Problem 5.5b Prepare A Correct Detailed Multiple-Step 280544

Problem 5 5bprepare A Correct Detailed Multiple Step Income Statement

Prepare a correct detailed multiple-step income statement for Wright Company for the month ended December 31, 2014, considering all adjustments and reconciling discrepancies in sales, revenues, expenses, and taxes as specified. The statement should include net sales, gross profit, operating expenses, income from operations, other revenues and gains, other expenses and losses, income before income taxes, income tax expense, and net income. Assume a tax rate of 25%.

Paper For Above instruction

The comprehensive preparation of Wright Company's income statement for December 31, 2014, involves meticulous adjustments to a provided condensed statement and detailed calculations to ensure accuracy in reflecting financial performance. This process is rooted in the principles of managerial accounting, emphasizing transparency and precision in financial reporting, especially for retail firms like Wright Company that engage in significant sales and related activities.

Initially, the net sales figure from the original statement, which was listed as $952,000, requires re-evaluation based on the detailed facts. According to the data, net sales should be computed as gross sales minus freight-out, sales discounts, and allowances. The gross sales amount is $972,000, with freight-out of $20,000, leading to net sales of $952,000. Furthermore, sales discounts of $12,000 and interest revenue of $4,000 are to be included under other revenues and gains, reflecting the total revenues from non-core activities. Thus, total revenues combine net sales and other revenues, resulting in a more comprehensive view of the company's income sources.

Next, the cost of goods sold (COGS) is recalculated based on inventory management data. Since the original COGS was $548,000, the adjustments in inventory and purchases need to be incorporated to confirm this figure. The gross profit, which is sales minus COGS, amounts to $420,000, aligning with the original statement, but verified through the detailed data provided.

Operating expenses are then categorized and itemized. Selling expenses encompass salespersons’ salaries ($88,000), depreciation ($4,000), sales returns and allowances ($46,000), advertising ($12,000), and sales commissions ($10,000). All these expenses pertaining to sales activities are consolidated under selling expenses. Administrative expenses should include office salaries ($54,000), utilities ($13,000), interest expense ($3,000), and rent expense ($20,000). Dividends, being a distribution of earnings rather than an expense, are excluded from the calculation of net income. Prepaid expenses like rent are recognized in the period when used or paid; thus, $2,000 in rent prepayment applicable to January 2015 is allocated accordingly.

Furthermore, accrued expenses such as utilities incurred but not paid ($3,000) are added to expenses to accurately reflect the financial obligations at year-end. This accrual ensures compliance with matching principles, aligning expenses with the period they relate to, thereby producing a true picture of profitability.

The income from operations is calculated as gross profit minus total operating expenses. After adjustments, this figure provides insight into core business profitability before considering non-operating items. 'Other revenues and gains' include interest revenue ($4,000) and sales discounts ($12,000), while 'Other expenses and losses' contain interest expense ($3,000). These items are combined to determine income before income taxes. Applying the 25% tax rate to income before taxes yields the income tax expense, which, in turn, leads to the net income figure after tax deduction.

Through this structured approach, the detailed multiple-step income statement for Wright Company faithfully reflects the company's financial performance and adheres to accounting standards, enhancing the quality of financial reporting for stakeholders and management evaluation.

References

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