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Evaluate and discuss the following types of transactions

Consider the following cost items:

1. Current year depreciation on a ship owned by a cruise line.
2. The cost of chemicals and paper used during the period by a producer of film products.
3. Assembly line wage cost incurred by a bicycle manufacturer.
4. Year-end production in process of a computer manufacturer.
5. The cost of products sold to customers of a department store.
6. The cost of products sold to distributors of a carpet manufacturer.
7. Salaries of players on a professional baseball club.
8. Year-end completed goods of a clothing manufacturer.
9. Executive compensation costs of mass-market retailer.
10. Advertising costs of an electronics manufacturer.
11. Costs incurred during the period to insure a manufacturing plant against fire and flood losses.


1. Evaluate the costs just cited, and determine whether the associated dollar amounts would be found on the firm's balance sheet, income statement, or schedule of costs-of-goods-manufactured. (note: In some cases, more than one answer will apply)
2. What major asset will normally be insignificant for service enterprises and relatively substantial for retailers, wholesalers, and manufacturers? Briefly discuss.
3. Briefly explain the major differences between income statements of service enterprises versus those of retailers, wholesalers, and manufacturers.
4. Picture the operations of a firm such as Comet Computer, one that is involved in direct sales and mass customization of products. What would be the major difference in the balance sheet of this type of organization versus the balance sheet of a company that engages in more traditional manufacturing activities, that is, producing goods and waiting for customer orders to arrive?

Solution Preview

The first part of this problem is designed to get you to think about what costs (expenditures might be a better word) go into a company's inventories and/or cost of goods sold - if they are NOT a merchandiser or a manufacturer, this is not relevant. So for the first cost item, depreciation on a ship would not be a part of cost of goods sold or cost of goods manufactured because the cruise line is not selling or manufacturing the ship.

The second one, cost of chemicals is probably going to go into the manufacturing cost of film products, so it will be part of the company's Cost of Goods Manufactured. HOWEVER, from there, it goes into the balance sheet as inventory:

Using the formula:

Solution Summary

The 469 word solution plus the excel presentation fully explain the effects of the various transactions listed in the problem.