EXERCISE 1 MIDTERM-40% 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 Sales (5,000 sleeping bags) 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) Depreciation, Plant equipment 6,000 65,000 Utilities (80% plant, 20% for sales operations) 32,000 Total operating expenses Operating loss $720,000 810,000 $(90,000) 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 $0 $30,000 $24,000. Finished goods inventory $0 ? Required: 1. Describe two conceptual errors that the "accountant" made in preparing the income statement shown in exhibit one 2. Prepare a schedule of the cost of goods manufactured for the quarter ending September 30th. 3. Prepare a corrected income statement for the quarter.