Notes to Financial Statements

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Southern New Hampshire University *

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Apr 3, 2024

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Southern New Hampshire University ACC- 308- Intermediate Accounting II February 2, 2023

Peyton Approved Notes to Financial Statements NOTE 1 - MANAGING DEPRECIATION For the equipment, Peyton Approved uses the straight-line depreciation method. The straight-line method allocates an equal amount of an asset’s depreciable cost to depreciation expense for each period of the asset’s service life (Wahlen et al., 2017). The 2017 balance sheet and income statements and 2018 pro forma statements can be viewed for depreciation expenses. On December 3, 2017, a mixer with a value of $2,000 was broken. This reduced the baking equipment assets from $14,000 to $12,000. The accumulated depreciation at the time of the accident was reduced by $1,200, ending the year from $1604.44 to $406.44. According to the 2017 Balance sheet, the net fixed assets is $11,593.56. For the new location, the 2018 proforma will show that baking equipment was purchased at the beginning of 2018 for $15,000. It has no residual value with a seven-year lifespan. $2,142.86 was expensed for a full year of depreciation, bringing the end of 2018 to $12,857.14 as the net fixed assts value. NOTE 2 – MANAGING SUPPLIES For baking supplies, Peyton uses LIFO and the periodic system. LIFO stands for Last In, First Out. The LIFO cost flow assumption results in the most recent costs incurred being allocated to cost of goods sold, while the earliest (and oldest) costs are allocated to ending inventory (Wahlen et al., 2017). With using a periodic inventory system, a physical count of supplies is done periodically, at least once a year. This allows the company to know what is physically on hand and how much was used or sold during the period. Baking supplies can be

compared using the 2017 balance sheet and 2018 pro forma balance sheet. The cost of goods sold can be compared using the 2017 income statement and 2018 pro forma income statement. NOTE 3 – MANAGING INVENTORY As supplies, inventory uses the same LIFO and periodic inventory system. Baking supplies and different inventory accounts are all included under inventory as assets on the 2017 balance sheet and 2018 pro forma balance sheet. NOTE 4 – MANAGING LONG-TERM DEBT Peyton Approved has a notes payable that is shown on the 2017 balance sheet and 2018 pro forma balance sheet under long-term liabilities. A company classifies an item as a long-term liability if the obligation is not expected to be repaid within one year of the balance sheet date or the current operating cycle whichever is longer (Wahlen et al., 2017). For the new location, the $15,000 equipment purchase was financed with a long-term note as well as an additional $5,000. Using the straight-line method, the $15,000 is depreciated over a seven-year life span with no residual value.

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REFERENCE: Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting and analysis (2nd ed.). Boston, MA: Cengage Learning.