Integrative Descriptions of Income Statements

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Note: The blue cells are for data entry. Enter text in the T cells, formulas in the F cells, dollars or numbers in the $ cells

Integrative

The following income statement, statement of cash flows, and additional information are available
for PEK Company:
PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2010

Sales revenue $1,250,000
Cost of goods sold 636,500
Gross profit $613,500
Depreciation on plant equipment $58,400
Depreciation on buildings 12,000
Interest expense 33,800
Other expenses 83,800 188,000
Income before taxes $425,500
Income tax expense (30% rate) 127,650
Net income $297,850

PEK COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2010

Cash flows from operating activities:
Net income $297,850
Adjustments to reconcile net income to net cash provided
by operating activities (includes depreciation expense) 83,200
Net cash provided by operating activities $381,050
Cash flows from financing activities:
Dividends (35,000)
Net increase in cash $346,050

Additional information:
a. Beginning inventory and purchases for the one product the company sells are as follows:

UNITS UNIT COST
Beginning inventory 50,000 $2.00
Purchases:
February 5 25,000 2.10
March 10 30,000 2.20
April 15 40,000 2.50
June 16 75,000 3.00
September 5 60,000 3.10
October 3 40,000 3.25

b. During the year, the company sold 250,000 units at $5 each.
c. PEK uses the periodic FIFO method to value its inventory and the straight-line method to depreciate all of its
long-term assets.
d. During the year-end audit, it was discovered that a January 3, 2010, transaction for the lump-sum purchase
of a mixing machine and a boiler was not recorded. The fair market values of the mixing machine and the
boiler were $200,000 and $70,000, respectively. Each asset has an estimated useful life of ten years with
no residual value expected. The purchase of the assets was financed by issuing a $270,000 five-year
promissory note directly to the seller. Interest of 8% is paid annually on December 31.

Required

1. Prepare a revised income statement and a revised statement of cash flows to take into account the
omission of the entry to record the purchase of the two assets. (Hint: You will need to take into account any
change in income taxes as a result of changes in any income statement items. Assume that income taxes
are paid on December 31 of each year.)

PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2010

Sales revenue F
Cost of goods sold F
Gross profit F
Depreciation on plant equipment F
Depreciation on buildings F
Interest expense F
Other expenses F F
Income before taxes F
Income tax expense (30% rate) F
Net income F

PEK COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2010

Cash flows from operating activities:
Net income F
Adjustments to reconcile net income to net cash provided
by operating activities (includes depreciation expense) F
Net cash provided by operating activities F
Cash flows from financing activities:
Dividends F
Net increase in cash F

Supplemental Schedule of Noncash Investing and Financing Activities:
T

2. Assume the same facts as in (1), except that the company is considering the use of an accelerated method
rather than the straight-line method for the assets purchased on January 3, 2010. All other assets would
continue to be depreciated on a straight-line basis. Prepare a revised income statement and a revised
statement of cash flows assuming that the company decides to use the accelerated method for these two
assets rather than the straight-line method, resulting in incremental depreciation of $49,091 for 2010.

PEK COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2010

Sales revenue F
Cost of goods sold F
Gross profit F
Depreciation on plant equipment F
Depreciation on buildings F
Interest expense F
Other expenses F F
Income before taxes F
Income tax expense (30% rate) F
Net income F

PEK COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2010

Cash flows from operating activities:
Net income F
Adjustments to reconcile net income to net cash provided
by operating activities (includes depreciation expense) F
Net cash provided by operating activities F
Cash flows from financing activities:
Dividends F
Net increase in cash F

Supplemental Schedule of Noncash Investing and Financing Activities:
T

Treat the answers in requirements (3) and (4) as independent of the other parts.

3. Assume that PEK decides to use the LIFO method rather than the FIFO method to value its inventory and
recognize cost of goods sold for 2010. Compute the effect (amount of increase or decrease) this would have
on cost of goods sold, income tax expense, and net income.

a. LIFO cost of goods sold:
Units Cost Total Cost
N $ F
N $ F
N $ F
N $ F
N $ F
N $ F
N $-

Total LIFO cost of goods sold F
Total FIFO cost of goods sold F
Increase in cost of goods sold F

b. Additional cost of goods sold F
Times the tax rate %
Decrease in income tax expense F

c. Additional cost of goods sold F
Decrease in income taxes F
Decrease in net income F

4. Assume that PEK failed to record an estimate of bad debts for 2010. (Bad debt expense is normally
included in "other expenses.") Before any adjustment, the balance in Allowance for Doubtful Accounts
is $8,200. The credit manager estimates that 3% of the $800,000 of sales on account will prove to be
uncollectible. Based on this information, compute the effect (amount of increase or decrease) of recognition
of the bad debt estimate on other expenses, income tax expense, and net income.

a. Sales on account F
Times estimated uncollectibles %
Increase in other expenses F

b. Increase in other expenses F
Times the tax rate %
Decrease in income tax expense F

c. Increase in other expenses F
Decrease in income taxes F
Decrease in net income F