Purpose Of This Assignment Is To Help You Bec

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 contains inaccuracies and omissions that need correction and expansion into a detailed multi-step income statement. As an experienced accountant, your task is to analyze the given financial data, adjust and reclassify amounts appropriately, and prepare a comprehensive multi-step income statement for the year ended December 31, 2017. Additionally, you are required to write a brief 700-word explanation of the income statement, outlining the significance of each section, what adjustments you made, and how these adjustments improve the clarity and accuracy of financial reporting. The explanation should include insights into the calculation of net sales, gross profit, operating income, and net income, considering tax effects and non-operating items. You will also demonstrate your work using an Excel spreadsheet, showing detailed calculations to support your final income statement. This exercise aims to deepen your understanding of income statement components, classification of expenses, treatment of unearned revenues, and the importance of proper financial reporting in decision-making processes.

Paper For Above instruction

The preparation of a detailed multi-step income statement is a crucial aspect of financial accounting, providing insight into a company's operational efficiency and profitability. In this scenario, the primary goal is to correct and expand upon the initially provided, simplified income statement for Simon Company, thereby offering a clearer depiction of the firm's financial performance for the year ended December 31, 2017. This process involves meticulous analysis and classification of revenues and expenses, considering appropriate adjustments, and understanding the relevance of various components within the income statement structure.

Starting with net sales, the original statement reports $850,000. However, the detailed analysis reveals that net sales should be calculated as sales of $911,000 minus freight-out expenses of $33,000, and sales returns and allowances of $28,000. Therefore, net sales should be:

Net Sales = $911,000 - $33,000 - $28,000 = $850,000.

This confirms the initial net sales figure, but the breakdown and calculation clarity are essential for transparency and accuracy.

Next, considering other revenues, the statement lists $22,000, which includes sales discounts of $18,000 and rent revenue of $4,000. It's important to classify sales discounts as reductions of gross sales rather than as part of 'other revenues.' For reporting purposes, sales discounts are subtracted from gross sales to arrive at net sales, which has already been addressed. Therefore, 'other revenues' should include only rent revenue of $4,000, and sales discounts are embedded within net sales adjustments.

The cost of goods sold (COGS) appears accurate at $555,000 based on the adjusted net sales and gross profit calculation. Gross profit, therefore, is:

Gross Profit = Net Sales - Cost of Goods Sold = $850,000 - $555,000 = $295,000.

Note that this differs from the initially reported gross profit of $317,000 due to the correction in net sales. The initial gross profit was likely overestimated due to the misclassification or incorrect calculation of net sales components.

Operating expenses encompass selling and administrative expenses. Selling expenses consist of salaries ($80,000), depreciation on equipment ($10,000), advertising ($13,000), and sales commissions ($6,000). Notably, the $6,000 commissions are earned but unpaid, thus accruing as a liability, which should be included in salaries and wages expenses for proper matching. Total selling expenses are:

Selling Expenses = $80,000 + $10,000 + $13,000 + $6,000 = $109,000.

Administrative expenses include office salaries ($47,000), utilities ($12,000), interest expense ($2,000), rent expense ($24,000, including $6,000 prepayments for the first quarter of 2018), and dividends ($18,000). Since dividends are not an expense but a distribution of earnings, they should not be included in the income statement. Therefore, administrative expenses should total:

Administrative Expenses = $47,000 + $12,000 + $2,000 + $24,000 = $85,000.

This correction ensures the expenses reflect operational costs only.

The calculation of net income involves subtracting total expenses from gross profit and considering taxes at 25%. The income before tax is:

Operating income = Gross profit - Operating expenses (selling + administrative) = $295,000 - ($109,000 + $85,000) = $101,000.

Tax expense = 25% of $101,000 = $25,250.

Net income after tax = $101,000 - $25,250 = $75,750.

Furthermore, interest expense and rent expense are non-operating expenses; rent expense of $24,000 already accounts for prepayments, and interest expense of $2,000 is included in operating expenses in this case. The rent revenue of $4,000 appears as non-operating revenue and should be listed separately under 'Other Revenues.' The rent prepayment of $6,000 for the upcoming quarter is a current asset and should be classified as a prepaid expense, not an expense in the current period.

All these adjustments lead to a comprehensive understanding of Simon Company's financial position, which is vital for internal decision-making and external reporting. The resulting multi-step income statement is structured to clearly differentiate between operating revenues, operating expenses, and non-operating items, providing stakeholders with a transparent view of the company's profitability.

References

• Financial Accounting: Tools for Business Decision Making, 9th Edition, Kieso, Weygandt, and Warfield, 2019.
• Gibson, C. H. (2018). Financial Reporting & Analysis. Boston: Cengage Learning.
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