Professional Documents
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Introduction
Accounting clinic I contains the following: A brief review of the four financial statements Examples of how each financial statement is prepared A summary of the principles of measurement in financial statement
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2. Income Statement
3. Cash Flow Statement
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February 1, 2002 ------------ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Other Total current assets Property, plant and equipment, net Investments Other non-current assets $ 3,641 273 2,269 278 1,416 -----7,877 826
February 2, 2001 ------------$ 4,910 525 2,424 400 1,467 -----9,726 996
Current liabilities: Accounts payable Accrued and other Total current liabilities Long-term debt Other Commitments and contingent liabilities (Note 7) Total liabilities Stockholders equity: Preferred stock and capital in excess of $.01 par value; shares issued and outstanding: none Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 2,654 and 2,601, respectively Treasury stock, at cost; 52 shares and no shares, respectively Retained earnings Other comprehensive income Other Total stockholders equity
5,605
4,795
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The balance sheet reports the resources the firm controls at a point in time and the claims against those resources. That is, it is
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Patent Interest payable Bonds payable Common stock, $5 par value Preferred stock, $10 par value Prepaid insurance Accounts payable Trading securities Land Accounts receivable Rent payable Retained earnings
$150,000 30,000 450,000 400,000 150,000 89,000 283,000 117,000 520,000 143,000 45,000 ?
Income taxes payable Notes payable (short-term) Equipment Discount on bonds payable Refundable federal and state income taxes Accumulated depreciation equipment Inventory Cash Accumulated depreciation building Long-term loan from bank Building
$93,000 264,000 950,000 25,000 97,630 232,000 242,000 360,000 450,000 640,000 1,200,000
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Solution
Current assets Cash Trading securities Accounts receivable Inventory Prepaid insurance Total current assets Property, plant and equipment Land Buildings Less acc. depreciation Equipment Less acc. depreciation Total Property, plant and equipment Intangible assets Patent $ 360,000 117,000 143,000 242,000 89,000 951,000 Current liabilities Accounts payable Notes payable Interest payable Income taxes payable Rent payable Total current liabilities Long-term liabilities Long term loan from bank Bonds payable Less discount on bonds payable Total long term liabilities Total liabilities Stockholders equity Capital stock Preferred stock, $10 par; Common stock, $5 par Retained earnings Total stockholders equity Total liabilities and stockholders equity $ 283,000 264,000 30,000 93,000 45,000 715,000
150,000
150,000 400,000
550,000 759,000
Total assets
3,089,000
3,089,000
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The balance sheet reports assets and the claims on those assets at a point in time.
The other three financial statements summarize the effects of transactions and economic events occurring between two balance sheets dates.
The income statement reports revenues less expenses (earnings) that increase owners' equity between two balance sheet dates.
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Fiscal Year Ended ------------------------------------------February 1, February 2, January 28, 2002 2001 2000 ----------------------------------$ 31,168 $ 31,888 $ 25,265 25,661 25,445 20,047 ---------------5,507 6,443 5,218 ---------------2,784 452 482 -----3,718 -----1,789 (58) -----1,731 485 -----1,246 $ -----1,246 -----$ 3,193 482 105 -----3,780 -----2,663 531 -----3,194 958 -----2,236 59 -----2,177 -----$ 2,387 374 194 -----2,955 -----2,263 188 -----2,451 785 -----1,666 -----1,666 ------
Operating expenses: Selling, general and administrative Research, development and engineering Special charges Total operating expenses Operating income Investment and other income (loss), net Income before income taxes and cumulative effect of change in accounting principle Provision for income taxes Income before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle, net Net income Earnings per common share: Before cumulative effect of change in accounting principle: Basic Diluted After cumulative effect of change in accounting principle: Basic Diluted Weighted average shares outstanding: Basic Diluted
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Merchandise Inventory Office salaries Sales Purchases Insurance expense Sales commission Sales returns Purchase discounts
Accounting and legal services Shipment-in Advertising Depreciation of office Depreciation of sales equipment Sales salaries Extraordinary loss (before tax) Interest expense
A physical inventory indicates that the ending inventory is $547,000. Assume a tax rate of 35%. Required:
Prepare a condensed income statement
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Solution
Net Sales (1) Cost of goods sold (2) Gross profit Selling expense (3) Administrative expense (4) Income from operations Other expense Income before taxes Income taxes (35%) Income before extraordinary item Extraordinary loss, net of $33,600 taxes Net income 4,958,000 2,460,000 2,498,000 499,000 394,000 893,000 1,605,000 176,000 1,429,000 500,150 928,850 62,400 866,450
(1) 5,000,000-42,000
(2) 409,000+(2,548,000+81,000-31,000)-547,000 (3) 257,000+76,000+108,000+58,000 (4) 282,000+26,000+24,000+62,000
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Fiscal Year Ended ------------------------------------------February 1, February 2, January 28, 2002 2001 2000 ----------------------------------$ 1,246 $ 2,177 $ 1,666
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Tax benefits of employee stock plans Special charges (Gains)/losses on investments Other Changes in: Operating working capital Non-current assets and liabilities Net cash provided by operating activities Cash flows from investing activities: Investments: Purchases Maturities and sales Capital expenditures Net cash used in investing activities Cash flows from financing activities: Purchase of common stock Issuance of common stock under employee plans Other Net cash used in financing activities Effect of exchange rate changes on cash Net (decrease) increase in cash
(2,606) 2,331 (482) -----(757) -----(2,700) 404 (9) -----(2,305) -----(32) -----1,101
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The statement of cash flows explains the change in cash during the period in terms of cash provided by or used for operating, investing and financing activities.
