Income Statement We Are Using The Same Company As In The Fir

Income Statementwe Are Using The Same Company As In The First Module

Prepare an income statement for Nybrostrand Company for the year 2014, incorporating the adjustments related to inventory and cost of goods sold, and explain how the revised income or loss compares to the original income statement. Additionally, discuss the importance of the matching concept in accounting, support your analysis with calculations, and cite credible sources in APA format.

Paper For Above instruction

The preparation of an accurate income statement is crucial for assessing a company's financial performance over a specific period. For Nybrostrand Company, the year 2014 presents particular challenges due to discrepancies in inventory valuation and cost of goods sold (COGS) calculations. This paper constructs an adjusted income statement for 2014, compares it to the original, and discusses the significance of the matching concept in financial reporting.

Introduction

An income statement summarizes a company's revenues and expenses over a reporting period, culminating in net income or loss. It provides stakeholders with insights into operational efficiency and profitability. Accurate income statements depend heavily on appropriate matching of revenues with related expenses, a principle at the core of accrual accounting. In the case of Nybrostrand Company, adjustments are necessary to accurately reflect COGS by considering ending inventory and to correct any potentially inflated expenses caused by including uncommitted sales transactions.

Review of the Original Financial Data

From the trial balance provided, key figures include revenues of $586,000, cost of goods sold of $307,000, and various expenses summing up to substantial figures affecting net income. The original net income can be roughly estimated before adjustments, but inaccuracies likely exist due to inventory valuation issues and the unconfirmed sales transaction of $42,500.

Adjustments for Inventory and Cost of Goods Sold

The original COGS included total production costs for 2014 but did not account for ending inventory adjustments related to the unconfirmed sales. The physical count determined ending inventory at $34,000. To accurately compute COGS, we need to start with the production costs, subtract ending inventory, and remove the unconfirmed sales transaction from revenues.

Step 1: Correct Revenue

The client showed interest in purchasing $42,500 worth of products. However, since the transaction was not confirmed, the revenue related to this sale should be excluded. Therefore, adjusted revenue equals:

  • Original Revenue: $586,000
  • Less: Unconfirmed sales ($42,500)

Adjusted Revenue = $586,000 - $42,500 = $543,500

Step 2: Adjust Cost of Goods Sold

The original COGS was $307,000, but this included total production costs without adjusting for ending inventory. Typically, COGS is computed as:

Beginning Inventory + Purchases/Production Costs - Ending Inventory

Given the total production costs, and the physical ending inventory of $34,000, the corrected COGS becomes:

  • Adjusted COGS = Total Production Costs - Ending Inventory

While the total production costs are not explicitly provided, they are assumed to equal the original COGS plus the dollar value of inventory adjustments. Assuming all costs were incurred during 2014, the unadjusted COGS is $307,000, which includes ending inventory at $34,000. This suggests the gross profit before adjustments was:

Gross Profit = Revenue - COGS = $586,000 - $307,000 = $279,000

After correction, the COGS should be reduced by the ending inventory, thus:

  • Corrected COGS = $307,000 - $34,000 = $273,000

Revising net income involves subtracting expenses from gross profit, accounting for the correction of the sales revenue, and the associated COGS adjustments.

Calculating the Adjusted Net Income

The total expenses given include salaries ($78,500), depreciation ($24,350), property taxes ($16,900), rent ($28,000), utilities ($6,700), marketing ($4,500), and insurance ($1,400). Summing these expenses gives:

  • Total Operating Expenses = $78,500 + $24,350 + $16,900 + $28,000 + $6,700 + $4,500 + $1,400 = $160,350

Now, the adjusted gross profit is:

  • Gross Profit after adjustment = $543,500 - $273,000 = $270,500

Subtracting total expenses yields the net income:

  • Net Income = $270,500 - $160,350 = $110,150

This net income reflects a corrected profit figure after accounting for unconfirmed sales and inventory adjustments, which is notably different from the initial estimate that was based on unadjusted figures.

Comparison with the Original Income Statement

Originally, before adjustments, the presumed net income was approximately:

  • Revenues of $586,000 minus COGS of $307,000 and total expenses of $160,350, giving:
  • Original Net Income = $586,000 - $307,000 - $160,350 = $118,650

The adjusted net income of $110,150 indicates a slight decrease compared to the original figure. This discrepancy underscores the significance of precise inventory management and accurate revenue recognition, as errors can lead to misleading financial reports that impact stakeholders’ decisions.

The Importance of the Matching Concept

The matching principle in accounting stipulates that expenses should be recognized in the same period as the revenues they help generate. Proper application ensures that financial statements accurately reflect profitability and operational efficiency. In Nybrostrand's case, the initial overstatement of COGS—by including total production costs without adjusting for ending inventory—resulted in understated net income. Correcting for inventory at period-end aligns expenses with the corresponding revenues, providing a more truthful picture of financial performance.

The matching concept enhances the reliability and comparability of financial reports. When expenses are matched accurately with revenues, financial statements better represent the true profitability, guiding informed decision-making by investors, managers, and other stakeholders. Conversely, failure to apply proper matching can distort net income figures, potentially leading to legal or regulatory issues, misinformed investment decisions, and poor managerial judgments.

Conclusion

This analysis underscores the importance of proper inventory management and adherence to the matching principle in preparing financial statements. Adjusting Nybrostrand Company’s income statement for 2014 reveals a slightly lower net profit than initially reported, emphasizing the impact of accurate inventory valuation and revenue recognition. Furthermore, the application of the matching concept remains fundamental in delivering truthful and comparable financial data, essential for stakeholder trust and effective decision-making.

References

  • Gibson, C. H. (2017). Financial Reporting & Analysis (13th ed.). Cengage Learning.
  • Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2014). Introduction to Financial Accounting (11th ed.). Pearson.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
  • Needles, B., & Powers, M. (2018). Financial Accounting (12th ed.). Cengage Learning.
  • Stickney, C. P., Brown, P., & Wahlen, J. M. (2018). Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective (9th ed.). Cengage Learning.
  • AccountingTools. (2020). The matching principle. Retrieved from https://www.accountingtools.com/articles/2017/5/14/the-matching-principle
  • Investopedia. (2021). Accrual Accounting. Retrieved from https://www.investopedia.com/terms/a/accrualaccounting.asp
  • Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2018). Accounting Principles, Volume 1 (13th ed.). Wiley.
  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Financial Accounting Standards Board (FASB). (2014). Accounting Standards Update No. 2014-09: Revenue from Contracts with Customers. Retrieved from https://fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176161851426

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