A colleague of yours has been reviewing the second-quarter income statements for a number of companies and is questioning a number of the expense items included in the statements. For each of the following independent questions, provide a written response to your colleague’s questions.1. A footnote accompanying Company A’s second-quarter income statement states that $360,000 was expended on research and development during the quarter on activities that should benefit operations over the next 24 months. Why does the second quarter reflect an expense of $120,000 rather than $15,000?2. Company B reported pretax income in both the first and second quarters, and the statutory tax rate during those periods and for the balance of the year is 30%. Assume that there were no net operating losses in prior years for tax purposes. However, both of the quarters reported an effective tax rate of less than 30%. What could possibly explain this?3. Assume the same facts as in part (2) except that the company only began operations last year, and it reported a net operating loss for both accounting and tax purposes last year. How might this fact explain why the first two quarters of the current year reported an effective tax rate of less than 30%?4. Company C is subject to a progressive tax rate schedule whereby additional amounts of income are taxed at increasing rates. The recognition of revenues and expenses for accounting purposes and tax purposes is exactly the same, and no tax credits are available. Why would the effective tax rate for the second quarter be lower than for the first quarter of the current year?5. Company D reported taxable income in the prior two years but reported tax losses in the first two quarters of the current year. The recognition of revenues and expenses for accounting purposes and tax purposes is exactly the same, and no tax credits are available. A tax loss is predicted for the current year. The statutory rate was 25% in the prior two years, but it is 30% in the current year. The effective annual tax rates in the first and second quarters of the current year are 18% and 28%, respectively. What might explain why the second-quarter effective tax rate is greater than the first quarter and that of the prior two years but less than 30%?6. Company E is a distributor that has experienced increasing costs for units of inventory due to a severe shortage of available goods. Furthermore, the shortage has resulted in the company selling more goods in the first six months of the current year than it had purchased. Given the use of LIFO, why wouldn’t the current year-to-date cost of sales on a per-unit basis have decreased?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
A colleague of yours has been reviewing the second-quarter income statements for a number of companies and is questioning a number of the expense items included in the statements. For each of the following independent questions, provide a written response to your colleague’s questions.
1. A footnote accompanying Company A’s second-quarter income statement states that $360,000 was expended on research and development during the quarter on activities that should benefit operations over the next 24 months. Why does the second quarter reflect an expense of $120,000 rather than $15,000?
2. Company B reported pretax income in both the first and second quarters, and the statutory tax rate during those periods and for the balance of the year is 30%. Assume that there were no net operating losses in prior years for tax purposes. However, both of the quarters reported an effective tax rate of less than 30%. What could possibly explain this?
3. Assume the same facts as in part (2) except that the company only began operations last year, and it reported a net operating loss for both accounting and tax purposes last year. How might this fact explain why the first two quarters of the current year reported an effective tax rate of less than 30%?
4. Company C is subject to a progressive tax rate schedule whereby additional amounts of income are taxed at increasing rates. The recognition of revenues and expenses for accounting purposes and tax purposes is exactly the same, and no tax credits are available. Why would the effective tax rate for the second quarter be lower than for the first quarter of the current year?
5. Company D reported taxable income in the prior two years but reported tax losses in the first two quarters of the current year. The recognition of revenues and expenses for accounting purposes and tax purposes is exactly the same, and no tax credits are available. A tax loss is predicted for the current year. The statutory rate was 25% in the prior two years, but it is 30% in the current year. The effective annual tax rates in the first and second quarters of the current year are 18% and 28%, respectively. What might explain why the second-quarter effective tax rate is greater than the first quarter and that of the prior two years but less than 30%?
6. Company E is a distributor that has experienced increasing costs for units of inventory due to a severe shortage of available goods. Furthermore, the shortage has resulted in the company selling more goods in the first six months of the current year than it had purchased. Given the use of LIFO, why wouldn’t the current year-to-date cost of sales on a per-unit basis have decreased?
‘’Since you have asked multiple question, we will solve the first question for you. If you want any specific question to be solved then please specify the question number or post only that question.’’
The company's financial statement will be prepared to know about the profitability position, and the liquidity position of the company. The profitability position of the company can be arrived from the income statement. All the revenues, and expenses of the company will be recorded in the income statement, and the expenses will be deducted from the revenue to arrive at the profits of the company.
The balance sheet of the company will show the liquidity position of the company. The investors will look into the liquidity position before investing or lending to the company. This is because, if the company has more liquidity then there will be a guarantee for the lenders, and investors that they will get their money back. The company should follow accrual concept, and matching concept while preparing the financial statements.
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