ChandraBebby sets up Bendigo Fencing Company tomanufacture, sell and install fencing material. He was an engineer by profession but he understood the importance of accounting information and kept his accounting records meticulously throughout the year. At the end of the year he prepared the following income statement for the year:
Bendigo Fencing Company
Income Statement
for the year ended 30 June, 2015
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Sales
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45,450
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Less Operating expenses:
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|
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Purchase of Raw Material
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$20,000
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|
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Purchase of factory supplies
|
1,000
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|
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Wages of the factory employees (who worked directly on the factory)
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1,000
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|
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Wages for other factory employees
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1,000
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|
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Painting department supervisor's salary
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7,500
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Painter
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500
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Managers' salary
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4,000
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|
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Office staff salaries
|
1,000
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|
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Sales Staff salaries
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2,200
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|
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Advertising
|
1,000
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|
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Administrative Expenses
|
800
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|
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Marketing and distribution costs
|
500
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|
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Sales commission
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500
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Rent
|
2,500
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|
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Electricity
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450
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|
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Purchase of factory equipment
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14,000
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|
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Purchase of Office Equipment
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1,000
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|
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Purchase of Sales vehicles
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1,500
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|
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Total Operating expenses
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60450
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Net Loss
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$(15000)
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Although disappointed, Chandra was not surprised. He knew that expenses were higher than sales because, throughout the year, he had been unable to generate a cash surplus. His bank overdraft had blown out and his bank manager has asked him to present his financial statements for 2015 to the bank.
Required:
You are asked to:
1. Review the performance of Bendigo Fencing Company in 2014 and make a recommendation as to whether Chandra's overdraft facility should be cancelled.
2. Prepare a report for Chandra explaining the errors he made in his income statement.
To perform this analysis you will need to recast Chandra's income statement. The following information may be useful:
• At 30 June 2015, the following inventories existed:
Raw Material $2,000
Work in Process $4,000
Finished Goods $5,150
• The factory occupies 70 per cent of the rented building, the sales area 25 per cent and the administration area 5 per cent.
• All the company's fixed assets are estimated to have a useful life for 7 years and no salvage value at the end of their life.
• Chandra spends 60 per cent of his time as factory manager and spends the remaining time equally on sales and general administration.
• Electricity costs are consumed 70% by the factory and 30% by the office.