Module 3: Slp Income Statement We Reviewed The Balance Sheet

Module 3 Slpincome Statementwe Reviewed The Balance Sheet For Vwv In

In this assignment, the focus is on analyzing the income statement of VWV Company for the period ending December 31, 20XX. The goal is to interpret various financial elements, understand the nature of the company's operations, and evaluate accounting methods used, based solely on the provided income statement and some insights from the previous balance sheet. The response should adopt a question-and-answer format, utilizing Word, and should not involve Excel. Critical aspects include identifying the company's type, explaining key financial terms, and discussing accounting principles and their implications.

Paper For Above instruction

The analysis of VWV Company's income statement provides valuable insights into the nature of its business operations, financial structure, and accounting practices. Based on the details provided, we can address several key questions to understand the company's financial health and operational characteristics better.

Is VWV a manufacturer/reseller or a service company?

Identifying whether VWV is a manufacturer, reseller, or service company largely depends on the components of its income statement. The presence of a "Cost of Goods Sold" (COGS) figure suggests that VWV performs some form of production or sourcing of goods that are sold to customers. If VWV were solely a service company, it might not report COGS or would report it differently (e.g., as direct labor or service-related expenses). Given the COGS of $200,000 and a gross profit of $340,000, VWV appears to be engaged in manufacturing or reselling goods rather than purely providing services. This structure indicates that VWV likely produces or resells tangible products, as COGS accounts for the direct costs involved in producing or purchasing those goods.

What is the term "cost of goods sold," and why is it significant?

The "cost of goods sold" (COGS) refers to the direct costs attributable to the production or purchase of the goods that a company sells during a specific period. It includes expenses such as raw materials, direct labor, and manufacturing overhead for a manufacturer, or the purchase cost of inventory for a reseller. This item is significant because it directly impacts gross profit; controlling COGS can improve profitability. A higher COGS without a proportional increase in sales price may reduce gross profit, affecting overall net income. Therefore, managing COGS effectively is vital for the company's financial health and cost efficiency.

Does the company have employees, and does it own property?

Yes, VWV likely has employees, as indicated by the salary expenses listed ($100,000). The presence of salary expenses suggests the need for personnel involved in operations, administration, or production. As for ownership of property, the inclusion of depreciation expenses ($19,922) indicates that the company owns long-term assets such as equipment, machinery, or property that depreciate over time. Furthermore, the lease expense ($30,000) for an office implies that the company may lease but also possibly owns or invests in property or equipment that depreciates.

Can we determine these details from the income statement alone or do we need to examine the balance sheet too?

While some insights can be gleaned from the income statement—such as expenses related to employees, depreciation indicating property or equipment ownership, or leasing costs—comprehensive understanding of asset ownership and liabilities requires examining the balance sheet. The balance sheet reveals detailed information about assets like property, equipment, and intangible assets, as well as liabilities and shareholders’ equity. As such, a complete picture of the company's financial position and operational scope is only possible when analyzing both financial statements.

Are earnings per share (EPS) important for VWV Company?

Earnings per share (EPS) is a crucial financial metric for public companies or those seeking external investment, as it indicates profitability on a per-share basis. For VWV, which appears to be a private entity based on the information provided, EPS may be less critical unless the company has outstanding shares or plans to go public in the future. However, if public or investor interest exists, EPS remains a key indicator of financial performance, influencing investment decisions and company valuation.

How do dividends affect the income statement?

Dividends are distributions of a company's earnings to shareholders and are recorded in the retained earnings section of the equity on the balance sheet, not on the income statement. Therefore, dividends do not directly impact net income or the income statement. Instead, they are paid out of net income after it is reported and are disclosed separately in the financing section of the statement of cash flows or in the notes to financial statements.

How do we know VWV Company is using the accrual basis of accounting?

The key indicator that VWV uses the accrual basis is the presence of revenues and expenses that are recognized when earned or incurred, regardless of cash receipt or payment. This is implied by the inclusion of items like depreciation, accrued expenses, and interest income and expense, which suggest that revenues and expenses are recorded when they occur, not necessarily when cash is exchanged. To confirm, referencing the prior balance sheet or notes to the financial statements would reveal whether the company records receivables and payables, typical of accrual accounting.

Why is the company using the accrual basis instead of cash basis?

The accrual basis provides a more accurate picture of a company's financial position and performance over time, aligning income and related expenses in the period they occur. This method is preferred for most businesses because it complies with Generally Accepted Accounting Principles (GAAP) and offers better insights into profitability, receivables, and payables management. Cash basis accounting, by comparison, records transactions only when cash changes hands, which can distort the true financial health and operational efficiency of the business.

Comment on operating income versus net income.

Operating income, at $109,878, reflects the company's profit from core business activities, excluding interest and taxes. Net income, which is $98,128, accounts for all revenues and expenses, including interest income, interest expenses, taxes, and any non-operating items. The difference indicates how financial activities outside core operations impact overall profitability. A healthy operating income suggests efficient core operations, while the net income provides a comprehensive view of total profitability after financial adjustments.

Conclusion

Analyzing VWV's income statement reveals its manufacturing or reselling nature, evidenced by COGS and related expenses. The company's use of depreciation and lease expenses implies ownership and leasing of assets. The reliance on accrual accounting offers a realistic view of financial health, integrating timing of revenues and expenses. While EPS and dividends may hold varying levels of importance depending on the company's ownership structure, they are integral to external stakeholder assessments. Ultimately, understanding both the income statement and balance sheet provides a holistic view of VWV's financial position, performance, and operational efficiency.

References

• Penman, S. H. (2013). Financial Statement Analysis and Security Valuation (5th ed.). McGraw-Hill Education.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis (11th ed.). Pearson.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
• Stickney, C. P., Brown, P., Wahlen, J., & Schipper, K. (2010). Financial Reporting, Financial Statement Analysis, and Valuation. Cengage Learning.
• American Institute of Certified Public Accountants (AICPA). (2020). Generally Accepted Accounting Principles (GAAP).
• Craig, R., & Reeve, J. (2020). Financial Accounting: An Introduction. Pearson.
• Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
• Gibson, C. H. (2013). Financial Reporting & Analysis. South-Western Cengage Learning.
• Healy, P. M., & Palepu, K. G. (2012). Business Analysis & Valuation: Using Financial Statements. Cengage Learning.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis. Wiley.