The Importance of Accurate Financial Statementsįinancial statements give a glimpse into the operations of a company, and investors, lenders, owners, and others rely on the accuracy of this information when making future investing, lending, and growth decisions. This net income figure is used to prepare the statement of retained earnings. If total expenses were more than total revenues, Printing Plus would have a net loss rather than a net income. Total expenses are subtracted from total revenues to get a net income of $4,665. Total revenues are $10,240, while total expenses are $5,575. Revenue and expense information is taken from the adjusted trial balance as follows: For Printing Plus, the following is its January 2019 Income Statement. When preparing an income statement, revenues will always come before expenses in the presentation. Income StatementĪn income statement shows the organization’s financial performance for a given period of time. Income Statement: Lawn mowing revenue, gas expense, advertising expense, depreciation expense (equipment), supplies expense, and salaries expense. Statement of Retained Earnings: Dividends. Identify which financial statement each account will go on: Balance Sheet, Statement of Retained Earnings, or Income Statement.īalance Sheet: Cash, accounts receivable, office supplied, prepaid insurance, equipment, accumulated depreciation (equipment), accounts payable, salaries payable, unearned lawn mowing revenue, and common stock. Go over the adjusted trial balance for Magnificent Landscaping Service. The balance sheet is going to include assets, contra assets, liabilities, and stockholder equity accounts, including ending retained earnings and common stock. The statement of retained earnings will include beginning retained earnings, any net income (loss) (found on the income statement), and dividends. Income statements will include all revenue and expense accounts. From this information, the company will begin constructing each of the statements, beginning with the income statement. To prepare the financial statements, a company will look at the adjusted trial balance for account information. These financial statements were introduced in Introduction to Financial Statements and Statement of Cash Flows dedicates in-depth discussion to that statement. Remember that we have four financial statements to prepare: an income statement, a statement of retained earnings, a balance sheet, and the statement of cash flows. Preparing financial statements is the seventh step in the accounting cycle. (1) original cost is greater than replacement cost, and (2) net realizable value less normal profit margin is not greater than replacement cost.Once you have prepared the adjusted trial balance, you are ready to prepare the financial statements. Net realizable value less normal profit margin could not exceed replacement cost because that would imply that replacement cost is the lowest of the three figures, which contradicts the fact that replacement cost is market value. Also, replacement cost is the middle of the three figures (or tied with one of the other two). The inventory in this question is reported at replacement cost, which means that replacement cost is market value and replacement cost is less than cost. If the middle figure (market) is less than cost, then the inventory is reported at market. net realizable value less normal profit margin.Under LCM, the market value of inventory is the middle of three figures (in amount): The net realizable value, less a normal profit margin, is greater than replacement cost - NO.The original cost is greater than replacement cost - YES.The cost of the earliest acquired goods would remain in ending inventory. In a periodic LIFO inventory system, the cost of sales for the period (COGS) would be based on the last goods acquired during the period. The cost of the most recently acquired goods would remain in ending inventory. In a periodic FIFO inventory system, the cost of sales for the period (COGS) would be based on the cost of the earliest acquired goods available during the period. Under a periodic inventory system, the costs of goods sold (COGS) and ending inventory are determined only at the end of the period. The cost of the earlier acquired goods would remain in inventory. In a perpetual LIFO inventory system, the cost of each sale (COGS) would be based on the cost of goods acquired just prior to the sale. In a perpetual FIFO inventory system, the cost of each sale (COGS) would be based on the cost of the earliest acquired goods on hand at the time of the sales. Under a perpetual inventory system, the cost of goods sold (COGS) is determined at the time of each sale.
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