Question

Using the data from Problem 14-2A and the following additional inventory information for Leone Company, complete the requirements below. Assume income tax expense is \(233,725 for the year.

Inventories
Raw material, December 31, 2016	\)166,850
Raw materials, December 31, 2017	182,000
Work in process, December 31, 2016	15,700
Work in process, December 31, 2017	19,380
Finished goods, December 31, 2016	167,350
Finished goods, December 31, 2017	136,490

Required

1. Prepare the company’s 2017 schedule of cost of goods manufactured.

2. Prepare the company’s 2017 income statement that reports separate categories for (a) selling expenses and (b) general and administrative expenses.

Analysis Component

3. Compute the (a) inventory turnover, defined as cost of goods sold divided by average inventory, and (b) days’ sales in inventory, defined as 365 times ending inventory divided by cost of goods sold, for both its raw materials inventory and its finished goods inventory. (To compute turnover and days’ sales in inventory for raw materials, use raw materials used rather than cost of goods sold.) Discuss some possible reasons for differences between these ratios for the two types of inventories. Round answers to one decimal place.

Short answer

1. The cost of goods manufactured totals$1,935,650.
2. Net income totals $1,714,005.
3. Financial ratios:

Ratio	Raw material	Finished goods
Inventory turnover	5.21 times	12.94 times
Day’s sales in inventory	73 days	25.33 days

Step-by-step solution

Definition of Selling Expenses

The costs incurred, such as marketing expenses, sales commission, etc., to sell the products to their customers are known as selling expenses.

Schedule for cost of goods manufactured

Particular	Amount $
Beginning raw material	$166,850
Add: Raw material purchased	925,000
Less: Ending raw material	(182,000)
Raw material used	$909,850
Direct labor	675,480
Manufacturing overhead applied in work-in-process	354,000
Total manufacturing cost	$1,939,330
Add: beginning work-in-process inventory	15,700
Less: Ending work-in-process inventory	(19,380)
Cost of goods manufactured	$1,935,650

Working note:

Particular	Amount
Depreciation expenses – factory equipment	$33,550
Factory supervision	102,600
Factory supplies used	7,350
Factory utilities	33,000
Indirect labor	56,875
Miscellaneous production costs	8,425
Rent expenses – factory building	76,800
Maintenance expenses – factory equipment	35,400
Total manufacturing overhead	$354,000

Income statement

Particular	Amount $
Sales	$4,462,500
Less: Cost of goods sold	(1,966,510)
Gross profit	2,495,990
Less: Selling expenses:
Advertising expenses	$28,750
Depreciation expenses – selling equipment	8,600
Rent expenses – selling space	26,100
Sales salaries expenses	392,560
Less: General and administration:
Depreciation expenses – office equipment	7,250
Office salaries expense	63,000
Rent expenses – office space	22,000
Income before tax	$1,947,730
Less: Income tax	($233,725)
Net Income	$1,714,005

Working note:

Particular	Amount $
Cost of goods manufactured	$1,935,650
Add: beginning finished goods	167,350
Less: Ending finished goods	(136,490)
Cost of goods sold	$1,966,510

Financial Ratios

1. For raw material:

$\begin{array}{l}\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}\mathbf{}\mathbf{t}\mathbf{u}\mathbf{r}\mathbf{n}\mathbf{}\mathbf{o}\mathbf{v}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{R}\mathbf{a}\mathbf{w}\mathbf{}\mathbf{m}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{d}}{\mathbf{A}\mathbf{v}\mathbf{e}\mathbf{r}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{909}\mathbf{,}\mathbf{850}}{\frac{\mathbf{\$}\mathbf{166}\mathbf{,}\mathbf{850}\mathbf{+}\mathbf{\$}\mathbf{182}\mathbf{,}\mathbf{000}}{\mathbf{2}}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{909}\mathbf{,}\mathbf{850}}{\mathbf{\$}\mathbf{174}\mathbf{,}\mathbf{425}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{5}\mathbf{.}\mathbf{21}\end{array}$

$\begin{array}{c}\mathbf{D}\mathbf{a}\mathbf{y}\mathbf{\text{'}}\mathbf{s}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}\mathbf{=}\frac{\mathbf{E}\mathbf{n}\mathbf{d}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}}{\mathbf{R}\mathbf{a}\mathbf{w}\mathbf{}\mathbf{m}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{d}}\mathbf{\times }\mathbf{365}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{182}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{909}\mathbf{,}\mathbf{850}}\mathbf{\times }\mathbf{365}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{73}\mathbf{d}\mathbf{a}\mathbf{y}\mathbf{s}\end{array}$

1. For finished goods:

$$\begin{gathered} \begin{array}{c}\mathbf{Inventory}\mathbf{}\mathbf{turn}\mathbf{}\mathbf{over}\mathbf{}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{sold}}{\mathbf{Average}\mathbf{}\mathbf{in}\mathbf{}\mathbf{ventory}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{966}\mathbf{,}\mathbf{510}}{\frac{\mathbf{\$}\mathbf{167}\mathbf{,}\mathbf{350}\mathbf{+}\mathbf{\$}\mathbf{136}\mathbf{,}\mathbf{490}}{\mathbf{2}}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{966}\mathbf{,}\mathbf{510}}{\mathbf{\$}\mathbf{151}\mathbf{,}\mathbf{920}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{12}\mathbf{.}\mathbf{94}\end{array} \\ \begin{array}{c}\mathbf{Day}\mathbf{\text{'}}\mathbf{s}\mathbf{}\mathbf{sales}\mathbf{}\mathbf{in}\mathbf{}\mathbf{inventory}\mathbf{=}\frac{\mathbf{Ending}\mathbf{}\mathbf{inventory}}{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{good}\mathbf{}\mathbf{ssold}}\mathbf{\times }\mathbf{365}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{136}\mathbf{,}\mathbf{490}}{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{966}\mathbf{,}\mathbf{510}}\mathbf{\times }\mathbf{365}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{25}\mathbf{.}\mathbf{33}\mathbf{days}\end{array} \end{gathered}$$

The difference between the ratios of the two types of inventories exists because the inventory turnover ratio for raw materials reflects the company's efficiency in producing finished goods from raw materials. On the other hand, the finished goods inventory turnover ratio reflects the efficiency of the business in generating cash from the sale of finished goods.

Day’s sales in the raw materials inventory reflect the time the business entity takes to convert its raw material into finished goods. Day’s sales in the finished goods inventory reflect the time the business entity takes to convert the finished goods inventory into sales.