Question

Prepare income statements (Learning Objective 5)

Part One: In 2012, Penny Henderson opened Penny’s Posies, a small retail shop selling oral arrangements. On December
31, 2013, her accounting records show the following:
Sales revenue ................................................................................................... $53,000
Utilities for shop ............................................................................................... $ 1,400
Inventory on December 31, 2013 .................................................................... $ 9,600
Inventory on January 1, 2013 ........................................................................... $12,700
Rent for shop .................................................................................................... $ 4,600
Sales commissions ............................................................................................ $ 4,900
Purchases of merchandise ................................................................................ $37,000
Requirement
Prepare an income statement for Penny’s Posies, a merchandiser, for the year ended December 31, 2013.
Part Two: Penny’s Posies was so successful that Penny decided to manufacture her own brand of oral supplies: Floral
Manufacturing. At the end of December 2014, her accounting records show the following:
Utilities for plant ......................................................................................... $ 4,300
Delivery expense ........................................................................................ $ 2,500
Sales salaries expense ................................................................................ $ 4,400
Plant janitorial services ............................................................................... $ 1,550
Work in process inventory, December 31, 2014 ........................................ $ 3,500
Finished goods inventory, December 31, 2013 ......................................... 0
Finished goods inventory, December 31, 2014 ......................................... $ 4,000
Sales revenue ............................................................................................. $109,000
Customer service hotline expense ............................................................. $ 1,700
Direct labor ................................................................................................ $ 20,000
Direct material purchases ........................................................................... $ 34,000
Rent on manufacturing plant ..................................................................... $ 9,600
Raw materials inventory, December 31, 2013 ............................................ $ 11,000
Raw materials inventory, December 31, 2014 ............................................$ 6,500
Work in process inventory, December 31, 2013 ........................................ 0
Requirements
1. Calculate the Cost of Goods Manufactured for Floral Manufacturing for the year ended December 31, 2014.
2. Prepare an income statement for Floral Manufacturing for the year ended December 31, 2014.
3. How does the format of the income statement for Floral Manufacturing differ from the income statement of Penny’s
Posies?
Part Three: Show the ending inventories that would appear on these balance sheets:
1. Penny’s Posies at December 31, 2013
2. Floral Manufacturing at December 31, 2014

Answer 1

Part 1 Penny Henderson

Income Statement

For the year ended December 31, 2013

Sales $53,000

Less: Cost of goods sold

Beginning Inventory 12,700

Add: Purchases 37,000

Total Goods available for sale 49,700

Less: Inventory, end 9,600

Cost of goods sold $40,100

Gross profit $12,900

Less: Operating expenses

Utilities expense 1,400

Rent expense 4,600

Sales commission 4 ,900

Total operating expense $10,900

Net Income $2,000

Part 2

1. $77,350

2. Floral Manufacturing

Income Statement

For the year ended December 31, 2014

Sales $109,000

Less: Cost of goods sold

Raw materials, beginning 11,000

Add:Purchases 34,000

Raw materials available 45,000

Less: Raw material, end 6,500

Cost of raw material used 38,500

Add: Direct labor 20,000

Prime Cost 58,500

Add: Factory overhead 22,350

Manufacturing cost 80,850

Add: Work in process, beginning -

Less: Work in process, Ending 3,500

Cost of Goods Manufactured 77,350

Add: Finished goods, beginning -

Cost of goods available for sale 77,350

Less: Finished goods, ending 4,000

Cost of goods sold 73,350

Gross profit $35,650

Less: Operating expenses

Customer service hotline 1,700

Net Income $33,950

3. The difference between the 2013 and 2014 income statement is the composition of their cost of goods sold. In 2013, there is no cost of goods manufactured, raw materials and work in process account like 2014.

Part 3

1. Ending inventory of $9,600

2. Ending inventory of $14,000

Step-by-step explanation:

Part 2

1. Floral Manufacturing

Statement of Cost of Goods Manufactured

For the year ended December 31, 2014

Raw materials, beginning 11,000

Add:Purchases 34,000

Raw materials available 45,000

Less: Raw material, end 6,500

Cost of raw material used 38,500

Add: Direct labor 20,000

Prime Cost 58,500

Add: Factory overhead 22,350

Manufacturing cost 80,850

Add: Work in process, beginning -

Less: Work in process, Ending 3,500

Cost of Goods Manufactured 77,350

3. The difference in the 2013 and 2014 preparation came from the balances of working in process and raw materials in the 2014 production wherein 2013 on the hand don't have it.

Part 3.

1. 2013 ending inventory consists of the goods not yet sold at the end of the year.

2. 2014 ending inventory consists of raw materials ending balance of $6,500 plus the work in process ending balance of $3,500 and the finished goods ending balance of $4,000.