Part A:

Stars, Inc. is a manufacturing company that has made toys for children for three years. The CEO Mr. Jones is very frustrated with the company's performance and has hired Mr. Kaye as the company's new accountant. Mr. Jones provides the following information to Mr. Kaye. Year 1 Year 2 Year 3 Sales in units 60,000 40,000 40,000 Production in units 60,000 50,000 60,000 Price $ 10 10 10 The company's variable manufacturing cost (including direct materials, direct labor, and variable manufacturing overhead) is $5 per unit. Fixed manufacturing overhead is $120,000 per year. The variable selling and administrative expense is $1 per unit and the fixed selling and administrative expense is $100,000 per year. The company uses the LIFO (last-in first-out) inventory flow assumption that the newest units in inventory are sold first. After reviewing all information provided, Mr. Kaye prepared one income statement for Mr. Jones, with the purpose of discovering the existing problems within the company and gathering information for future decision making.

Required:

a. Prepare the same income statement Mr. Kaye has provided for Mr. Jones. (5 marks)

b. Mr. Jones realizes that there are two types of income statements and each gives different values for Net Operating Income. Please show how to reconcile the differences in Net Operating Income between the two income statements. (5 marks)

c. After reviewing all the information provided, Mr. Kaye also raised some concerns with the numbers from the income statement he has prepared for Mr. Jones. Explain his concerns. (5 marks)