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THE BLANK MANUFACTURING CO.

Statement of Profit and Loss

Year Ended Dec. 31, 1918 Sales (less returns and allowances)

$625,275.00 Less Cost of Sales (Schedule “B-1")

439,429.40 Gross Profit on Sales.....

$185,845.60 Operating Expenses: Selling Expenses: Advertising

$12,575.00 Salaries of Salesmen.

30,250.00
Stable Expense...

2,000.00
Depr. on Horses, Wagons
and Harness...

1,500.00 Total Selling Expenses.....

46,325.00 General Expenses:

Office and Other Expenses . . 12,875.00
Office Salaries and Clerical
Force..

37,560.00
Depr. on Office Furniture 260.05
Loss on Doubtful Notes, 2% 258.12
Loss on Bad Debts, 2%

1,694.43 Total General Expenses...

52,647.60 Total Expenses..

98,972.60 Net Profit on Sales..

$86,873.00 Other Income:

Rent from Part of Business
Premises...

250 00 Gross Income...

$87,123.00 Deductions from Income: Interest and Discount.

2,118.83 Bond Interest...

5,000.00 Total Deductions.

7,118.83 Net Operating Income..

$80,004.17 Special Charges to Profit and Loss:

Organization Expense Writ-
ten off...

735.00
Bond Discount Amortized...

300.00 Total Special Deductions....

1,035.00 Profit for Period (To Surplus).

$78,969.17 Surplus, Jan. 1, 1918...

38,535.00 Less:

Dividend, July 1, 1918...... 22,500.00

Bond Interest Adjustment.. 2,315.07 24,815.07 13,719.93 Surplus, Dec. 31, 1918......

$92,689.10

Exhibit “B”

THE BLANK MANUFACTURING CO.

Statement of Cost of Goods Manufactured and Sold

Year Ended Dec. 31, 1918

Material:

Inventory, Raw Material, 12-31-17.
Purchases...

In-freight and Cartage.
Cost of Material Consumed.

Labor, Factory Pay Roll.. Prime Cost of Material Consumed..

$37,310.50 195,000.00

2,831.00 235,141.50 303,075.00

$538,216.50

Manufacturing Expenses:

Maintenance and Repairs....
Depreciation-

Machinery, 6%
Buildings, 22%
Taxes...

Insurance..
Total Manufacturing Expenses..

Deduct:

Inventory, Materials and Stock in Process

12-31-18.... Cost of Production..

Add:

Inventory, Finished Stock, 12-31-17......

Deduct:

Inventory, Finished Stock, 12-31-18..... Cost of Sales (To Exhibit "B"). ..

13,471.00

6,012.90 3,750.00 2,010.00 844.00

26,087.90 $564.304.40

59,875.00 $504,429.40

15,000.00 $519,429.40

80,000.00 $439,429.40

Schedule "B-1"

THE BLANK MANUFACTURING CO.

Comments on the Audit
For the Year Ended Dec. 31, 1918

1. ACCOUNTS RECEIVABLE The individual accounts receivable were verified by correspondence. The schedule of the accounts from the customers ledger was checked and it agreed with the controlling account in the general ledger. A fact to be noted, however, is that the total debit balances of customers' accounts amounted to $84,721.50, while there were credit balances amounting to $3,034.50. Instead of using the balance of the controlling account in the Balance Sheet, it was thought best to list the total debit balances among the current assets and to list the total credit balances among the current liabilities.

2. INVENTORIES The inventories were carefully checked and tested and found to be correct as stated. They were calculated at cost or market price, whichever was the lower. It would have been better had the inventory of "raw material" and "work in process" been separated, but for some unexplainable reason they were combined in one sum. This has no material effect upon the statements at this time. Hereafter, it would be better to state the inventory in three divisions:

(a) Raw Material.
(b) Work in Process.
(c) Finished Goods.

3. FIXED ASSETS All fixed assets are stated at cost less the depreciation provided for. Reserves for depreciation have been established for all of the fixed assets, except tools and implements, and office furniture, the practice having been to credit the Office Furniture account direct with the amount of depreciation, and to take a physical inventory of tools and implements annually.

4. RATES OF DEPRECIATION The rates of depreciation are considered approximately correct as stated. It is to be noted, however, that in the case of machinery, no provision has been made for obsolescence. Inasmuch as there is a likelihood of obsolescence with re to the machines in use before they have depreciated to scrap value, it might be well to take cognizance of it. The rate of depreciation is not sufficiently high to provide for this obsolescence.

5. AMORTIZATION OF BOND DISCOUNTS The method of amortizing the bond discounts which were set up at the time of the sale of the bonds is not scientifically correct but is reasonably accurate, and it is doubtful whether there would be any real value in changing the established procedure at this time.

