HW 4-1 Walk-through and Reasoning
HW 4-1 Walk-through and Reasoning Acct 3304
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This 8 page Class Notes was uploaded by Allison Moreno on Thursday September 8, 2016. The Class Notes belongs to Acct 3304 at Texas Tech University taught by Dr. Carrasco in Fall 2016. Since its upload, it has received 14 views. For similar materials see Intermediate accounting I in Accounting at Texas Tech University.
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Date Created: 09/08/16
Homework 41 Please read the explanations, they will help when it comes to taking tests. Question 1 Part A is the first part of income statements. Begin with Revenue and subtract Cost of Goods Sold. This produces Gross Profit. The company bought items (Cost of Goods Sold) and sold them to the public for a higher price (Revenue). The difference between what the public paid and what the company paid equals the Company’s profit (Gross Profit to be exact). (Don’t confuse profit with revenue. Gross means Beginning and Net means Ending. Imagine a Bullseye for Profit and Revenue. Revenue is the inner circle because it only consists only of Revenue. Profit is the outer circle because it encompasses more accounts than just Revenue.) Next, subtract Selling and Administrative Expenses as normal. Basically, this is everything the Company pays to sell a product because products don’t magically sell themselves. These are only expenses. Never include an Asset and Assets never go anywhere on income statements. ( When completing future problems, be sure to read carefully because salaries, depreciations, and other expenses are sometimes divided between selling and administrative expenses.) Luckily, they already put those amounts together for us. The remaining total resulting from the previous step i Income from Operations. Part B is the last bit of income statements. Begin where you left off on Income from Operations. Use the total from Income from Operations then include Interest Expense, Gains, and Losses. The book describes these as secondary or auxiliary. In other words, they don’t come directly from selling the main product. Interest Expense and extra revenues (not in question) don’t help or hurt the main revenue sources, so they aren’t included in Income from Operations. Gains are defined as auxiliary because they aren’t revenues or expenses. After including Gains, Losses, and Extra Revenues, we have Net Income . Part C is Comprehensive Income In order to understand what Comprehensive income should include, Comprehensive Income’s purpose. Comprehensive Income is designed to show anything and everything that caused Stockholders’ Equity to change. Therefore, we already know that it will include Net Income. It will also include unrealized gains/losses. We only add Unrealized gain on availableforsale investments because that’s the only unrealized account listed in this Question. Once we add the unrealised gain (or subtract unrealised losses in other questions), we will have Comprehensive Income. Part D wants Retained Earnings. Disregard Comprehensive Income for this part because it includes unrealised gains and losses while Retained Earnings does not. Start with Net Income again and subtract dividends this time. Normally we start with Retained Earning from last year, but this is the company's first year of operations so Retained Earnings on January 1 is 0. Add Net Income because that’s what has been gained from operations, and subtract Dividends because that is what was given away during the period. That total gives you Retained Earnings for December 31 . Question 2: 2 parts Part a is a combination of part a and b in the first question, except question 2 is expanded. Income Statements are meant for a specific time period so you need to choose the option that best identifies what period this income statement is for. (For future questions, Balance Sheets don’t start over every period, so their contents are only labeled with the date. They don’t say “For the Year Ended” or specify any other period.) The Income Statement can be broken up into subsections: Gross Profit, Income From Operations, Net Income before Taxes, Net Income and Earnings per Share. Begin with the net of your Sales and subtract COGS to get Gross Profit Always start with Revenue. This is everything the business earned from selling goods. Cost of Goods Sold is what the company paid for their products. You now have Gross Profit. You can partially figure out where a section ends because there will be a line under the section above the total. Gross Profit equals all extra money gained only from raising the price from what it was originally bought for. Next comes operating expenses. You’re getting a bit further down the page and might be scrolling a lot by now. It helps to screenshot the first table (ctrl+prt sc: for windows) and paste it into a different document so it is separated like so (I’m not showing my answers as promised): Start by labeling the Section. Like I said, this is the section where you get Income from Operations. The two subsections consist of Selling Expenses and Administrative Expenses. Selling Expenses always come first. I don’t remember why, that’s from last year, but put selling expenses first. Selling Expenses include: Supplies, Depreciations as Directed and Salaries as Directed. Sometimes, they’ll tell you an exact amount for depreciations and salaries. Sometimes, they’ll tell you to calculate them. In this case, present both ways. Make sure you read the information given to you so you can determine what is a selling expense and an administrative expense. Selling Expenses are directly linked to operations that attribute to products. That is why Supplies Expenses are included, but interest, income tax, and administrative expenses aren’t included. The total goes below those three accounts. Administrative expenses will be calculated separately below that total. Administrative expenses are pretty self explanatory in this question. You already know “Other Admin. Expenses” is included because it’s in the name. The other two