Prepare An Income Statement For Nybrostrand Company

Prepare an income statement for Nybrostrand Company based on provided data

The assignment involves creating an accurate income statement for Nybrostrand Company for the year ending December 31, 2014, based on the provided trial balance information and additional considerations regarding inventory valuation and sales recording. The report must be formatted in Times New Roman, font size 12, double-spaced, and include detailed computations, discussion of results, and references in APA format.

Additionally, the analysis requires comparing the computed income or loss to the original income statement and discussing the significance of the matching concept. The problem emphasizes understanding the impact of inventory adjustments on gross profit and net income, considering the correction of sales figures and cost of goods sold (COGS).

Paper For Above instruction

Nybrostrand Company’s financial performance for the fiscal year ending December 31, 2014, requires preparation of an income statement that accurately reflects the company’s revenues, costs, and net income after adjustments based on new information. The data provided includes the trial balance, which forms the basis of calculation, with specific notes on the sales transaction and inventory adjustments.

Introduction

An income statement is a fundamental financial statement that summarizes a company's revenues and expenses over a specific period, providing insight into its profitability. In this case, the focus is on ensuring the accuracy of the income statement by properly adjusting for misstatements related to sales and inventory. Such adjustments are crucial because they directly impact the calculation of gross profit and net income, thereby influencing management decisions, investor confidence, and compliance with accounting standards such as the matching concept.

Adjustments and Calculations

Initially, the bookkeeper recorded a sale of $42,500 based on a client’s interest, without a confirmed purchase commitment. Since the sale was not actual, this amount must be reversed from revenues, reducing total gross revenues. The correction involves removing this sales figure from the income statement, affecting both revenue and the associated cost of goods sold, which was calculated incorrectly due to the inclusion of total production costs without adjusting for ending inventory.

In the original trial balance, the Sales figure was $586,000, but considering the unconfirmed sale, the corrected revenue should be $586,000 - $42,500 = $543,500. This correction impacts the gross profit calculation.

Regarding cost of goods sold (COGS), the initial figure was $307,000, derived from total production costs for 2014. However, those costs included inventory that was not sold yet at year-end ($42,500 worth of units). The physical count determined the ending inventory, which was not correctly reflected in the initial COGS calculation. To accurately determine COGS, we need to deduct the ending inventory of $34,000 from the total manufacturing costs, adjusting for the units remaining unsold at year-end.

Revised COGS Calculation

Assuming the production costs relate proportionally to the inventory, and the physical count specifies an ending inventory of $34,000, the corrected COGS is calculated as:

Total Production Costs - Ending Inventory = Corrected COGS

$307,000 - $34,000 = $273,000

This refined figure ensures the gross profit reflects only the cost of goods that were actually sold during the period, adhering to the matching principle.

Income Statement Preparation

Following these adjustments, the income statement for Nybrostrand Company for the year ending December 31, 2014, is presented as follows:

Discussion and Analysis

The revised income statement indicates a net income of $104,650, emphasized by correcting the sales figure and inventory-based COGS adjustment. Previously, if the unconfirmed sale had been included, the revenues would have been overstated, leading to an inflated gross profit and net income. Such overstatement distorts the company's financial health and can mislead stakeholders. Correcting these errors highlights the importance of accurate recording and adjusting entries to reflect true performance.

The principle of the matching concept, fundamental to accrual accounting, dictates that expenses should be recognized in the same period as the revenues they help generate. Proper inventory valuation ensures that COGS aligns with actual sales, providing a realistic picture of profitability. By adjusting COGS for unsold inventory, the company avoids overstating income, maintains compliance with accounting standards, and ensures financial statements are meaningful to users.

Comparison with Original Income Statement

The original income statement likely showed higher revenues and gross profit due to the unconfirmed sale inclusion and incorrect COGS calculation. The corrected statement provides a more accurate depiction of profitability, demonstrating the importance of adhering to the matching concept. Accurate matching of revenues and expenses ensures financial statements are reliable and useful for decision-making.

Conclusion

Constructing an accurate income statement for Nybrostrand Company requires meticulous adjustments for unverified sales and inventory valuation. The corrected figures underpin the importance of the matching concept, ensuring expenses are properly aligned with associated revenues. Accurate financial reporting not only upholds accounting standards but also fosters transparency, enabling stakeholders to assess the company's true financial position effectively.

References

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