Empire Company is a manufacturer of smart phones. Its controller resigned in October 2017. An inexperienced assistant accountant has prepared the following income statement for the month of October 2020.
EMPIRE COMPANY
Income Statement
For the Month Ended October 31, 2020
Sales revenue $780,000
Less:Operating expenses
Raw materials purchases $264,000
Direct labor cost 190,000
Advertising expense 90,000
Selling and administrative salaries 75,000
Rent on factory facilities 60,000
Depreciation on sales equipment 45,000
Depreciation on factory equipment 31,000
Indirect labor cost 28,000
Utilities expense 12,000
Insurance expense 8,000
803,000
Net loss $(23,000)
Prior to October 2020, the company had been profitable every month. The company’s president is concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.
1. Inventory balances at the beginning and end of October were:
October 1 October 31
Raw materials $18,000 $29,000
Work in process 20,000 14,000
Finished goods 30,000 50,000
2. Only 75% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.
Prepare a letter to the president of the company, Shelly Phillips, describing the changes you made. Explain clearly why net income is different after the changes. Keep the following points in mind as you compose your letter.
1. This is a letter to the president of a company, who is your friend. The style should be generally formal, but you may relax some requirements. For example, you may call the president by her first name.
2. Executives are very busy. Your letter should tell the president your main results first (for example, the amount of net income).
3. You should include brief explanations so that the president can understand the changes you made in the calculations.
