Financial Statements Paper 3

Answer (A) is correct. Cost of goods sold equals cost of goods manufactured (COGM) adjusted for the change in finished goods. COGM equals the sum of raw materials used, direct labor costs, and production overhead, adjusted for the change in work-in-progress. Raw materials used equals $255,000 ($105,000 BI + $300,000 purchases – $20,000 returns – $130,000 EI). Thus, COGM equals $1,650,000 ($255,000 RM + $600,000 DL + $750,000 OH + $220,000 BWIP – $175,000 EWIP), and COGS equals $1,480,000 ($1,650,000 COGM + $90,000 BFG – $260,000 EFG).

Answer (C) is correct. Madengrad’s cost of goods manufactured can be calculated as follows: Sales.................................... $160,000
Less: gross profit.... ................(48,000)
Cost of goods sold.................. $112,000
Add: ending finished goods........ 58,300
Goods available for sale.......... $170,300
Less: beginning finished goods... (60,190)
Cost of goods manufactured..... $110,110

Answer (C) is correct. Purchases equals usage adjusted for the inventory change. Hence, purchases equals $130,150 ($128,900 used – $27,500 BI + $28,750 EI).

Answer (B) is correct.
Scurry’s cost of goods sold can be calculated as follows:
Beginning inventory of finished goods..... $ 100,000
Add: cost of goods manufactured.............. 700,000
Less: ending inventory of finished goods. ..(200,000)
Cost of goods sold ...............................$ 600,000

Answer (B) is correct.
This solution requires a series of computations.
Beginning raw materials................... $38,000
Add: net purchases raw materials ......$115,000
Materials available.......................... $153,000
Less: ending materials......... ............(45,000)
Materials used in production............. $108,000
Direct labor.................................... 236,000
Manufacturing overhead Factory rent ..$59,000
Factory depreciation......................... 18,700
Material handling costs...................... 35,800
Total Manufacturing overhead............. 113,500
Total manufacturing costs................. $457,500
Add: beginning work-in-process........... 21,000
Less: ending work-in-process............. (10,000)
Costs of Goods Manufactured............. $468,500
Add: beginning finished goods ............78,000
Less: ending finished goods ..............(107,000)
Cost of Goods Sold ..........................$439,500

Answer (A) is correct. The results of operations for a period of time are reported in the income statement (statement of earnings) on the accrual basis using an approach oriented to historical transactions.

Answer (D) is correct.
Maynard’s net income for the year is calculated as follows:
................................................... Income............ Times:
................................................... Statement ........Tax............. As
................................................... Item............ ... Effect.......... Reported
Income from continuing operations
(net of tax)............................................................................ $72,000
Discontinued operations ..................$(70,000) .......(1.0 – .40) .....(42,000)
Extraordinary loss due to earthquake. .(90,000)....... (1.0 – .40)......(54,000) Net income................................................................................ $(24,000)

Answer (D) is correct. Prior-period adjustments are made for the correction of errors. According to SFAS 16, Prior Period Adjustments, the effects of errors on prior-period financial statements are reported as adjustments to beginning retained earnings for the earliest period presented in the retained earnings statement. Such errors do not affect the income statement for the current period.

Answer (D) is correct. The appropriation of retained earnings is a transfer from one retained earnings account to another. The only practical effect is to decrease the amount of retained earnings available for dividends. An appropriation of retained earnings is purely for disclosure purposes.

Answer (A) is correct. The statement of shareholders’ equity (changes in equity) presents a reconciliation in columnar format of the beginning and ending balances in the various shareholders’ equity accounts. A statement of changes in equity may include, for example, columns for (1) totals, (2) comprehensive income, (3) retained earnings, (4) accumulated OCI (but the components of OCI are presented in another statement), (5) common stock, and (6) additional paid-in capital.