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What does the income statement tell you about the company?

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- What does the income statement tell you about the company? Why is this statement important? What business decisions could be made using the income statement?

- What does the balance sheet tell you about the company? Why is the balance sheet important? What business decisions could be made using the balance sheet?

- What does the statement of cash flows tell you about the company? What business decisions could be made using the statement of cash flows?

- What information is provided in the statements that will assist you in making these business decisions? What information is not provided that could assist in managerial decision making?

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1. What does the income statement tell you about the company? Why is this statement important? What business decisions could be made using the income statement?

An income statement shows the financial results of the company for the particular financial year. It shows the profit or loss of the company for the particular financial period. It shows the operational efficiency of the company. It shows how much money came into the company as revenue and how much money spent as expenses and the net effect of sales and expenses. The net effect will be profit or loss.

An income statement is not necessarily to be tallied. An income statement shows either profit or loss except when the income and expenses are equal. However, a balance sheet must be tallied as the assets the company owns should be equivalent to the liabilities payable.

An income statement is important as it shows the operational efficiency of the company. Shareholders will decide to buy more shares if the income statement shows a positive figure. If it is negative, shareholders will decide to sell their holdings and the market price of the share of the company will decline. If the income statement shows high profit, then the company can decide to expand its business by the issue of new shares or it may decide to plough back the income by issue of stock dividend. Likewise, the company can decide to drop the segment which is incurring loss or it can decide to put more efforts on the segment which is yielding high income as income statement shows the income from different segments.

2. What does the balance sheet tell you about the company? Why is the balance sheet important? What business decisions could be made using the balance sheet?

A balance sheet shows ...

Solution Summary

This solution discusses the elements fo the balance sheet, income statement and cash flow statement in 1179 words.

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The Colo Company: Multiple-Step Income Statement, Statement of Owner's Equity and Classified Balance Sheet

The Colo Company

Assume it is Monday, May 1, the first business day of the month, and you have just been hired as the accountant for Colo Company, which operates with monthly accounting periods. All of the company's accounting work is completed through the end of April and its ledgers show April 30 balances.
During your first month on the job, the company experiences the following transactions and events (terms for all its credit sales are 2_10, n_30 unless stated differently):

May 1 Issued Check No. 3410 to S&P Management Co. in payment of the May rent, $3,710. (Use two lines to record the transaction. Charge 80% of the rent to Rent Expense?Selling Space and the balance to Rent Expense?Office Space.)

2 Sold merchandise on credit to Hensel Company, Invoice No. 8785, for $6,100 (cost is $4,100). 2 Issued a $175 credit memorandum to Knox, Inc., for defective (worthless) merchandise sold on April 28 and returned for credit. The total selling price (gross) was $4,725.

3 Received a $798 credit memorandum from Peyton Products for the return of merchandise purchased on April 29.

4 Purchased the following on credit from Gear Supply Co.: merchandise, $37,072; store supplies, $574; and office supplies, $83. Invoice dated May 4, terms n_10 EOM.

5 Received payment from Knox, Inc., for the balance from the April 28 sale less the May 2 return and the discount.

8 Issued Check No. 3411 to Peyton Products to pay for the $7,098 of merchandise purchase on April 29 less the May 3 return and a 2% discount.

9 Sold store supplies to the merchant next door at their cost of $350 cash.

10 Purchased $4,074 of office equipment on credit from Gear Supply Co., invoice dated May 10, terms n_10 EOM.

11 Received payment from Hensel Company for the May 2 sale less the discount.

11 Purchased $8,800 of merchandise from Garcia, Inc., invoice dated May 10, terms 2_10, n_30.

12 Received an $854 credit memorandum from Gear Supply Co. for the return of defective office equipment received on May 10.

15 Issued Check No. 3412, payable to Payroll, in payment of sales salaries, $5,320, and office salaries, $3,150. Cashed the check and paid the employees.
15 Cash sales for the first half of the month are $59,220 (cost is $38,200). (Cash sales are recorded daily but are recorded only twice here to reduce repetitive entries.)

15 Post to the customer and creditor accounts. Also post individual items that are not included in column totals at the end of the month to the general ledger accounts. (Such items are posted daily but are posted only twice each month because they are few in number.)

16 Sold merchandise on credit to Hensel Company, Invoice No. 8786, for $3,990 (cost is $1,890).

17 Purchased $13,650 of merchandise from Fink Corp., invoice dated May 14, terms 2_10,n_60.

19 Issued Check No. 3413 to Garcia, Inc., in payment of its May 10 invoice less the discount.

22 Sold merchandise to Lee Services, Invoice No. 8787, for $6,850 (cost is $4,990), terms 2_10, n_60.

23 Issued Check No. 3414 to Fink Corp. in payment of its May 14 invoice less the discount.

24 Purchased the following on credit from Gear Supply Co.: merchandise, $8,120; store supplies, $630; and office supplies, $280. Invoice dated May 24, terms n_10 EOM.

25 Purchased $3,080 of merchandise from Peyton Products, invoice dated May 23, terms 2_10, n_30.

26 Sold merchandise on credit to Crane Corp., Invoice No. 8788, for $14,210 (cost is $8,230).

26 Issued Check No. 3415 to Perennial Power in payment of the May electric bill, $1,283.

29 The owner of Colo Company, Jenny Colo, used Check No. 3416 to withdraw $7,000 cash from the business for personal use.

30 Received payment from Lee Services for the May 22 sale less the discount.

30 Issued Check No. 3417, payable to Payroll, in payment of sales salaries, $5,320, and office salaries, $3,150. Cashed the check and paid the employees.

31 Cash sales for the last half of the month are $66,052 (cost is $42,500).
31 Post to the customer and creditor accounts. Also post individual items that are not included in column totals at the end of the month to the general ledger accounts. Foot and crossfoot the journals and make the month-end postings.

Required
1. Enter these transactions in a sales journal, a purchases journal, a cash receipts journal, a cash disbursements journal, or a general journal as illustrated in this chapter. Post when instructed to do so. Assume a perpetual inventory system.
2. Prepare a trial balance in the Trial Balance columns of the work sheet form provided with the working papers. Complete the work sheet using the following information for accounting adjustments:

a. Expired insurance, $553.
b. Ending store supplies inventory, $2,632.
c. Ending office supplies inventory, $504.
d. Depreciation of store equipment, $567.
e. Depreciation of office equipment, $329.

Prepare and post adjusting and closing entries.

3. Prepare a May 2005 multiple-step income statement, a May 2005 statement of owner's equity, and a May 31, 2005, classified balance sheet.

4. Prepare a post-closing trial balance. Also prove the accuracy of subsidiary ledgers by preparing schedules of both accounts receivable and accounts payable.

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