Booker Jones Essay

1120 WordsMay 5, 20125 Pages
1) Calculate the effect on the financial statements in Tables 1 and 2 if the accounting system were changed to incorporate the cost of barrels ($31.50 each) into the inventory accounts. a. What would pretax profit be in 1961? Booker Jones “other operating costs” increased from 1960 to 1961 primarily because of the cost of the barrels used, the occupancy costs and the warehousing costs. This is understandable because Booker Jones decided to increase production which would require 20,000 more barrels. If the cost of barrels is $31.50, then these 20,000 barrels would have cost $630,000. This is precisely why the cost of barrels used went up from 1960 to 1961. If these barrels were not considered an “Other Operating Cost” but instead…show more content…
This would make the total inventory go up $6.05M and would go up by this amount as well. iii. The operating statement for 1960? The retroactive change would have “no effect” on the income statement of 1960. The calculations required for question 1 are not massive (it takes more thinking than pencil‐pushing). Working those calculations will help solidify your understanding of the relationship between inventory and cost of goods sold in a manufacturing company. You’ll know you’re on the right track if you conclude that the answer to part b(3) is “no effect.” 2) Do you believe that Jones went from a profit in 1960 to a loss for 1961, despite the fact that sales were the same and production increased? I do not belief Jones went from a profit to a loss from 1960 to 1961. Jones is simply investing in his future business by increasing production today so that he can increase his revenue a few years down the line. If he had decided not to increase production, his profits would have been very comparable to the year before. Therefore, he chose to invest at a time when he had ample cash in the bank, increasing receivables, etc. Nothing has really changed except a strategic decision to increase production in the hopes of chasing future sales numbers. 3) What method of accounting would you recommend that
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