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a.
Prepare an income statement, a
a.
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Explanation of Solution
Income statement:
The income statement is the financial statement of a company that shows all the revenues earned and expenses incurred by the company over a period of time.
Balance sheet:
Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Statement of cash flows:
This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities. Operating activities include
The calculation of income statement of Company L is as follows:
Company L | |
Income Statement | |
Particulars | Amount ($) |
Sales revenue | $95,000 |
Less: operating expense | 75,000 |
Net income | 20,000 |
Table (1)
The calculation of balance sheet of Company L is as follows:
Company L | |
Balance Sheet | |
Assets: | |
Cash (1) | $84,000 |
Total assets | $84,000 |
Equity: | |
Common stock | $64,000 |
20,000 | |
Total equity | $84,000 |
Table (2)
The calculation of statement of cash flows of Company L is as follows:
Statement of Cash Flows | |
Operating Activities | |
Inflow from Revenue | $95,000 |
Less: Outflow for operating Expenses | (75,000) |
Net Outflow from Operation Activities | 20,000 |
Investing Activities | - |
Add: Financing Activities | 64,000 |
Net Change in Cash | 84,000 |
Beginning Cash Balance | - |
Ending Cash Balance | 84,000 |
Table (3)
Note:
The entire $75,000 is treated as operating expenses.
Working note (1):
The total cash is calculated as follows:
Hence, the total cash is $84,000.
b.
Prepare an income statement, a balance sheet and statement of cash flows of Company L; assume Company L is the car rental business.
b.
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Explanation of Solution
The calculation of income statement of Company L is as follows:
Company L | |
Income Statement | |
Particulars | Amount ($) |
Sales revenue | $95,000 |
Less: | 15,000 |
Net income | 80,000 |
Table (3)
The calculation of balance sheet of Company L is as follows:
Company L | |
Balance Sheet | |
Assets: | |
Cash (1) | $84,000 |
Rental equipment | 75,000 |
Less: | 15,000 |
Total assets | $144,000 |
Equity: | |
Common stock | $64,000 |
Retained earnings | 80,000 |
Total equity | $144,000 |
Table (4)
The calculation of statement of cash flows of Company L is as follows:
Statement of Cash Flows | |
Operating Activities | |
Inflow from Revenue | $95,000 |
Less: Outflow for operating Expenses | (75,000) |
Net Outflow from Operation Activities | 20,000 |
Investing Activities | - |
Add: Financing Activities | 64,000 |
Net Change in Cash | 84,000 |
Beginning Cash Balance | - |
Ending Cash Balance | 84,000 |
Table (5)
Working note (2):
The depreciation is calculated as follows:
c.
Prepare an income statement, a balance sheet and statement of cash flows of Company L; assume Company L is a manufacturing company.
c.
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Explanation of Solution
The calculation of income statement of Company L is as follows:
Company L | |
Income Statement | |
Particulars | Amount ($) |
Sales revenue | $95,000 |
Less: Cost of goods sold (5) | 33,000 |
Gross margin | 62,000 |
Less: Administration expense | 5,000 |
Net income | 57,000 |
Table (3)
The calculation of balance sheet of Company L is as follows:
Company L | |
Balance Sheet | |
Assets: | |
Cash (1) | $84,000 |
Finished goods inventory (6) | 11,000 |
Manufacturing equipment | 36,000 |
Less: Accumulated depreciation (3) | 10,000 |
Total assets | $121,000 |
Equity: | |
Common stock | $64,000 |
Retained earnings | 57,000 |
Total equity | $121,000 |
Table (4)
The calculation of statement of cash flows of Company L is as follows:
Statement of Cash Flows | |
Operating Activities | |
Inflow from Revenue | $95,000 |
Less: Outflow for Inventory | (34,000) |
Less: Outflow for administration expenses | (5,000) |
Net Outflow from Operation Activities | 56,000 |
Investing Activities: | |
Outflow to Purchase Equipment | (36,000) |
20,000 | |
Financing Activities | 54,000 |
Issue stock | 84,000 |
Beginning Cash Balance | - |
Ending Cash Balance | 84,000 |
Table (5)
Working note (3):
The depreciation on the manufacturing equipment is calculated as follows:
Working note (4):
The cost per unit is calculated as follows:
Working note (5):
Calculate the cost of goods sold:
Working note (6):
The total finished goods are calculated as follows:
d.
Explain the reason why management might be more interested in average cost than the actual cost.
d.
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Explanation of Solution
The exact cost of the product cannot be determined because the labor and material usage will differ among the same products. Cost average is an element that smoothen these differences.
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Chapter 10 Solutions
Survey Of Accounting
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