accounts contain the remaining amounts from Depreciation and Salary expenses. Administrative depreciation is likely to come from buildings and Salaries are attributable to Office Salaries. Total the administrative expenses then add selling expenses and you get total operational expenses. These accounts are kept separate from each other and combined at the end so data and statistics can be drawn from each of the totals. Take the total away from Gross Profit and you get Income from Operations. You are more than halfway to having Net Income. Hang in there. Other Revenues and Expenses/Gains and Losses will be added or subtracted from Income From Operations. I don’t know if it makes any difference because I got this right on my first attempt, but I always add my Revenues before I subtract my expenses. I included Rent Revenue because the company doesn’t normally gain revenues from this source. I also included Interest Expense because racking up interest doesn’t contribute to operations. Therefore, Interest and Rent are “others.” After adding and subtracting those you have Income Before Income Tax. You’ve officially added and subtracted all expenses except for Income Taxes. It hints why it’s income before income taxes. Subtract Income Taxes and you get Net Income/ (Loss). Sometimes tax amounts are given and sometimes they need to be calculated. In this case, they’re given so life is made easy. Lastly, just divide Net Income by total common shareholders for Earnings Per Share. Technically, you subtract Preferred Stockholders’ dividends from Net Income then divide, but no dividends were removed. Part b is much simpler because it’s a single step income statement. Take all Revenues. Add them together. You have total Revenues. Take all Expenses (except Income Tax). Add them together. You have total expenses. Selling Expenses are lumped together and added. Administrative Expenses are lumped together and added. COGS and Interest remain the same when put in. You’re summarizing the other steps and totaling them. Subtract total Expenses from Revenues for Income Before Income Taxes. We skipped Gross Profit and Income from Operations because other Revenues and Expenses are included. The book claims that this format is used so accounts aren’t discriminated against for not being included in operational expenses or revenue. Subtract Income Tax Income for Net Income/ (Loss). This amount is the exact same as before so you can use that tip to see if you got the right answer before submitting it. Earnings per Share is Calculated the same way as before. It should also come out the same way. Question 3: 2 parts Part a is like part a of question two, but focuses on other expenses and revenues more. Complete Gross Profit like before. Add Selling and Administrative Expenses together for Total Operating Expenses. Disregard depreciation expense from the previous year. Subtract Operating Expenses from Gross Profit for Income from Operations . Add up other Revenues and Gains and add them to previous total. Other revenues include other sources of income that aren’t part of their normal services or Product (Interest and Dividend Revenue.) Normally any other Gain (like selling equipment for more than it’s worth) will be added in when they occur. Total other Expenses and Losses then subtract them from previous total for Income before Income Tax . Casualty Loss and Writeoffs are considered Losses and don’t directly contribute to the product being sold. Other losses (selling equipment for less than it is worth) will also be subtracted when they occur. Subtract Income Tax Expense for Net Income/ (Loss). Income taxes will be found by dividing Income before taxes by the Income Tax percent Established. Don’t just divide Gross Profit or Income from Operations because that is wrong. Divide Net Income by total common stock outstanding for Earnings Per Share. Divide Net Income by Common Stock. You don’t subtract dividends because they aren’t preferred dividends. You know it isn’t preferred because this company only states that it as Common Stock, not Preferred Stock. The last section is designed slightly differently, but it is Earnings Per Share again. This time, they want you to label the section Earnings Per Share and label the account Net Income to Prep you for future questions. It is meant to help you realise when Earnings Per Share is labeling a section, every total in the section will be divided by the number of Common Stocks outstanding. Part 2 is a new form of Retained Earnings. Retained Earnings is for a period, so the header will be labeled like so. Start with the reported Retained Earnings from the beginning of this year. Starting with reported earnings makes more sense because you’re about to adjust it. Subtract the overstatement of Net Income caused by Understated Depreciation Expense for Adjusted Retained Earnings. More revenues means more net income. More depreciations means less net income. To Understate Depreciation Expense, is to say that there is less than there actually is. Fewer Expenses means more Net Income, so Net Income is Overstated. You offset too much by subtracting it until it balances again. I convert it to Net Income because Net Income goes on Retained Earnings. Not Expenses or Revenues. Don’t forget about taxes. Just take out the amount of taxes that are attributed to the Depreciation. Depreciation (Depreciation / Tax Rate) = Total offset. Do not put the original Depreciation amount in the blank! Again, it’s subtracted from the Net Income. As result it is subtracted from Retained Earnings (adjusting it) and you now have your adjusted Retained Earnings. Add Net Income. Then total it. Subtract Dividends Declared. Then total it. This last total is Retained Earnings for December 31. Question 4: 1 part Part a of question 3 gave you a quick look into what this one will be like. As you can see it is labeled Earnings per Share. Everything will be divided by the number of outstanding common stock. Not the Price. The number of Shares. Don’t include Preferred Stock. Also, don’t forget about taxes. The first blank wants Income from