Question

The Jiffy Manufacturing Company was started at the beginning of the current year when it acquired $100,000 from its owners. During the incurred the following costs, all for cash: the company year, Direct material costs $40,000 50,000 20,000 30,000 Direct labor costs Overhead costs Selling and administrative costs The company produced 10,000 units of product and sold 8,000 units. The average selling price was $17 per unit; all sales were for cash. Required: The accountant who prepared the firm's financial statements misclassified the selling and administrative costs as product costs. Demonstrate the impact of the error on the company's income statement and balance sheet by completing the following schedule: Scenario 1: With the error Scenario 2: Without the error Income statement: Revenue Less: Cost of goods sold Gross margin Less: Selling, general, and administrative expenses Net income Balance sheet: Assets Cash Inventory Total assets Equity Common stock Retained earnings Total equity

Answer 1

Solution:

Scenario 1: With the error Scenario 2: without the error Income statement: Revenue 136,000 $ 136,000 Less: Cost of goods sold Gross margin 88,000 112,000 24,000 48,000 Less: Selling, general and administrative expense 30,000 Net income 24,000 $ 18,000 Balance sheet: Assets Cash 96,000 96,000 Inventory 28,000 22,000 Total assets 124,000 118,000 Equity Common stock 100,000 100,000 Retained earnings „000 18,000 Total equity 124,000 118,000

workings:

Computation of COGS and inventory (with the error)

Per unit cost = ($40,000+50,000+ 20,000 + 30,000)/ 10,000 = $14

So, COGS = $14 * 8,000 = $112,000

and inventory = $14 * 2,000 = $28,000

Computation of COGS and inventory (without error):

per unit cost = ($40,000 + 50,000 +20,000) / 10,000 = $11

So, COGS = $11 * 8,000 = $88,000

and inventory = $11 * 2,000 = $22,000

Here retained earnings are just net income.

Cash = Sales revenue + Initial investment - All cash expense = $136,000 + 100,000 - 140,000

= $96,000

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