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Change in Cash = Cash from Operations + Cash from Investing + Cash from Financing
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Additional Information:
Equipment with original cost of $50 was sold for $35 Dividend declared and paid in cash was $300 Stocks and Bonds were issued for cash Net income reported was $80.
Note: Cash from operating activities involves adjusting net income for all the non-cash items in net income.
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Solution
Scientific Instruments, Ltd. Statement of Cash Flow For the year ended December 31, 2005 Cash flows from operating activities Net Income Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of equipment Depreciation Increase in deferred tax liability Decrease in accounts receivables Decrease in inventories Decrease in accounts payable Net cash provided by operating activities
80
175 255
Cash flows from investing activities Loan to B Purchase of Land Sale of Equipment Net cash used by investing activities Cash flows from financing activities Issuance of common stock Issuance of bonds payable Payment of cash dividend Net cash provided by financing activities Net decrease in cash Cash, December 31, 2004 Cash, December 31, 2005
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Shares Balances at February 2, 2001 Net income Change in unrealized gain on investments, net of taxes Foreign currency translation adjustments Net unrealized gain on derivative instruments, net of taxes Total comprehensive income for fiscal 2002 Stock issuances under employee plans, including tax benefits Purchases and retirements Others Balances at February 1,2002 2,601 -
Amount 4,795 -
Shares -
Amount -
Other (74) -
39 -
__39 1,222
52 __ 52
___ $38
10 ___ $(64)
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Shareholders Equity
has two primary components:
contributed capital which represents stockholders investment common stock (par value) and additional paid in capital, and retained earnings which equals cumulative net income minus cumulative dividends since the formation of the company. (Dividends are distributions of assets to stockholders.)
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Comprehensive Income
To avoid earnings fluctuations some of the unrealized gains/losses are reported in other comprehensive income and not included in net income.
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Total Assets
by owners Net income and other earnings Net change in owners equity
Income Statement
Revenues Expenses Net income
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Principles of Measurement
Two types of measurement are used in financial statements Mark-to-market accounting Assets and liabilities are reported at their fair value and gains and losses from revaluing them are reported in the income statement or as part of other comprehensive income in the equity statement. Fair value is either market value or an estimate of value.
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Historical cost accounting Assets and liabilities are reported at their historical cost (the dollar amount paid when they were acquired or incurred). In subsequent periods, those costs are amortized to the income statement as the assets are deemed to have been used up in operations or as liabilities accrue costs. GAAP accounting uses both types of measurement.
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The following assets and liabilities are measured at an estimate of their fair value rather than their market value:
Net Accounts Receivables (net of estimate of likely bad debt.) Accrued and Estimated Liabilities
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These assets can be written down if their value is deemed to have been impaired, but are never written up (in the U.S.).
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Equity investments
Trading Available-for-sale
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Matching principle Expenses are recognized in the income statement by their association with revenues for which they are incurred. The earnings number reflects net value added from revenues, that is, net of matched expenses.
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The beginning balance of inventory and purchases of goods during the year sum up to the total goods that the firm could have sold during the year. The ending balance of inventory (usually available from physical count) is subtracted to get the cost of the goods actually sold.
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In the income statement preparation example total purchases were 2,598,000 (after adding shipment and subtracting discounts).
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The cash outflow equivalent to the cost of goods sold is payment to suppliers. Accrual accounting performs two main adjustments to this amount to arrive at the cost of goods sold: Accounts Payable adjustment payment might not reflect the entire expenditure
on inventories. Some inventories were purchased on account.
goods sold).
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(1) R&D is expensed immediately 2004 $30,000 2005 $30,000 2006 $30,000 2007 $30,000 2008 $30,000 2009 $30,000
Operating income before R&D Incremental income from R&D R&D expense Operating income
(2) R&D is capitalized using straight line The total R&D expenditure is 20,000. It is amortized 20,000/5=4,000 per year for 5 years. 2004 $30,000 2005 $30,000 2006 $30,000 2007 $30,000 2008 $30,000 2009 $30,000
Operating income before R&D Incremental income from R&D R&D expense Operating income
Fully expensing R&D in the year in which it was incurred results in poor matching in operating income.
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