Please explain to me how this COGS calculation that I found in a document published on this site can be correct. Here is the information:

The Snap-It-Open Corporation incorporated and began operations on January 15 of the current year. Its address is 3701 Commerce Drive, Baltimore, MD 23239. Its employer identification number is 69-7414447. It elects to file its initial tax return as a calendar-year corporation and uses the accrual method of accounting. It elects the FIFO method of inventory valuation.

Jason Sprull (SSN 333-33-3333) and Martin Winsock (SSN 555-55-5555) formed the business. They each contributed $250,000 cash for 50 percent of the 100,000 shares of $1 par value stock issued and outstanding.

The company was formed to assemble and market a unique, compact, snap- open umbrella and its business activity code is 339900. These umbrellas are sold to a variety of organizations as premiums. The company purchases the umbrella frames and several types of waterproof fabric for the umbrella material and covers from various manufacturers. It prints the organizations advertising logos or other designs on the umbrella material and covers. It then assembles these on the umbrella frames for delivery to the customer along with the covers.

On January 16, the company placed in service two new machines that they had purchased for $250,000 each for printing and cutting the fabric for the umbrellas and two used umbrella assembly machines purchased for $200,000 each. The company obtained a bank loan of $750,000 secured by the machines. Jason and Martin were required to personally guarantee this loan that has an 8 percent annual interest rate on the unpaid balance. The first principal and interest payment of $160,000 is not due until January 16 of next year.

During the year, the company purchased $250,000 of fabric and $310,000 of umbrella frames. It returned one order of frames valued at $5,000 because of a defect in the snap-open mechanism and received a cash refund for that amount.

Both Jason and Martin worked full-time in the business. Jason was the sales- person for the company and Martin managed the office and the printing and assembly operations. Each received a salary of $60,000 for the year. They had six employees with the following incomes for the year: $45,000 for an accountant; $21,000 for a receptionist; $28,000 for each of two print machine operators; and $25,000 for each of two assembly machine operators. There are no accrued salaries or taxes as of the end of the current year. FUTA taxes are assessed on the first $7,000 of wages at a rate of 6.0 percent.

During the year, the company had $1,935,000 in umbrella sales and collected $1,430,000 on these sales. They also paid the following expenses in cash:

As an accrual-basis taxpayer, the company recognized $57,500 in interest expense on the note ($750,000 .08 11.5/12) and established an allowance account for bad debts equal to two percent of sales.

They recognized depreciation expense for financial accounting equal to 10 percent of the purchase price for the new printing machines and 12.5 percent of the purchase price for the used assembly machines.

Their inventory at year-end consisted of $65,000 of fabric and $68,000 of umbrella frames based on the FIFO inventory method. (For simplicity, you are only required to allocate the factory salaries to the calculation of cost of goods sold.)

The company made estimated tax payments of $40,000 for the year.

Part A: Following are the before-tax financial accounting income statement and balance sheet for Snap- It-Open Corporation as of December 31, 2013

Snap-It-Open Corporation Income Statement

For the Year Ending December 31, 2013

Sales Revenue		$1,935,000
Cost of Goods Sold (1)		428,000
Gross Profit on Sales Expenses:		$1,507,000
Salaries and Wages	$186,000
FICA/FUTA (2)	25,698
Rent	240,000
Repairs and Maintenance	20,000
Utilities	80,000
Taxes and Licenses (excluding FICA and FUTA taxes)	10,000
Health Insurance	16,000
Advertising	40,000
Travel (excluding meals)	20,000
Meals and Entertainment	15,000
Group Term Life Insurance	2,000
Depreciation (3)	100,000
Interest Expense	57,500
Bad Debt Expense (4) Total Expenses	38,700	850,898
Net Income Before Tax		$656,102

(1) Cost of Goods Sold:

Beginning Inventory	0
+ Purchases	$360,000
- Purchase Returns	(5,000)
- Ending Inventory	(33,000)
+ Factory Salaries	106,000
Cost of Goods	$428,000

(2) FICA = $292,000 x .0765 = $22,338 FUTA = 8 x $7,000 x .06 = 3,360

Total $25,698

(3) Depreciation: ($500,000 x .10) + ($400,000 x .125) = $100,000