EXERCISE 1

Delta Mountain Supplies has been in business for three months.

The company was formed by two

outdoor enthusiasts to produce high quality sleeping bags, which can used in all kinds of weather

conditions. The owners of the company were well skilled in production and had developed an excellent relationship with a boutique store that specializes in selling outdoor equipment. The administration work and the accounting have been managed by the brother of one of the owner's. The brother had a business degree but no special training in accounting. The owners had just received the income statement for the latest quarter and were somewhat dismayed by the results. The company had almost reached its productive capacity for producing sleeping bags and most of them had been sold. Still, the income statement, presented in exhibit one, showed an operating loss for the quarter. Believing something was not correct, the owners have hired you to review the accounting information and to report back to them.

Exhibit One

Delta Mountain Supplies

Income Statement

For the Quarter ended, September 30th

During the quarter, the company completed 7,000 sleeping bags.

The owners completed a physical

inventory count and valuation on September 30th. The opening and closing inventory values are as follows:

July 1st September 30th

Raw materials inventory SO

Work-in-process inventory SO

$24,000

Finished goods inventory ISO

Sales (5,000 sleeping bags)		|$720,000
Operating expenses:
Selling and administrative salaries	$63,000
Travel for sales purposes	45,000
Advertising	98,000
Indirect labour costs	100,000
Raw materials purchased	220,000
Plant supplies	15,000
Direct labour cost	75,000
Plant maintenance	38,000
Depreciation, office equipment	13,000
Rent (90% for the plant, 10% for sales space) 50,000
Insurance (Plant only)	16,000
Depreciation, Plant equipment	65,000
Utilities (80% plant, 20% for sales operations) 32,000
Total operating expenses		810,000
Operating loss		$(90,000)

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