Inexperienced Accountant Prepared This Condensed Scenario

Scenarioan Inexperienced Accountant Prepared This Condensed Income St

Prepare a detailed multiple-step income statement for Simon Company based on the provided scenario, including all relevant revenues, expenses, and calculations. Additionally, write a 700-word explanation of your process in creating the income statement, focusing on how you decided where to place each item, to be submitted as a Word document.

Paper For Above instruction

The task involves reconstructing a comprehensive multiple-step income statement for Simon Company, a retail firm, using provided financial data and adjustments made by an experienced accountant. This process requires understanding the components of the income statement, accurately classifying revenues and expenses, and applying accounting principles to reflect the company's financial performance correctly. Moreover, a written explanation of the approach will demonstrate the analytical reasoning and decision-making involved in preparing the statement.

The income statement is structured into several key sections, starting with net sales, followed by gross profit, operating expenses, and ending with net income before taxes and net income after taxes. Each component must be carefully computed and categorized to present an accurate financial picture.

Analysis and Construction of the Income Statement

Initial data from the scenario indicates a discrepancy between the condensed income statement provided and the actual figures based on an in-depth review. The challenge lies in accurately calculating net sales, which includes deducting freight-out and sales returns and allowances from total sales. The initial reported net sales of $850,000 must be adjusted according to the corrected calculations: sales of $911,000 minus freight-out ($33,000) and sales returns and allowances ($28,000), resulting in net sales of $850,000, confirming the original figure but emphasizing the importance of accurate computation.

Other revenues are composed of sales discounts ($18,000) and rent revenue ($4,000), with sales discounts typically reducing gross sales. As the scenario indicates, these are considered part of the other revenues, which should be added to gross profit calculations, but here they mostly reduce gross sales, so their treatment affects net sales and total revenues.

Cost of goods sold (COGS) of $555,000 is directly deducted from net sales to determine gross profit. The gross profit is therefore $850,000 (net sales) minus $555,000 (COGS), which equals $295,000. However, the original gross profit stated as $317,000 suggests some adjustments or previous inaccuracies; therefore, accurate computation and classification are crucial.

Operating expenses must also be carefully detailed. Selling expenses include salaries, depreciation, advertising, and commissions. Notably, commissions earned but unpaid ($3,000) should be accrued as expenses, reflecting the matching principle, bringing total sales commissions to $9,000 ($6,000 paid + $3,000 accrued).

Administrative expenses comprise office salaries, utilities, interest, rent, and dividends. Dividends are a distribution of profits and should not be included as an expense on the income statement. Rent expense includes prepayments of $6,000 for the first quarter of 2018, which should be adjusted to reflect only the period ending December 31, 2017, i.e., $18,000, assuming monthly rent of $6,000.

All expenses and revenues are then summed to determine net income before taxes. A tax rate of 25% is applied to the pre-tax income to calculate income tax expense, leading to net income after taxes, which provides a complete picture of profitability.

The step-by-step process involves extracting the raw data, performing necessary adjustments, classifying each item according to standard accounting categories, and finally presenting the information in a clear, structured multiple-step income statement format. This approach ensures transparency and facilitates accurate financial analysis, which is essential for decision-making by stakeholders.

Conclusion

Creating the income statement required thorough review and application of accounting principles. Accurate classification of revenues and expenses, correct adjustments for accrued liabilities, prepayments, and other unique items ensure the statement reflects true financial performance. The detailed explanation captures this reasoning process, demonstrating how various components fit into the overall presentation.

References

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