FAR Sims Flashcards
Income Statement Simulation
This simulation asks you to complete tasks related to measurement and disclosure involving the income statement. The simulation provides all the information necessary to do your work.
Situation: Your task is to prepare the income statement for Kendall Inc. The information provided is in no special order, and some items may not be relevant to income statement reporting. All items are pretax, where relevant. Kendall faces an average tax rate of 30% which applies to all items subject to tax. Kendall’s inventory costs have increased gradually over the last several years. Kendall has 10,000 shares of common stock outstanding.
Using the information from the list provided, prepare the segment’s income statement for the current year in the spreadsheet below. Kendall reports all required earnings per share disclosures directly below net income on the income statement. The segment had no dilutive securities outstanding during the period. Kendall reports gross margin and operating income, a subtotal before interest and dividends. Revenue unrelated to gross margin is reported below gross margin. Enter the amount for net sales and cost of goods sold as a single value rather than showing its components.
For each of the Items for Column A below, indicate the concept being defined by double clicking the related cell and selecting the appropriate concept from the list provided. Each concept will be used only once. Amounts not provided in column B will need to be computed by the student and the result entered into appropriate cell. Use parentheses for negative amounts leading to subtotals as appropriate. Please note that the last four entries in the spreadsheet require two decimals each.
Gross sales, $750,000 Sales returns and allowances, ($20,000) Sales discounts, ($5,000) Net Sales 725,000 Cost of Goods Sold: Beginning inventory, $36,000 Transportation in, $32,000 Gross purchases, $212,000 Purchases returns and allowances, ($24,000) Ending inventory, ($45,000) Cost of Goods Sold (211,000) Gross Margin 514,000 Bad debt expense, $12,000 Depreciation and amortization, $67,000 Rent expense, $14,000 Salaries and wage expense, $156,000 Transportation out, $19,000 Operating Income: 246,000 Interest expense, ($9,000) Dividends received on investments in trading securities, $23,000 Income From Continuing Operations before tax 260,000 Income Tax Expense (78,000) Income From Continuing Operations 182,000 Discontinued Operations: Operating loss from discontinued operation 35,000 Net Income 147,000 Earnings Per Share: Income From Continuing Operations 18.20 Discontinued operations 3.50 Net Income 14.70
Rationale:
Only three items were not used on the Income Statement.
- Allowance for doubtful accounts balance, $6,400 - This is a contra asset and is found on the Balance Sheet.
- Cumulative effect of change from LIFO to FIFO, $50,000 - The change from LIFO to FIFO is an accounting principle change which therefore does not affect current period income. It is reported as a direct adjustment to the beginning retained earnings balance.
- Unrealized loss on securities available for sale, ($20,000) - This is a part of Other Comprehensive Income.
- Weighted average common shares outstanding, 10,000 - This is used to calculate EPS, but is not a line item within the income statement.
Income Measure Sim
Gain on disposal of plant asset - Income from continuous operations (IFCO)
Unearned revenue - None of the above
Cumulative effect of change from LIFO to FIFO - Owner’s equity other than the above three measures
Unrealized loss on investment in trading securities - Income from continuous operations (IFCO)
Realized gain on investment in securities available for sale - Income from continuous operations (IFCO)
Unrealized loss on investment in securities available for sale - Other comprehensive income
Cumulative effect of change from FIFO to LIFO - Owner’s equity other than the above three measures
Effect of change in estimate of useful life for a plant asset - Income from continuous operations (IFCO)
Estimated disposal loss on discontinued component for which operations and cash flows can be distinguished from the rest of the entity for operational and financial reporting purposes - Income other than IFCO
Deferred tax liability - None of the above
Increase in unrealized pension cost - Other comprehensive income
Income tax expense - Income from continuous operations (IFCO)
Restructuring charge - Income from continuous operations (IFCO)
Loss from effect of a new regulation or law - Income other than IFCO
Stock dividend distributed - Owner’s equity other than the above three measures
Accumulated other comprehensive income - Owner’s equity other than the above three measures
Dividends received on investment in securities available for sale - Income from continuous operations (IFCO)
Dividends received on equity method investment - None of the above
Journal Entry Sim
- Products are sold with the following warranty: the product may be returned for service free of cost to the customer any time during the year of sale and for the succeeding three calendar years. Thus if a product is sold in 20x3, the warranty covers the product through the end of 20x6. The cost to service warranty claims is estimated to be 1% of sales in the year of sale, 2% in the year following sale, 3% in the second year after sale, and 4% in the third year after sale. During 20x3, sales under warranty totaled $600,000. Assume that warranty expense is recorded as an adjusting entry at year-end. Record that entry for 20x3.
