BIKE Company starts with $3,000 cash to finance its business plan of producing bike helmets using a simple assembly process. During the first month of business, the company signs sales contracts for 1,300 units (sales price of $9 per unit), produces 1,200 units (production cost of $7 per unit), ships 1,100 units, and collects in full for 900 units. Production costs are paid at the time of production. The company has only two other costs: (1) sales commissions of 10% of selling price when the company collects from the customer, and (2) shipping costs of $0.20 per unit paid at time of shipment. Selling price and all costs per unit have been constant and are likely to remain the same.
a. Prepare comparative (side-by-side) balance sheets and income statements for the first month of BIKE Company for each of the following three alternatives:
(1) Revenue is recognized at the time of shipment.
(2) Revenue is recognized at the time of collection.
(3) Revenue is recognized at the time of production.
Note: Net income for each of these three alternatives is (1) $990, (2) $810, and (3) $1,080, respectively.
b. The method where revenue is recognized at time of collection, known as the installment method, is acceptable for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax purposes?
c. Comment on the usefulness of the installment method for a credit analyst in using both the balance sheet and income statement.
A revenue recognition for comparative balance sheets are examined.
Prepare statement of cash flows (indirect method) using balance sheet data.
Prepare statement of cash flows (indirect method) using balance sheet data. Presented below are comparative balance sheets for Millco, Inc., at January 31 and February 28, 2004
February 28 and January 31, 2004
February 28, 2004 January 31, 2004
Cash $42,000 $37,000
Accounts receivable 64,000 53,000
Merchandise inventory 81,000 94,000
Total current assets $187,000 $184,000
Plant and equipment:
Production equipment 166,000 152,000
Less: Accumulated depreciation (24,000) (21,000)
Total assets $329,000 $315,000
Short-term debt $44,000 $44,000
Accounts payable 37,000 41,000
Other accrued liabilities 21,000 24,000
Total current liabilities $102,000 $109,000
Long-term debt 33,000 46,000
Total liabilities $135,000 $155,000
Common stock, no par value, 40,000 shares authorized,
30,000 and 28,000 shares issued, respectively $104,000 $96,000
Beginning balance $64,000 $43,000
Net income for month 36,000 29,000
Dividends -10,000 -8,000
Ending balance $90,000 $64,000
Total owners' equity $194,000 $160,000
Total liabilities and owners' equity $329,000 $315,000
Prepare a statement of cash flows using the indirect method