Chapter 18, Problem 9E

To determine

Concept Introduction- Income statement-

Income statement refers to the financial statement that evaluates the financial performance of the company. It shows the expenses, revenues and net income of a firm over specific period of time. Therefore evaluation of financial performance can be undertaken by identifying the revenues and expenses incurred by the business through both non-operating and operating activities.

Requirement-1:

To Prepare To prepare an income statement.

Answer to Problem 9E

Income statements are prepared as follows-

Income statement
Garcon Co.
Particulars	Amount ($)
Sales	195,030
Cost of goods sold	91,030
Gross profit	104,000
Operating expenses
General and administrative expense	21,000
Selling expense	50,000
Total operating expenses	71,000
Income before tax	33,000

Income statement
Pepper Co.
Particulars	Amount ($)
Sales	290,010
Cost of goods sold	143,010
Gross profit	147,000
Operating expenses
General and administrative expense	43,000
Selling expense	46,000
Total operating expenses	89,000
Income before tax	58,000

Explanation of Solution

Garcon Co.

Given,

• Sales-$195,030
• General and administrative expenses -$21,000
• Selling expenses- $50,000
Cost of goods sold is calculated as follows-

Cost of goods sold
Particulars	Amount ($)	Amount ($)
Beginning raw material inventory	7,250
Add: Raw materials	33,000
Raw material available for use	40,250
Less: Raw material ending balance	5,300
Direct material used		34,950
Direct labor		19,000
Factory overheads:
Rental cost on factory equipment	27,000
Factory utilities	9,000
Factory supplies used	8,200
Indirect labor used	1,250
Repair factory equipment	4,780
Total factory overhead		50,230
Total manufacturing costs		104,180
Add: Work in process, beginning balance		14,500
Total cost of work in process		118,680
Less: Work in process, ending balance		22,000
Cost of goods manufactured		96,680
Add: Finished goods inventory, beginning balance		12,000
Goods available for sale		108,680
Less: Finished goods inventory, ending balance		17,650
Cost of goods sold		91,030

Gross profit is calculated as follows-

  $\begin{array}{l}Grossprofit=Sales-Costofgoodssold\hfill \\ Grossprofit=\$195,030-\$91,030\hfill \\ Grossprofit=\$104,000\hfill \end{array}$

Income before tax is calculated as follows-

  $\begin{array}{l}Incomebeforetax=Grossprofit–Totaloperatingexpenses\\ Incomebeforetax=Grossprofit–\left(Generalandadministrativeexpense+Sellingexpenses\right)\\ Incomebeforetax=\$104,000-\left(\$21,000+\$50,000\right)\\ Incomebeforetax=\$104,000-71,000\\ Incomebeforetax=\$33,000\end{array}$

Pepper Co.

Given,

• Sales-$290,010
• General and administrative expenses -$43,000
• Selling expenses- $46,000
Cost of goods sold is calculated as follows-

Cost of goods sold
Particulars	Amount ($)	Amount ($)
Beginning raw material inventory	9,000
Add: Raw materials	52,000
Raw material available for use	61,000
Less: Raw material ending balance	7,200
Direct material used		53,800
Direct labor		35,000
Factory overheads:
Rental cost on factory equipment	22,750
Factory utilities	12,000
Factory supplies used	3,200
Indirect labor used	7,660
Repair factory equipment	1,500
Total factory overhead		47,110
Total manufacturing costs		135,910
Add: Work in process, beginning balance		19,950
Total cost of work in process		155,860
Less: Work in process, ending balance		16,000
Cost of goods manufactured		139,860
Add: Finished goods inventory, beginning balance		16,450
Goods available for sale		156,310
Less: Finished goods inventory, ending balance		13,300
Cost of goods sold		143,010

Gross profit is calculated as follows-

  $\begin{array}{l}Grossprofit=Sales-Costofgoodssold\hfill \\ Grossprofit=\$290,010-\$143,010\hfill \\ Grossprofit=\$147,000\hfill \end{array}$

Income before tax is calculated as follows-

  $\begin{array}{l}Incomebeforetax=Grossprofit–Totaloperatingexpenses\\ Incomebeforetax=Grossprofit–\left(Generalandadministrativeexpense+Sellingexpenses\right)\\ Incomebeforetax=\$147,000-\left(\$43,000+\$46,000\right)\\ Incomebeforetax=\$147,000-789000\\ Incomebeforetax=\$58,000\end{array}$

Conclusion:

Thus, income statements are prepared.

To determine

Concept Introduction-Current assets-

Current assets are balance sheet items which represents all the assets which are expected to convert into cash within a period of 12 months i.e. within 1 year.

Current assets section is part of balance sheet.

Requirement-2:

To prepare:

To prepare current asests section of the balance sheet.

Answer to Problem 9E

Partial Balance sheet
Garcon Co.
Particulars	Amount ($)	Amount ($)
Cash		20,000
Accounts receivable, net		13,200
Inventories-
Ending raw materials inventory	5,300
Ending work in process inventory	22,000
Ending finished goods inventory	17,650	44,950
Total current assets		78,150

Partial Balance sheet
Pepper Co.
Particulars	Amount ($)	Amount ($)
Cash		15,700
Accounts receivable, net		19,450
Inventories-
Ending raw materials inventory	7,200
Ending work in process inventory	16,000
Ending finished goods inventory	13,300	36,500
Total current assets		71,650

Explanation of Solution

Garcon Co.

Given,

• Cash= $20,000
• Accounts receivable, net = $13,200
• Ending raw materials inventory = $5,300
• Ending work in process inventory = $22,000
• Ending finished goods inventory = $17,650
Total current assets are calculated as follows-

  $\begin{array}{l}\begin{array}{l}\begin{array}{l}Totalcurrentassets=Cash+Accountsreceivable,net+Endingrawmaterialsinventory\\ +Endingworkinprocessinventory+Endingfinishedgoodsinventory\end{array}\hfill \\ Totalcurrentassets=\$20,000+\$13,200+\$5,300+\$22,000+\$17,650\hfill \end{array}\\ Totalcurrentassets=\$78,150\end{array}$

Pepper Co.

Given,

• Cash= $15,700
• Accounts receivable, net = $19,450
• Ending raw materials inventory = $7,200
• Ending work in process inventory = $16,000
• Ending finished goods inventory = $13,300
Total current assets are calculated as follows-

  $\begin{array}{l}\begin{array}{l}\begin{array}{l}Totalcurrentassets=Cash+Accountsreceivable,net+Endingrawmaterialsinventory\\ +Endingworkinprocessinventory+Endingfinishedgoodsinventory\end{array}\hfill \\ Totalcurrentassets=\$15,700+\$19,450+\$7,200+\$16,000+\$13,300\hfill \end{array}\\ Totalcurrentassets=\$71,650\end{array}$

Conclusion:

Thus, current assets section of balance sheeti prepared.