6. BOND INTEREST At the end of the previous period, December 31, 1917, there should have been charged to Bond Interest the amount of the accrued interest from July 15 to December 31, 1917. This was not done, hence it was necessary to adjust the Surplus account because we could not charge more than $5,000.00 to the Bond Interest account for the year 1918, as the total interest on the bonds for the year would only amount to this sum.

7. INCOME AND EXCESS PROFIT TAXES It would be unwise to distribute the net profit for the year before provision has been made for Income and Excess-Profits Taxes. At least, a reserve for the estimated amount of such taxes should be set up before any action is taken regarding the distribution of profite.

8. SINKING FUND APPROPRIATION There is a provision to the effect that $15.000.00 must be apporpriated for the sinking fund before profits are distributed.

9. ADVERTISING This account represents expenditures in connection with the publication of a catalog and miscellaneous advertising matter, and, inasmuch as a physical inventory shows that a large part of this material is still on hand and unused, it was thought best to defer one-half of the cost to the next fiscal period. This advertising matter is to be used over a period of two years, and, inasmuch as both years will benefit from it equally, we have only charged off one-half of the cost of advertising to current expenses.

10. ORGANIZATION EXPENSES Investigation showed that there were organization expenses amounting to $7,350.00 that had not been charged off. The policy of the company has been to charge off 10 per cent of the balance of this account annually. While it might be more conservative to charge this off over a shorter period of time, yet in the face of the fact that there is no doubt but that the first ten years will benefit from these expenditures, there can be no harm in apportioning them over this period of time.

11. GOOD WILL At the time the corporation was formed the business of a partnership was in part taken over. The corporation was forced to pay a sum of $75,000.00 on account of the good will of the partners. This valuation was based largely upon the value of a trade name and other intangible assets. Inasmuch as the account, therefore, represents an actual investment, it would seem that there can be no criticism in permitting it to stand on the books of account. While it might be con. servative practice to write off the account proportionately over a period of years, yet this is a financial matter to be decided by the management. It is to be noted that instead of classifying it among the assets in the Balance Sheet, we have deducted it from the net worth of the concern.

Since we have been asked to express our opinion in the matter, we believe that it would be wise to install a Cost Accounting system which should connect with the general accounting records, and would enable the management to determine costs accurately and thereby determine selling prices in an intelligent manner instead of a more or less arbitrary manner as at present. The material and stock records, if kept properly, would also enable the chief accountant to furnish monthly comparative statistics and interim financial statements that would prove of great benefit to the executives in making their plans, and would enable them to know just where they stand at all times.

In conclusion, we are desirous of expressing our appreciation of the cooperation rendered us during the period of the audit, and we also desire to state that the books of account have been kept accurately and neatly, which, of course, aided materially in completing the audit promptly.

Respectfully,
(Signed) J. F. SHERWOOD,

C.' P. A.

A. THEORY QUESTIONS What is meant by a qualified certificate? Give an illustration of a case in which a qualified certificate might properly be given and draft a qualification applicable to that case.

Inst. Ex. 1917. 2. What are the essentials of an audit certificate in an audit for credit purposes?

Inst. Ex. 1917. 3. Draft a form of audit certificate to accompany a Balance Sheet which is to be published in the annual report of a corporation.

Inst. Ex. 1918. 4. Draw up an outline of a report on your audit of the accounts of a corporation that has recently erected a large apartment house. Assume your instructions covered the period of erection and at least one year of operation.

Inst. Ex. 1918. 5. Give your opinion of the following form of certificate to a Balance Sheet:

"I have examined the above Balance Sheet and certify that it
is in accordance with the books of the Company."
(Signed) CHARLES E. WILSON

C. P. A. III. 6. If employed by the officers of a corporation to make an audit, would you make any difference in your plans and in your report if you knew whether the audit was to be presented to a prospective purchaser of the stock, to a prospective purchaser of bonds, to the bank as a basis for the purpose of securing a loan, or to the stockholders at their regular annual meeting? If so, state the differences.

C. P. A. Mich.

B. ACCOUNTING PROBLEMS I. From the following accounts appearing on the Trial Balance, prepare without using figures, statements which you consider best calculated to set forth the operations of the year and the financial position at December 31, 1916, assuming that you are preparing these statements on behalf of a bank which desires paper available for rediscount with the federal reserve bank. Accounts payable

Discount allowed on sales Accounts receivable

Discount rec'd. on purchases Advertising

Doubtful accounts receivable Buildings

Factory expense Capital stock

Finished goods inv. 12-31-15 Capital stock unsubscribed Freight and cartage inward Cash on deposit

Freight and cartage outward Commissions paid salesmen

Fuel Depreciation buildings 1916 Good will Depreciation machinery 1916 Insurance bldgs. and mach.

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