Survey Of Accounting
Survey Of Accounting
4th Edition
ISBN: 9780077862374
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
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Chapter 10, Problem 22P

a.

To determine

Prepare an income statement, a balance sheet and statement of cash flows of Company L; assume Company L is a promoter of rock concerts.

a.

Expert Solution
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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 cash inflows and outflows from business operations. Investing activities includes cash inflows and cash outflows from purchase and sale of land or equipment, or investments. Financing activities includes cash inflows and outflows from issuance of common stock and debt, payment of debt and dividends.

The calculation of income statement of Company L is as follows:

Company L
Income Statement
ParticularsAmount ($)
Sales revenue$95,000
Less: operating expense 75,000
Net income20,000

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
Retained earnings20,000
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 Activities20,000
Investing Activities-
Add: Financing Activities64,000
Net Change in Cash84,000
Beginning Cash Balance-
Ending Cash Balance84,000

Table (3)

Note:

The entire $75,000 is treated as operating expenses.

Working note (1):

The total cash is calculated as follows:

Total cash=Acquired capital+Sales revenueSpendings=$64,000+$95,000$75,000 =$159,000$75,000=$84,000

Hence, the total cash is $84,000.

b.

To determine

Prepare an income statement, a balance sheet and statement of cash flows of Company L; assume Company L is the car rental business.

b.

Expert Solution
Check Mark

Explanation of Solution

The calculation of income statement of Company L is as follows:

Company L
Income Statement
ParticularsAmount ($)
Sales revenue$95,000
Less: Depreciation expense (2)15,000
Net income80,000

Table (3)

The calculation of balance sheet of Company L is as follows:

Company L
Balance Sheet
Assets: 
Cash (1)$84,000
Rental equipment75,000
Less: Accumulated depreciation (2)15,000
Total assets$144,000
  
Equity: 
Common stock$64,000
Retained earnings80,000
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 Activities20,000
Investing Activities-
Add: Financing Activities64,000
Net Change in Cash84,000
Beginning Cash Balance-
Ending Cash Balance84,000

Table (5)

Working note (2):

The depreciation is calculated as follows:

Depreciation=Automobiles purchasedNumber of years=$75,0005=$15,000

c.

To determine

Prepare an income statement, a balance sheet and statement of cash flows of Company L; assume Company L is a manufacturing company.

c.

Expert Solution
Check Mark

Explanation of Solution

The calculation of income statement of Company L is as follows:

Company L
Income Statement
ParticularsAmount ($)
Sales revenue$95,000
Less: Cost of goods sold (5)33,000
     Gross margin 62,000
Less: Administration expense 5,000
Net income57,000

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 earnings57,000
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 Activities56,000
Investing Activities:
Outflow to Purchase Equipment(36,000)
 20,000
Financing Activities54,000
Issue stock84,000
Beginning Cash Balance-
Ending Cash Balance84,000

Table (5)

Working note (3):

The depreciation on the manufacturing equipment is calculated as follows:

Depreciation=Manufacturing equipmentSalvage valueNumber of years=$36,000$6,0003=$30,0003=$10,000

Working note (4):

The cost per unit is calculated as follows:

Cost per unit=Materials+Labor+Overheads (depreciation on equipments)Total number of units produced=$12,000+$22,000+$10,0002,000 units=$44,0002,000 units=$22

Working note (5):

Calculate the cost of goods sold:

Cost of goods sold=Cost per unit×Number of goods sold=$22(4)×1,500 units=$33,000

Working note (6):

The total finished goods are calculated as follows:

Finished goods=Cost per unit×Completed goodsNumber of goods sold=$22×2000 units1500 units=$22×500 units=$11,000

d.

To determine

Explain the reason why management might be more interested in average cost than the actual cost.

d.

Expert Solution
Check Mark

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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