FINISHED GOODS STOCK ACCOUNT

They may also include for their cost accounting divisions

1. DIRECT LABOUR COST ACCOUNT
2. DIRECT MATERIAL COST ACCOUNT
3. FACTORY OVERHEAD COST ACCOUNT

When the company purchases the raw material it is added to the raw material stock account when the raw materials taken for production it is transferred to the work in progress stock account and when the product is finally produced it is transferred to finished goods stock account when sales are made the finished goods stock account is credited with the cost of goods sold

Above all these the company will have a manufacturing account before the p&l which will replace the typical trading account in the income statement if there is trading in the same company the manufacturing account will be opened before the trading account

Goodwill is the amount of money which is given to the aquiring company in excess of the net assets and the owners equity

Goodwill on acquisition can be calculated by subtracting the net of fair value of total asset and liabilities with the purchase price.

i.e, purchase price - ( fair value of asset - fair value of liability)