Chapter 1, Problem 9E

Exercise 14-9 Preparing financial statements for a manufacturer C4 P2

Refer to the data in Exercise 14-8. For each company, prepare (1) an income statement, and (2) the current assets section of the balance sheet. Ignore income taxes.

To determine

Income Statement:

Income statement gives a detail representation of the revenues generated and the expenses incurred by the company in a fiscal year thereby concluding the company’s financial status. It is a financial statement which deals with operating and non-operating activities of the company.

Net Income:

Net income is the net revenue earned by the company after taking into account various charges, costs, expenses and deductions. The net income is crucial for the shareholders and gives an idea of profitability level of the company.

Balance Sheet:

The balance sheet concludes the assets invested in by the company as well as reports the liabilities and equity taken up thus showing the economic or financial status of the company.

Current Assets:

It comprises of all the assets which gets converted into cash in less than a year. Example: inventory, other current assets, etcetera.

Operating Expenses:

The costs incurred in the day to day operations to continue with the business though not related directly with the production of goods are termed as operating expenses.

Cost of Goods Sold (COGS):

Cost of goods sold is the total expense or the cost incurred by the business during the process of manufacturing of goods and is directly related to the production. It generally includes the cost of material, labor and other manufacturing support costs.

(1)

To prepare: an income statement for each of the company.

Explanation of Solution

Given info,

G Company:

Sales amounts to $195,030

Selling expenses are of $50,000

Administrative and general expenses are $21,000.

For cost of goods sold of G Company refer to the question 91,030.

P Company:

Sales amount to $290,000.

Selling expenses are $46,000.

Administrative and general expenses are $43,000.

For cost of goods sold of $143,010 refer to question 8E.

Formula to calculate income before tax is,

Income statement for G Company

Income before tax:

G Company
Income Statement
For the Year Ended 31 December, 2017
Particulars	Amount($)
Sales	195,030
Less: Cost of goods sold	(91,030)
Gross profit	104,000
Add:
Selling expenses	50,000
Administrative and general expenses	21,000
Income before tax	33,000

Table (1)

The income before tax for G Company amounts to $33,000.

Note: Selling expenses and administrative and general expenses are operating expenses thus taken up to compute income before tax.

Income statement for P Company

Income before tax:

P Company
Income Statement
For the Year Ended 31 December, 2017
Particulars	Amount ($)
Sales	290,010
Less: Cost of goods sold	(143,010)
Gross profit	147,000
Add:
Selling expenses	46,000
Administrative and general expenses	43,000
Income before tax	58,000

Table (2)

The income before tax for the P Company is $58,000.

Note: Selling expenses and administrative and general expenses are operating expenses thus taken up to compute income before tax.

To determine

To compute: Current assets for both the company.

Explanation of Solution

Given info,

G Company:

Cash amounts to $20,000.

Receivable accounts to $13,200.

Raw material inventory is $5,300.

Work in progress inventory is $22,000.

Finished goods amount to $17,650.

P Company:

Cash amounts to $15,700.

Receivable accounts to $19,450.

Raw material inventory $7,200.

Work in progress inventory is $16,000.

Finished goods amount to $13,300.

G Company’s current assets

Particulars	Amount($)
Cash	20,000
Receivable accounts	13,200
Raw material inventory	5,300
Work in progress inventory	22,000
Finished inventory	17,650
Net current assets	78,150

Table (3)

Current assets account to $79,150 for G Company.

P Company’s current assets

Particulars	Amount($)
Cash	15,700
Receivables accounts	19,450
Raw material inventory	7,200
Work in progress inventory	16,000
Finished inventory	13,300
Net current assets	71,650

Table (4)

P Company’s current assets amount to $71,650.