Phillips Income Statement

P1-5A Phillips Company is a manufacturer of computers. Its controller resigned in October 2014. An inexperienced assistant accountant has prepared the following income statement for the month of October 2014.


Income Statement

For the Month Ended October 31, 2014

Sales (net)                    $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 2014, 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           16,000 14,000

Finished goods 30,000 45,000

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.


(a) Prepare a schedule of cost of goods manufactured for October 2014.

(b) Prepare a correct income statement for October 2014.

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