Please help me prepare an income statement and answer the following questions for this situation:
Diane Maynard was grateful for the balance sheets that her friend prepared. ( I attached the balance sheet I did) In going over the numbers, she remarked, "it's sort of surprising that cash increased by $31677, but net income was only $19635. Why was that? Her friend replied, "A partial answer to that question is to look at an income statement for June. I think I can find the data I need to prepare one for you." In addition to the data given in the case, her friend found a record of cash reciepts and disbursements, which is summarized in Exhibit 1. She also learned that all accounts payable were to vendors for purchase of merchandise inventory and that cost of sale was $39345 in June.
1. Prepare an income statement for June in proper format. Explain the derivation of each item on this statement, including cost of sales.
2. Explain why the change in the cash balance was greater than the net income.
3. Explain why the following amounts are incorrect cost of sales amounts for June: (a) 14715 and (b) 36030. Under what circumstances would these amounts be correct cost of sales amounts?
BALANCE SHEETS AS OF JUNE 1 AND JUNE 30
Current Assets: As of June I As of June 30:
Cash $ 34,983 $ 66,660
Accounts receivable 21,798 26,505
Note receivable 11,700 0
Merchandise inventory 29,835 26,520
Supplies on hand 5,559 6,630
Prepaid insurance 3,150 2,826
Total current assets $107,025 $129,141
Land 89,700 89,700
Building 585,000 585,000
Less: Accumulated depreciation (156,000 ) 429,000 ( 157,950 ) 427,050
Equipment 13,260 36,660
Less: Accumulated depreciation ( 5,304 ) 7,956 ( 5,928 ) 30,732
Other noncurrent assets 4,857 5,265
Total noncurrent assets 531,513 552,747
Total assets $638,538 $681,888
Liabilities and Shareholders' Equity
Accounts payable $8,517 $ 21,315
Bank notes payable 8,385 29,250
Taxes payable 5,700 7,224
Accrued wages payable 1,974 2,202
Total current liabilities $ 24,576 $ 59,991
Other noncurrent liabilities 2,451 2,451
Total liabilities 27,027 62,442
Capital stock 390,000 390,000
Retained earnings 221,511 229,446
Total shareholder's equity 611,511 619,446
Total liabilities and shareholders' equity $638,538 $681,888
Cash Receipts and Disbursements
Month of June
Cash Sales $44420
Credit customers 21798
Diane Maynard 11700
Bank Loan 20865
Total Receipts 98783
Equipment purchased $23400
Other assets purchased 408
Payments on accounts payable 8517
Cash purchase of merchandise 14715
Cash purchase of supplies 1671
Wages paid 5660
Utilities paid 900
Miscellaneous payments 135
Total disbursements 67106
Cash balance, June 1 $34983
Cash balance, June 30 $66660
INCOME STATEMENT .... I just don't know where should I get the other values or I have entered the correct values which are marked in red. I tried many times but I cannot come up with net income of 19635.
Sales ($44,420 cash sales + $26,505 credit sales) $70,925
Less: Cost of sales *
Income before income tax
Income tax expense 7224
Net Income 19,635
Less: Dividends 11700
Increase in retained earnings 7935
*Cost of sales:
Merchandise purchased for cash $14,715
Merchandise purchased on credit
Inventory, June 1 29835
Total goods available during June
Inventory, June 30 26520
Cost of Sales
You did good as far as you went, but it is difficult to make this kind of analysis without preparing journal entries. The part you are having trouble with is the change in the balance sheet amounts. You need only deal with the change.
For example, insurance expense is 3150 - 2826 = 324. You attempted to expense the entire balance rather than just the change. Depreciation is only the change of 2574 too.
There are a couple of tricky ...
The solution explains the process to arrive at the correct amounts and also gives the computation of the values. A formatted income statement is not prepared, but all the amounts are calculated and shown to drop into a format. Further comments explain adjustments to the balance sheet. There are two tricky parts to this problem; both are explained.