Financial Accounting Principles Assessment 2 Adjusting Entri

Financial Accounting Principlesassessment 2 Adjusting Entries Invent

Financial Accounting Principles Assessment 2: Adjusting Entries, Inventory, and Cost of Goods Sold Use this worksheet to complete the following two exercises for Assessment 2. Refer to the instructions in the course for submitting your assessment. Exercise 2-1 For this exercise, use the following fiscal year-end unadjusted trial balance for the Bigelow Company. Note: Rent and salary expenses are divided equally between general/administrative and selling activities. Bigelow uses a perpetual inventory system. BIGELOW COMPANY Unadjusted Trial Balance April 30, 2012 (Fiscal year-end) Debit Credit Cash $2,150 Merchandise inventory $12,100 Store supplies $4,600 Prepaid insurance $2,100 Store equipment $42,350 Accumulated depreciation—Store equipment $12,000 Accounts payable $8,700 Common stock $4,500 Retained earnings $25,400 Dividends $1,800 Sales $108,500 Sales discounts $950 Sales returns and allowances $1,750 Cost of goods sold $36,300 Depreciation expense—Store equipment $0 Salaries expense $32,500 Insurance expense $0 Rent expense $13,800 Store supplies expense $0 Advertising expense $8,700 Totals $159,100 $159,100 Prepare adjusting journal entries for the following: $1,700 of store supplies remaining at the end of the fiscal year. $1,800 of expired insurance for the fiscal year (administrative expense). $1,250 depreciation expense on store equipment for the fiscal year (selling expense). $11,200 of merchandise inventory remaining at the end of the fiscal year (based on a physical count to estimate shrinkage).

Adjustment (a): Supplies Expense 2900 Supplies 2900 Adjustment (b): Insurance Expense 1800 Prepaid Insurance 1800 Adjustment (c): Depreciation Expense 1250 Store Equipment 1250 Adjustment (d): Cost of Goods Sold 900 Inventory 900 Prepare a fiscal year 2012 multiple-step income statement. For distinguished performance, prepare both multiple- and single-step income statements. BIGELOW COMPANY Income Statement For Year Ended April 30, 2011 [Create the 2011 multiple-step income statement here.] Bigelow Company Multistep Income Statement For Year Ended April 30, 2011 Revenue Sales Revenue $108,500 Less: Sales Return & Allowance $2,700 Less: COGS $36,300 Gross Profit $69,500 Less: Selling & Admin Expenses ($55,000) Net Income $14,500 Prepare a fiscal year 2012 single-step income statement. BIGELOW COMPANY Income Statement For Year Ended April 30, 2011 [Create the 2011 single-step income statement here.] Bigelow Company Single Step Income Statement Year end April 30, 2011 Revenue Sales Revenue $108,500 Less: Sales Returns ($2,700) Total Revenue $105,800 Expenses Advertising Expense $8,700 COG $36,300 Rent Expense $13,800 Salary & Wages $32,500 Total Expenses $91,300 Net Income $14,500 Compute the following ratios as of April 30, 2012. Current ratio. Current Asset 20,.41 Current Liability 8,+12100+4600+2100/8700=2.41:1 Acid test ratio. Current Asset Inventory 8,.02 Current Liability 8,+12100+4600/8700=1.02:1 For distinguished performance, compute the gross margin ratio. 69500/105800x100=65.69 Gross Margin Ratio = Gross Profit = 69, 500 which is 65.69% Net Sales 105,800 Exercise 2-2 The following A. B. Murphy Company data show purchase and sales transactions for the month of April. A. B. Murphy uses a perpetual inventory system. Date Activities Units Purchased (at cost) Units Sold (at retail) Apr 1 Beginning inventory 065 units @ $40/unit Apr 8 Purchase 225 units @ $45/unit Apr 12 Sales 235 units @ 75/unit Apr 19 Purchase 050 units @ $50/unit Apr 23 Purchase 125 units @ $55/unit 0 Apr 27 Sales ________ 95 units @ 80/unit Totals 465 units 330 units Compute the following: Cost of (1) goods available for sale and (2) number of units for sale. 65x40+225x40+225x45+50+12x55=22,100 Number of units in ending inventory. 135 Cost assigned to ending inventory, using any three of the following four methods. Compute costs using all four methods for distinguished performance. Round per unit costs to three decimal places and inventory balances to the nearest dollar. FIFO. LIFO. Weighted average. Specific identification (see note below). FIFO Perpetual Date Goods Purchased Cost of Goods Sold Inventory Balance Apr Apr Apr Apr Apr LIFO Perpetual Date Goods Purchased Cost of Goods Sold Inventory Balance Weighted Average Perpetual Date Goods Purchased Cost of Goods Sold Inventory Balance Specific Identification Note: The April 12 sale comprised 55 units from beginning inventory and 180 units from the April 8 purchase. The April 27 sale comprised 30 units from the April 19 purchase and 65 units from the April 23 purchase. Date Goods Purchased Cost of Goods Sold Inventory Balance Gross profit, using FIFO, LIFO, weighted average, and specific identification. FIFO LIFO Weighted Average Specific Identifi-cation

