Problem - Kirsoff company makes ebook readers. The company had the following amounts at the beginning of 2011 cash $660,000; Raw materials inventory, $51,000; work in process inventory, $18,000; finished goods inventory, $43,000; common stock, $583,000; and retained earnings, $189,000. kirsoff experienced the following accounting events during 2011. Other than the adjusting entries for depreciating, assume that all transactions are cash transactions.
1. Paid $23, 000 of research and development costs.
2. Paid $47,000 for raw materials that will be used to make ebook readers.
3. Placed $83,000 for raw materials cost into the process of manufacturing ebook readers
4. Paid $60,000 for salaries of selling and administrative employees
5. Paid 91,000 for wages of production workers
6. Paid $90,000 to purchase equipment used in selling and administrative offices
7. Recognized depreciation on the office equipment. The equipment was acquired on January 1, 2011. It has a $10,000 salvage value and a five year life. The amount of depreciation is computed as [(cost-salvage)/useful life]. Specifically ($90,000-$10,000)/5=$16,000
8. Paid $165,000 to purchase manufacturing equipment
9. Recognized depreciation on the manufacturing equipment. The equipment was acquired on January 1, 2011. It has a $25,000 salvage value and a 7 year life. The amount of depreciation is computed as [(cost-salvage)/useful life]. Specifically, ($165,000-$25,000)/7=$20,000
10. Paid $45,000 for rent and utilities cost on the manufacturing facility.
11. Paid $70,000 inventory holding expense for completed ebook readers (rental of warehouse space, salaries of warehouse personnel, and other general store cost).
12. Completed and transferred ebook readers that had a total cost of $240,000 from work and process inventory to finished goods
13. Sold 1000 ebook readers for $420,000
14. It cost kirsoff $220,000 to make the ebook readers sold in event 13
Required -
a. Show how this events affected the balance sheet income statement and statement of cash flows by recording them in a horizontal financial statement model
b. Explain why kirsoff recognition of cost of goods sold had no impact on cash flow
c. Prepare a schedule of cost of goods manufactured and sold, a formal income statement, and a balance sheet for the year
d. Distinguish between the product cost and the upstream cost that kirsoff incurred.
e. The company president believes that kirsoff could save money by buying the inventory that it currently makes. The warehouse manager said that it would not be a good idea because the purchasing price of $230 per unit was above the $220 average cost per unit of making the product. Assuming the purchase inventory would be available on demand, explain how the company could be correct and why the production manager could biased in his assessment of the option to buy the inventory.