The cost of the goods sold and the expenses incurred in selling them must next be accumulated. The first item, of course, is the raw material used in the manu facturing operations. At the beginning of the year there was on hand raw material to the amount of $13, 500. The firm purchased $200,000 worth of material on which they received a trade discount of $4,000. At the end of the year there remains $16,750 in raw ma terial. In other words, $192,750 worth of raw ma terial has been taken out of stock for manufacturing purposes. To this material there was applied $240, 000 worth of services for which the firm has paid, and $3,000 worth for which they have not yet paid. The superintendent's salary was $10,000, while the factory light, heat and power, inclusive of accrued but unpaid items, amounted to $21,000.
The amount of supplies consumed in manufactur ing operations is made up of the total of the inventory on hand at the beginning of the year, plus the pur chases during the year; from which must be taken the inventory at the end of the year. The actual amount of insurance that has expired during the year, plus the charges for freight brought to the factory, the sundry fagtory expenses and the taxes on land and buildings, together with depreciation on the production assets used in the manufacturing process, make up the total charge against manufacturing for the year.
From this manufacturing cost must be taken the value of goods in process at the end of the year. If an inventory of goods in process had been made at the beginning of the year, the value of those goods would have been added to the manufacturing charges for the year before the value of the goods in process at the end of the year was deducted. After the cost value of un finished goods has been eliminated, there remains a bal ance of $489,122, which is the cost of goods completed during the year.
Of course, not all these goods were sold, and there were some goods on hand at the beginning of the year; consequently, from the cost of the goods manu factured during the year the firm deducts the value represented by the excess of the goods on hand at the end of the year over the goods on hand at the begin ning of the year. This is simply another way of recording inventory adjustments. If there are more goods on hand at the end of the year than there were at the beginning of the year, it is evident that the cost of the goods manufactured during the year is not the total cost of the goods sold during the same period.
Therefore, in order to determine the cost of the goods sold, the cost of whatever goods have been added to the stock during the year must be deducted from the manufacturing cost.
In this way an item of $487,822 is obtained, which represents the cost of the goods sold. Before the profit on sales can be determined, the selling expenses must be accumulated. Therefore, the following items are set off separately: packing material, less the value of the amount on hand at the end of the year; sales men's traveling expenses; advertising, less the pre paid portion; commissions paid and accrued; and freight on sales, amounting to $15,050. When the manufacturing cost is added, the total is $502,872, , which represents the selling cost of the goods. This amount is deducted from the net sales, and the bal ance is $55,628, "trading" profit.
From this sum must be deducted the administrative expenses, such as office salaries, paid and accrued, office light and heat, stationery, general expenses, expired insurance and depreciation on furniture and fixtures. This leaves us an ordinary business profit of $28,128.
This business profit must be adjusted to include the results of financial transactions and deductions from income. Consequently the cash discount is added, and the total is $30,928, the gross income from all sources. The deductions from income, such as cash-discount loss and loss expected on account of bad debts must be subtracted. The net income is then, $23,628.
14. Proprietor's the proprietor had furnished all the money required to start and operate this business, the net income would belong entirely to him. But he was apparently unable to finance his proposition and had to borrow $15,000. Conse quently he must share his income with the other in vestors in the business. He gives them their shares, which are fixed by contract, and retains the balance. Thus, the distribution of net income is made up of $750, which is paid to the mortgagor, and $22,878, which belongs to the owner. Unless the owner draws out this profit, his capital now becomes increased by the amount of profits made for the year.