The following incorrect income statement was prepared by the accountant of the Axel Corporation:AXEL CORPORATIONIncome StatementFor the Year Ended December 31, 2018Revenues and gains:Sales $592,000Interest and dividends 32,000Gain on sale of investments 86,000Total revenues and gains 710,000Expenses and losses:Cost of goods sold $325,000Selling expenses 67,000Administrative expenses 87,000Interest 26,000Restructuring costs 55,000Income taxes 60,000Total expenses and losses 620,000Net Income $ 90,000Earnings per share $ 0.90Required:Prepare a multiple-step income statement for 2018 applying generally accepted accounting principles. The incometax rate is 40%.Chance Company had two operating divisions, one manufacturing farm equipment and the other office supplies. Both divisions are considered separate components as defined by generally accepted accounting principles. The farm equipment component had been unprofitable, and on September 1, 2018, the company adopteda plan to sell the assets of the division. The actual sale was completed on December 15, 2018, at a price of$600,000. The book value of the division’s assets was $1,000,000, resulting in a before-tax loss of $400,000on the sale.The division incurred a before-tax operating loss from operations of $130,000 from the beginning of the yearthrough December 15. The income tax rate is 40%. Chance’s after-tax income from its continuing operations is$350,000.
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.
The following incorrect income statement was prepared by the accountant of the Axel Corporation:
AXEL CORPORATION
Income Statement
For the Year Ended December 31, 2018
Revenues and gains:
Sales $592,000
Interest and dividends 32,000
Gain on sale of investments 86,000
Total revenues and gains 710,000
Expenses and losses:
Cost of goods sold $325,000
Selling expenses 67,000
Administrative expenses 87,000
Interest 26,000
Restructuring costs 55,000
Income taxes 60,000
Total expenses and losses 620,000
Net Income $ 90,000
Earnings per share $ 0.90
Required:
Prepare a multiple-step income statement for 2018 applying generally accepted accounting principles. The income
tax rate is 40%.
Chance Company had two operating divisions, one manufacturing farm equipment and the other office supplies. Both divisions are considered separate components as defined by generally accepted accounting principles. The farm equipment component had been unprofitable, and on September 1, 2018, the company adopted
a plan to sell the assets of the division. The actual sale was completed on December 15, 2018, at a price of
$600,000. The book value of the division’s assets was $1,000,000, resulting in a before-tax loss of $400,000
on the sale.
The division incurred a before-tax operating loss from operations of $130,000 from the beginning of the year
through December 15. The income tax rate is 40%. Chance’s after-tax income from its continuing operations is
$350,000.
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