Purpose Of Assignment: The Purpose Of This Assignment 126317

Purpose Of Assignmentthe Purpose Of This Assignment Is To Help You Bec

The purpose of this assignment is to help you become familiar with the parts of the multiple-step income statement. An inexperienced accountant prepared a condensed income statement for Simon Company, a retail firm, which is as follows:

Income Statement for Simon Company for the Year Ended December 31, 2017

• Revenues: Net sales of $850,000, Other revenues of $22,000
• Cost of goods sold: $555,000
• Gross profit: $317,000
• Operating expenses: Selling expenses $109,000, Administrative expenses $103,000
• Net earnings: $105,000

As an experienced accountant, you review the statement and identify the following facts:

• Net sales include sales of $911,000, minus freight-out of $33,000, and sales returns and allowances of $28,000.
• Other revenues consist of sales discounts of $18,000 and rent revenue of $4,000.
• Selling expenses include salespersons' salaries of $80,000, depreciation on equipment of $10,000, advertising of $13,000, and sales commissions of $6,000. The commissions are paid but $3,000 of commissions are earned but unpaid as of December 21. All compensation should be recorded as Salaries and Wages Expense.
• Administrative expenses include office salaries of $47,000, dividends of $18,000, utilities of $12,000, interest expense of $2,000, and rent expense of $24,000, which includes prepayments of $6,000 for the first quarter of 2018.

Required: Prepare a detailed multi-step income statement based on the given data, including a brief explanation of about 700 words. Show your work on an Excel spreadsheet and submit it with your explanation. Assume a 25% tax rate.

Paper For Above instruction

The purpose of this assignment is to deepen understanding of the multi-step income statement, which provides a detailed view of a company's revenue streams, expenses, and profitability. Using the provided data about Simon Company, a retail business, this paper will develop a comprehensive income statement, reflecting adjustments and classifications that present an accurate financial picture for the year ended December 31, 2017. The process involves analyzing the original condensed statement, recalculating net sales, identifying and categorizing revenues and expenses correctly, and calculating net income after taxes.

First, understanding the core structure of a multi-step income statement is essential. It separates operating activities from non-operating activities, providing insights into operational efficiency and profitability. The primary components include gross profit, operating income, non-operating revenues and expenses, and net income. Each element must be precisely computed, considering all relevant data and adjustments.

Net sales are refined by subtracting freight-out and sales returns from gross sales, resulting in net sales. Additional revenues such as sales discounts and rent revenue are included under other revenues. Expenses are categorized into selling and administrative expenses, with specific attention to the proper allocation and treatment of accrued commissions and prepayments.

Gross profit is derived by subtracting the cost of goods sold from net sales. Operating expenses are then deducted to determine operating income. Non-operating revenues and expenses are adjusted accordingly, leading to earnings before tax. Applying the 25% tax rate yields the net income attributable to the company.

The detailed calculation process involves adjusting all figures to reflect accrual basis accounting, recognizing earned but unpaid commissions, and accounting for prepayments on rent expense. The comprehensive income statement offers stakeholders a detailed view of the company's financial performance during the fiscal year, supporting better decision-making and financial analysis.

Analysis and Construction of the Multi-step Income Statement

Calculating net sales begins with the gross sales figure of $911,000, from which freight-out ($33,000) and returns and allowances ($28,000) are subtracted, resulting in net sales of $850,000, aligning with the original summarized figure. Additional revenues such as sales discounts ($18,000) and rent revenue ($4,000) are included under 'Other Revenues,' totaling $22,000.

The cost of goods sold remains at $555,000, providing the basis for gross profit calculation. Gross profit is therefore $850,000 minus $555,000, equaling $295,000.

Next, operating expenses are classified into selling expenses and administrative expenses. Selling expenses include salaries ($80,000), depreciation ($10,000), advertising ($13,000), and commissions ($6,000). Notably, commissions earned but unpaid amount to $3,000, which should be accrued, increasing commissions expense and owed commissions liability. Total selling expenses sum to $109,000 after accrual adjustments.

Administrative expenses involve office salaries ($47,000), utilities ($12,000), interest expense ($2,000), rent expense ($24,000), including prepayments ($6,000). The prepayment affects the rent expense recognition: since it covers only part of the upcoming period, the current rent expense remains at $24,000, with the prepayment recorded as a current asset.

Calculating operating income involves subtracting total operating expenses ($109,000 + $103,000 = $212,000) from gross profit, resulting in operating income of $83,000.

Other revenues and expenses include rent revenue ($4,000) and sales discounts ($18,000), which are deducted from income, along with interest expense and adjustments for non-operating activities, to derive earnings before tax. After applying a 25% tax rate, the net income is computed, providing stakeholders with insights into the company's profitability.

This detailed income statement enables assessment of operational efficiency, cost management, and profitability. It also highlights the importance of accurate data classification and adjustments in financial reporting, ensuring compliance with accounting standards and providing useful information for decision-makers.

Conclusion

Constructing a multi-step income statement from the given data involves meticulous analysis and precise application of accounting principles. It enhances understanding of how revenues and expenses interact to influence overall profitability. The process underscores the significance of correct classification, accrual adjustments, and tax considerations. Properly prepared, the income statement offers a comprehensive view of Simon Company's financial performance, serving as a vital tool for management and external stakeholders alike.

References

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