- The count of inventory at year-end for a firm using the periodic inventory system revealed that inventory had increased $40,000 compared with the beginning inventory. Gross purchases for the year totaled $670,000; purchases discounts taken were $12,000; purchases returns and allowances were $82,000; transportation in amounted to $33,000; and transportation out was $9,000. Provide the adjusting entry that establishes cost of goods sold for the period, updates the inventory account, and closes the other accounts related to inventory (only).
- The CEO’s compensation contract includes a provision for a bonus of 15% of income before the bonus but after income taxes (30% rate). Income before bonus and income tax is $1.2 million for the current year. The bonus is computed and paid at year-end to obtain the tax deduction for the bonus in the current year. Prepare the journal entry to record the bonus only.
- Inventory with a recorded cost of $550,000 was completely destroyed in an uninsured casualty deemed unusual and infrequent. The relevant tax rate is 35%. Record the loss and tax effect in one journal entry.
- Warranty expense 60000
1. Warranty liability (60000)
- Inventory 40000
- Purchases discounts 12000
- Purchases returns and allowances 82000
2.
Cost of goods sold 569000
- Purchases (670000)
2. Transportation in (33000)
- Salary expense 131937
- Cash (131937)
- Inventory loss 357500
- Income tax payable 192500
- Inventory (550000)
Cash Flow Sim 1
Payments to suppliers - Operating cash flow
Interest payments - Operating cash flow
Payments to retire bonds outstanding - Financing cash flow
Down payment on purchase of equipment - Investing cash flow
Obtain loan to purchase land to be held as an investment - Financing cash flow
Purchase of treasury stock - Financing cash flow
Depreciation expense - Not a cash flow
Purchase of trading securities - Operating cash flow
Monthly mortgage payment* - Operating cash flow and Financing cash flow
Dividends received on investments - Operating cash flow
Loss on disposal of equipment - Not a cash flow
Proceeds from sale of securities available for sale - Investing cash flow
Annual lease payment on capital lease* - Operating cash flow and Financing cash flow
Payments to fund company pension plan - Operating cash flow
Increase in accounts receivable for the period - Not a cash flow
Cash Flow Sim 2
Proceeds from sale of land held as an investment - Both formats
Change in wages payable for the period - Both formats
Income taxes paid - Direct format only
Payments for insurance premiums - Direct format only
Real estate taxes paid - Direct format only
Change in income taxes for the period - Both formats
Patent amortization - Both formats
Cost of goods sold - Does not appear in SCF
Proceeds from sale of long-term investment in bonds - Both formats
Collections on loans to customers (principal portion) - Both formats
Collections on loans to customers (interest portion) - Direct format only
Dividends paid - Both formats
Amortization of bond discount - Both formats
Proceeds from sale of land used as a parking lot for the firm’s customers - Both formats
Purchase of securities appropriately classified as cash equivalents - Does not appear in SCF
Cash Flow Sim 3
Income Statement for the Year Ended 12/31/10
Sales $400 Wages expense (125) Rent expense (100) Depreciation expense (75) Net income $100
Comparative Balance Sheets 12/31/10
2009 2010 Cash $100 $155 AR 50 75 Prepaid rent 70 50 Equipment 300 400 Accum. Dep. (75) (150) Total Assets $445 $530
Wages payable 30 10
Capital stock 200 230
Retained earnings 215 290
Total L+OE $445 $530
A1 lock copy cut paste
A
B
C
1
Benz Company Statement of Cash Flows For the Year Ended December 31, 2010
2
Operating Activities
3
Collections from customers $375 $0
4 Wages paid ($145) $0
5 Rent paid ($80) $0
6
NCF-operations $0 $150
7
Investing Activities
8 Purchase equipment ($100) $0
9
NCF-investing $0 ($100)
10
Financing Activities
11
Issue capital stock $30 $0
12 Dividends paid ($25) $0
13
NCF-financing $0 $5
14
Increase in cash, 2010 $0 $55
15
Cash, 1/1/12 $0 $100
16
Cash, 12/31/10 $0 $155
17
Reconciliation of Net income and Net Flow from Operations
18
Net income $100 $0
19
Accounts receivable increase ($25) $0
20
Wages payable decrease ($20) $0
21
Prepaid rent decrease $20 $0
22
Depreciation expense $75 $0
23
NCF-operations $0 $150
