BIKE Company starts with $3,000 cash to finance its business plan of producing bike helmets using a simple assembly process. During the first month of business, the company signs sales con- tracts for 1,300 units (sales price of $9 per unit), produces 1,200 units (production cost of $7 per unit), ships 1,100 units, and collects in full for 900 units. Production costs are paid at the time of production. The company has only two other costs: (1) sales commissions of 10% of selling price when the company collects from the customer, and (2) shipping costs of $0.20 per unit paid at time of shipment. Selling price and all costs per unit have been constant and are likely to remain the same. Required: a. Prepare comparative (side-by-side) balance sheets and income statements for the first month of BIKE Company for each of the following three alternatives: (1) Revenue is recognized at the time of shipment. (2) Revenue is recognized at the time of collection. (3) Revenue is recognized at the time of production. Note: Net income for each of these three alternatives is (1) $990, (2) $810, and (3) $1,080, respectively. b. The method where revenue is recognized at time of collection, known as the installment method, is acceptable for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax purposes? c. Comment on the usefulness of the installment method for a credit analyst in using both the balance sheet and income statement.
BIKE Company starts with $3,000 cash to finance its business plan of producing bike helmets using a simple assembly process. During the first month of business, the company signs sales con- tracts for 1,300 units (sales price of $9 per unit), produces 1,200 units (production cost of $7 per unit), ships 1,100 units, and collects in full for 900 units. Production costs are paid at the time of production. The company has only two other costs: (1) sales commissions of 10% of selling price when the company collects from the customer, and (2) shipping costs of $0.20 per unit paid at time of shipment. Selling price and all costs per unit have been constant and are likely to remain the same. Required: a. Prepare comparative (side-by-side) balance sheets and income statements for the first month of BIKE Company for each of the following three alternatives: (1) Revenue is recognized at the time of shipment. (2) Revenue is recognized at the time of collection. (3) Revenue is recognized at the time of production. Note: Net income for each of these three alternatives is (1) $990, (2) $810, and (3) $1,080, respectively. b. The method where revenue is recognized at time of collection, known as the installment method, is acceptable for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax purposes? c. Comment on the usefulness of the installment method for a credit analyst in using both the balance sheet and income statement.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:**BIKE Company Financial Scenario**
**Overview:**
BIKE Company starts with $3,000 cash to finance its business of producing bike helmets using a simple assembly process. During its first month, the company:
- Signs contracts for 1,300 units (sales price of $9 per unit)
- Produces 1,200 units (cost $7 per unit)
- Ships 1,100 units
- Collects full payment for 900 units
Production costs are paid at the time of production. The company has additional costs:
1. Sales commissions: 10% of selling price when collected
2. Shipping costs: $0.20 per unit, paid at the time of shipment
Selling prices and all costs are constant and likely to remain the same.
**Tasks:**
a. **Prepare Comparative Balance Sheets and Income Statements:**
- For each scenario, consider when revenue is recognized:
1. At time of shipment
2. At time of collection
3. At time of production
*Note: Net income for each alternative is (1) $990, (2) $810, and (3) $1,080, respectively.*
b. **Financial Reporting Method:**
- Discuss the installment method (revenue recognized at collection) and its acceptance for financial reporting in special cases. Why might BIKE Company prefer this method for tax purposes?
c. **Usefulness of the Installment Method:**
- Evaluate the effectiveness for a credit analyst using both balance sheets and income statements.
No graphs or diagrams are included in this document.
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