Continuing Operations per Share. ^Start with Income from continued operations before taxes (we need it after taxes) ^Divide by the tax rate and subtract that from Income before taxes = Net Income (after taxes) You now have to include preferred Stock in the mix. ^Subtract Preferred Stock from Net Income. ^Divide this total by the number of Common Stocks. Don’t add in Preferred Stock. You have your total, but keep the unrounded version for later use. All of this was taken from the equation and for future reference, remember the difference between before and after taxes. Second Blank wants to take away Discontinued Operations. ^You start with discontinued operations (before taxes). ^Divide this by the tax rate so it’ll be after tax discontinued operations. ^Subtract this total from discontinued operations. ^Lastly, divide this total by common stock like before. You have your total. You don’t take away preferred dividends from discontinued operations because Dividends are like an expense. You take expenses away from earnings, but you don’t take expenses away from expenses. As for making up for taxes: you’re taking taxes away from adjustments, not expenses. Take the two values (not rounded) and subtract discontinued operations from Net Income. Divide by Common Stock outstanding like before and you have Net Income / (Net Loss). Question 5: 2 parts Part a is almost exactly like question 3 part b. It added in an extra correction and forces you to calculate reported retained earnings yourself. Retained Earnings are for a specific period so it needs to be labeled like so. Start with Reported Earnings. Find reported Earnings by adding all net income then subtracting all declared dividends from previous years. You know you don’t make any changes yet, because all corrections were found in the period of this retained earnings statement and will go on this statement as opposed to past statements. Don’t worry about tax rates yet because these incomes don’t indicate that they’re untaxed. Perform the Corrections I did depreciation first. The chart indicates an understatement in depreciation. Lower expenses mean higher incomes and so you have an overstatement of Net Income. (Again I use Net Income on Retained Earnings Statements so I convert corrections into Net Income Corrections.) Overstatements need to be subtracted, so I make it a negative amount. Consequently, you subtract it from Retained Earnings. The account indicates no taxes were taken away so you have to do that for the final total to subtract. Look back at other explanations of how to do this if you’re still having trouble with that portion. The same goes for the change in inventory methods, but they tell you right away that it is a decrease in income. You must subtract the correction from past statements to account for the perceived loss. This account also indicates that taxes weren’t removed yet so you need to remove the indicated tax amount. Look back at other explanations of how to do this if you’re still having trouble with that portion. Subtracting both Net Income Overstatements will give you the Adjusted Retained Earnings. Add Net Income. Don’t forget to adjust for taxes. Subtract Dividends Don’t worry about the amount paid at a future date. This is indicating that the amount that will be paid is Dividends Payable. Payables aren’t added or subtracted. They are irrelevant in this step. You have Retained Earnings. Part b wants to know what the total retained earnings are if a restriction is placed. In my version, her total retained earnings remained the same for the given restriction. Restricted Retained earnings are put in place to protect lenders. It ensures that lenders get their money before stockholders. Total Retained earnings remain unchanged by this, but if the question were to ask for unrestricted retained earnings the total would be different. Unrestricted Retained Earnings = Total RE Restricted RE. They’re asking for total so it’s unchanged. Question 6: 2 parts Part a1 is long, but don’t be worried. It’s an income statement like the others. It will be labeled like the others. The first section is sales: ^Start with Sales Revenue and Less the Discounts, and Returns and Allowances. You will have Net Sales. The accounts in the table are jumbled round, but they are there. This time you know you have to find Net Sales because there is no account for it. Sales Revenue is Gross Sales. Taking out returns means you are only left with what was actually earned, Net Sales. (It’s like a paycheck. You start with Gross Earnings, take out taxes, and you’re left with Net Pay.) Subtract COGS for Gross Profit Total Selling Expenses to be subtracted. This includes costs the sales department incurs. This includes Traveling, Entertainment, Depreciation, and Delivery. In addition, This includes Internet, Maintenance, Sales Commissions, Misc. Selling, Salaries, and Bad debts as directed. Total Administrative Expenses to be subtracted. As directed, this includes Internet, depreciation, and Maintenance. Other ones include Property Tax, Supplies (Office Supplies), and Office Expenses. These are everything still associated with running a business, but are for higher level positions or broader equipment. Subtract operational expenses for Income from Operations. The rest mimics past questions. Add other Revenues. Subtract other Expenses. Subtract Income Tax for Net Income. Subtract Prefer Dividends. Divide by number of Common Shares for Earnings per Share. Part a2 is basically the exact same as the past ones. Start with Reported Earnings Correct for Overstatement of Net Income Technically this one is labeled as Depreciation Understatement, but it transfers into an Overstatement of Income. Add Net Income. Subtract Both Dividends for Retained Earnings on June 30. A dividend is a dividend in this portion. No matter what kind it is, it is subtracted because it is coming out of Retained Earnings. It is also a nominal account and if we don’t account for it now, it may remain unaccounted for for eternity. We have to include it.
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