Quiz 8: Bridge Water Castings
PART (A) "Other operating cost" of Booker Jones increased from 1960 to 1961 majorly because of the price of the barrels used, the costs of warehousing and costs of occupancy. This is understandable as the company decided to increase the production that would need 20,000 more barrels. Now if the cost of a barrel is $31.50, then these additional 20,000 barrels would cost $630,000. This is the main reason why the barrels cost went up from 1960 to 1961. If these barrels were considered as the inventory and not as "other operating costs" then it would be moved out of the statement of income and would only be mentioned in the income statement when whisky was sold in later years. At that time barrels would be the sold whisky cost and not "other operating costs". As a result of taking this out of the income statement, the net profit before tax ( pretax profit ) would be . PART (B) i) Balance sheet at the 1960 year end If the retroactive changes are made in 1959, then the balance sheet of 1960 would look different. Mostly the balance sheet in 1959 would not show the inventory for barrels while the balance sheet of 1960 would account for the barrels inventory. On July 31, 1959, the number of whisky barrels was 172,000 at the cost of $31.5 for $5.4 million of total inventory. Thus, the balance sheet of 1960 would see the inventory rise by $5.4 million. Subsequently, this asset class would rise with no simultaneous increase in the shareholders equity; liabilities would rise by the similar amount. ii) Balance sheet at the 1961 year end As discussed in 1961, the company would increase the barrel numbers in the inventory from 172,000 to 192,000 per operation statements. Assuming that apart from the increase in the production the barrel numbers in the stock remains as it is, this would lead to the barrel inventory of . This would lead the inventory to go up by $6.05 million and would go up by the same amount as well. iii) Operating statement of 1960 The backdated change would not have any effect on the income statement of 1960.
No, it is not believed that Jones went from the profit to loss from 1960 to 1961. He is merely investing in the upcoming future business by increasing the production at present so that he can increase the revenue by a few years. If he is certain not to increase the production, then his profits would be comparable to the last year. Thus, he has chosen to invest at the time when he had enough cash in his bank account, rising receivable etc. Nothing has changed really except the strategic decision for increasing the production hoping to change the sales numbers of future.
Person J should capitalize the number of barrels and then put them in the stock or the inventory. This will make the numbers of financial accounting look like more portable because the loss is getting changed in profit and is arguably a much better reflection of the economics of business.