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    Maynard Company Income Statement Preparation

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    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?

    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
    Noncurrent assets:
    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
    Current liabilities:
    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
    Shareholders' Equity:
    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

    Exhibit 1
    Cash Receipts and Disbursements
    Month of June

    Cash Receipts
    Cash Sales $44420
    Credit customers 21798
    Diane Maynard 11700
    Bank Loan 20865
    Total Receipts 98783

    Cash Disbursements
    Equipment purchased $23400
    Other assets purchased 408
    Payments on accounts payable 8517
    Cash purchase of merchandise 14715
    Cash purchase of supplies 1671
    Dividends 11700
    Wages paid 5660
    Utilities paid 900
    Miscellaneous payments 135
    Total disbursements 67106

    Cash balance, June 1 $34983
    Receipts 98783
    Subtotal 133766
    Disbursements 67106
    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 *
    Gross Margin
    Wages 5660
    Utilities 900
    Supplies 1671
    Insurance) 2826
    Depreciation) 5928
    Miscellaneous 135
    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

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    Solution Preview

    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 ...

    Solution Summary

    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.