PROBLEM 2-6 Preparing Financial Statements for a Manufacturer [LO5 - CC9, 10; LO6 - CC11, 12] Gallup Enterprises was organized on March 1 of the current year. After five months of startup losses, management had expected to earn a profit during August, the most recent month. Management was disappointed, however, when the Income statement for August also showed a loss. August's Income statement follows: GALLUP ENTERPRISES Income Statement For the Month Ended August 31 Sales

$920,000 Less: Operating expenses:

Indirect labour cost $ 19,000

Utilities 45,000

Direct labour cost 120,000

Depreciation, factory equipment 34,000

Raw materials purchased 402,000

Depreciation, sales equipment 18,000

Insurance 28,000

Rent on facilities

140,000

Selling and administrative salartes 38,000

Advertising 95,000 939,000 Net loss

S(19.000) The company's controller resigned a month ago. Hilda, a new assistant in the controller's office, prepared the income statement above. Hilda has had little experience in manufacturing operations. After seeing the $19,000 loss for August, Gallup's president stated, "I was sure we'd be profitable within six months, but our six months are up and this loss for August is even worse than July's. I think it's time to start looking for someone to buy out the company's assets if we don't, within a few months there won't be any assets to sell." Additional information about the company follows: a. Approximately 70% of the utilities cost and 40% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities. b. Inventory balances at the beginning and end of August were as follows:

August T August 31 Raw materials $51,000 $88,000 Work in process 28,000 34,000 Finished goods 50,000 55,000

c. Only 60% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities. The president has asked you to check over the income statement and make a recommendation about whether the company should look for a buyer for its assets.