Granger Supply, Inc., has two main areas of inventory, industrial supplies and industrial cleaning equipment. The FIFO inventory method is used for industrial supplies, and the LIFO method is used for the cleaning equipment. Prior to considering special interim reporting modifications for LIFO liquidations and lower of cost or market, the company reported the following results for the first two quarters of the current year: Quarter 1 Quarter 2Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000,000 $9,000,000Cost of sales—industrial supplies . . . . . . . . . 4,300,000 4,700,000Cost of sales—cleaning equipment . . . . . .. . 3,000,000 3,200,000Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,700,000 $1,100,000Selling, general, and administrative . . . . . . . 2,100,000 1,800,000Income before taxes . . . . . . . . . . . . . . . . . . . . $ 2,600,000 $ (700,000)During the first quarter, the company experienced unprecedented demand for its cleaning equipment and as a result liquidated a significant portion of its beginning inventory of equipment. The cost of sales—cleaning equipment is based on the historical cost of the liquidated layers. Management anticipates that 400 units of beginning inventory that were included in cost of sales at $1,500 per unit will be replaced during the year and remain in ending inventory at a cost of $2,700 per unit. The cost of sales—industrial supplies does not reflect the fact that the ending inventory of supplies has a fair value of $120,000 less than FIFO cost. During the second quarter, the market for industrial supplies strengthened and the inventory of industrial supplies at the end of the second quarter had a fair value of only $25,000 less than FIFO cost.Interim income tax expense is based on the following estimates: At End of Quarter 1 At End of Quarter 2 Statutory tax rate Projected income before taxes for the balance of the year . . Annual deductions permanently disallowed for tax purposes Estimated annual tax credits . . . . . . . . 35% $5,100,000 $ 60,000 $ 18,000 35% $4,000,000 $ 35,000 $ 30,000 Prepare an income statement for each of the first two quarters of the current year. All supporting schedules should be in good form.
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.
Granger Supply, Inc., has two main areas of inventory, industrial supplies and industrial cleaning equipment. The FIFO inventory method is used for industrial supplies, and the LIFO method is used for the cleaning equipment. Prior to considering special interim reporting modifications for LIFO liquidations and lower of cost or market, the company reported the following results for the first two quarters of the current year:
Quarter 1 Quarter 2
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000,000 $9,000,000
Cost of sales—industrial supplies . . . . . . . . . 4,300,000 4,700,000
Cost of sales—cleaning equipment . . . . . .. . 3,000,000 3,200,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,700,000 $1,100,000
Selling, general, and administrative . . . . . . . 2,100,000 1,800,000
Income before taxes . . . . . . . . . . . . . . . . . . . . $ 2,600,000 $ (700,000)
During the first quarter, the company experienced unprecedented demand for its cleaning equipment and as a result liquidated a significant portion of its beginning inventory of equipment. The cost of sales—cleaning equipment is based on the historical cost of the liquidated layers. Management anticipates that 400 units of beginning inventory that were included in cost of sales at $1,500 per unit will be replaced during the year and remain in ending inventory at a cost of $2,700 per unit. The cost of sales—industrial supplies does not reflect the fact that the ending inventory of supplies has a fair value of $120,000 less than FIFO cost. During the second quarter, the market for industrial supplies strengthened and the inventory of industrial supplies at the end of the second quarter had a fair value of only $25,000 less than FIFO cost.
Interim income tax expense is based on the following estimates:
| At End of Quarter 1 | At End of Quarter 2 | |
|
Statutory tax rate Projected income before taxes for the balance of the year . . Annual deductions permanently disallowed for tax purposes Estimated annual tax credits . . . . . . . . |
35% $5,100,000
$ 60,000 $ 18,000 |
35% $4,000,000
$ 35,000 $ 30,000 |
Prepare an income statement for each of the first two quarters of the current year. All supporting schedules should be in good form.
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