Question

Swift Company was organized on March 1 of the current year. After five months of start-up losses, management had expected to earn a profit during August. Management was disappointed, however, when the $310,000 income statement for August also showed a loss. August's income statement follows:
After seeing the $12,000 loss for August, Swift'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
Chapter 1
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. By the way, I don't see any reason to look for a new controller. We'll just limp along with Sam for the time being."
The company's controller resigned a month ago. Sam, a new assistant in the controller's office, prepared the income statement on the prior page. Sam has had little experience in manufacturing operations. Inventory balances at the beginning and end of August were:

The president has asked you to check over the income statement and make a recommendation as whether the company should look for a buyer for its assets.
Required:
(b) As a second step, prepare a new income statement for August.

Answer 1

A new income statement for August for Swift company is shown below.

Also, since the president has asked you to check over the income statement and make a recommendation as to whether the company should look for a buyer for its assets.

My recommendation would be to not buy.

                                            Swift Company

                                         Income Statement

                               For the Month Ended August 31

Particulars                                                   Amount (in $)    Amount (in $)

Sales ..............................................................                          450,000

Cost of goods sold:

Finished goods inventory, August 1 ...............  40,000

Add: Cost of goods manufactured ................. 310,000

Goods available for sale ................................ 350,000

Deduct: Finished goods inventory, August 31.. 60,000             290,000

Gross margin ..................................................                         160,000

Selling and administrative expenses .................                      142,000

Net operating income......................................                           18,000

Sam failed to distinguish between product costs and period costs when preparing the August income statement, and he also failed to recognize changes in inventories between the beginning and end of the month.

Once these errors are corrected, the company's financial situation looks much better, and selling the company may not be a good idea.

Hence, my recommendation would be not to buy.

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