Paper For Above instruction

Introduction

Financial accounting plays a crucial role in providing accurate financial information for decision-making, planning, and control within organizations. A fundamental aspect of financial accounting involves preparing adjusting entries, managing inventory, and calculating the cost of goods sold (COGS). These elements ensure that financial statements truly reflect a company’s financial position at a specific point in time. This paper explores the principles and application of adjusting entries, inventory management using different valuation methods, and the preparation of both multiple-step and single-step income statements, using the case examples of Bigelow Company and Murphy Company.

Adjusting Entries and Their Significance

Adjusting entries are essential journal entries made at the end of an accounting period to allocate income and expenses properly. They ensure that revenues are recognized when earned and expenses are matched with related revenues, conforming to the accrual basis of accounting. In the case of Bigelow Company, several adjusting entries were necessary, including the adjustment for supplies, insurance, depreciation, and inventory shrinkage. For instance, the supplies remaining at year-end were $1,700, but an adjustment was made to reflect a $2,900 expense, indicating previous supplies were overestimated or misused. Stock supplies adjustment emphasizes the importance of accurate inventory management for financial reporting.

Inventory and Cost of Goods Sold Management

Inventory management is paramount for accurately reporting the value of inventory and the cost of goods sold (COGS). Bigelow’s use of a perpetual inventory system requires continuous tracking of inventory transactions and applying appropriate valuation methods. The main methods include FIFO (First-In, First-Out), LIFO (Last-In, First-Out), Weighted Average Cost, and Specific Identification. Each method influences gross profit and net income differently. FIFO assumes the oldest inventory is sold first, leading to lower COGS during inflationary periods, while LIFO assigns newer, higher-cost inventory to COGS, increasing expenses and reducing profitability. Weighted average smooths out price fluctuations, and specific identification tracks actual costs for individual items, typically used for unique or high-value inventory.

Income Statement Formats and Their Implications

The flexibility in presenting financial information is exemplified by the two main income statement formats: multiple-step and single-step. The multiple-step income statement, as prepared for Bigelow Company, segregates operating revenues and expenses, providing detailed gross profit calculations and operating income. Conversely, the single-step approach consolidates all revenues and expenses, presenting net income as the bottom line without separating operational from non-operational items. Both formats serve different analytical purposes; the multiple-step provides insight into operational efficiency, while the single-step offers simplicity for quick assessment.

Financial Ratios and Their Analytical Importance

Financial ratios are vital tools to evaluate a company's liquidity, profitability, and operational efficiency. The current ratio indicates liquidity, measuring a company's ability to meet short-term obligations; Bigelow’s calculated current ratio of 2.41 reflects a healthy liquidity position. The acid-test ratio, or quick ratio, excludes inventory to assess immediate liquidity, which stood at 1.02 for Bigelow. The gross margin ratio, at 65.69%, indicates the percentage of sales remaining after COGS to cover operating expenses and profit. The accurate calculation and interpretation of these ratios assist management and investors in making informed decisions about the company’s financial health.

Sales and Inventory Management in Murphy Company

Murphy Company’s example illustrates how inventory valuation impacts gross profit and net income. Using a perpetual inventory system, they recorded inventory purchases, sales, and the application of different valuation methods: FIFO, LIFO, Weighted Average, and Specific Identification. These methods produce different ending inventory costs and gross profits, influencing the income statement and financial ratios. For example, during inflationary periods, LIFO results in higher COGS and lower gross profit, benefiting tax obligations, while FIFO yields higher gross profit and inventory valuation. Accuracy in tracking inventory costs and applying the chosen valuation method is critical for reliable financial reporting.

Conclusion

Accurate recording of adjusting entries, meticulous inventory management, and appropriate calculation of COGS are fundamental to producing reliable financial statements. Both Bigelow and Murphy Companies exemplify how different inventory valuation methods and reporting formats influence financial outcomes and ratios. The understanding and application of these principles enable stakeholders to make informed decisions and ensure compliance with accounting standards. As financial accounting continues to evolve, the importance of precise inventory and expense management remains paramount in accurately depicting a company’s financial condition.

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