Full file at https://testbankuniv.eu/Accounting-for-Decision-Making-and-Control-8th-Edition-Zimmerman-Solutions-Manual Chapter 02 - The Nature of Costs
Case 2–1: a.
Solution to Old Turkey Mash (50 minutes) [Period versus Product Costs]
This question involves whether the costs incurred in the aging process (oak barrels and warehousing costs) are period costs (and written off) or product costs (and capitalized as part of the inventory value). The table below shows the effect on income of capitalizing all the warehousing costs and then writing them off when the whiskey is sold.
Revenues less: Cost of Goods Sold: bbls distilled @ $100/bbl Oak barrels Warehouse rental Warehouse direct costs Net Income before taxes Income taxes (30%) Net Income after taxes Increase in income from capitalizing aging costs
Base Year
Year 1
Year 2
Year 3
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$1,000,000 750,000 1,000,000 2,500,000 $ 750,000 225,000 $ 525,000
$1,000,000 750,000 1,000,000 2,500,000 $ 750,000 225,000 $ 525,000
$1,000,000 750,000 1,000,000 2,500,000 $ 750,000 225,000 $ 525,000
$1,000,000 750,000 1,000,000 2,500,000 $ 750,000 225,000 $ 525,000
$000
$203,000
$504,000
$903,000
Since all the additional expansion costs are now being capitalized into inventory, profits are higher by the amount of the capitalized costs less the increase in taxes. b.
The present financial statements based on treating aging cost as period costs show an operating loss. This loss more closely represents the operating cash flows of the firm. Unless the bank is dumb, the bank will want to see a statement of cash flows in addition to the income statement. If the firm computes net income with the aging costs treated as product costs, net income is higher. But is the banker really fooled? If the firm is able to sell the additional production as it emerges from the aging process, then the following income statements will result for years 3 to 10:
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Full file at https://testbankuniv.eu/Accounting-for-Decision-Making-and-Control-8th-Edition-Zimmerman-Solutions-Manual