Solved by verified expert :Abstract
The intent of this
paper is to prepare an income statement for Nybrostrand Company in good format,
compare the income or loss compare to the original income statements and
explain the importance of the matching concept.
1. Income statement for Nybrostrand Company.
Nybrostrand
Company
Balance
Sheet from 01January to 31-December-2011
Particulars
Amount
Assets:
Accounts Receivable
$36,500.00
Cash
$16,700.00
Inventory
$76,500.00
Total Current Assets
$129,700.00
Equipment
$395,000.00
Total Fixed Assets
$395,000.00
Total Assets
$524,700.00
Liabilities & Shareholders’ Equity:
Accounts Payable
$78,000.00
Total Current Liabilities
$78,000.00
Long Term Debt
$127,000.00
Total Long-Term Liabilities
$127,000.00
Total Liabilities
$205,000.00
Common Stock
$10,000.00
Paid in Capital
$50,000.00
Retained Earnings
$259,700.00
Total Shareholder’s Equity
$319,700.00
Total Liabilities & Shareholder’s Equity
$524,700.00
2. There is a huge
difference in the original report compared to the second statement since the
income statement became inaccurate due to the error made by the bookkeeper
which is contrary to the guidelines established by the generally accepted
accounting principles (GAAP).
The expenses of an
enterprise should be matched with the revenues of the reporting period so as to
show the company’s correct profitability in the reporting period. It is based
on the cause and effect relationship. The sale of goods leads to the cost of
goods sold and the sales commission expense. If the cost incurred is not
related to the revenue or to a particular accounting period, then it should be
recorded immediately. Example – Advertising Expense and Research and
Development expenditure is to be recorded immediately because the measurement
of future economic benefit cannot be made.
The Income Statement and Balance Sheet are used to report the
financial results of the company. The income statement gives information about
the revenues and expenses of a business so that the Net Income earned can be
determined. The Balance Sheet provides the details about the asset, liabilities
and shareholder’s equity of the business enterprise. It shows the overall
results of the business. The company is able to earn income of $150,150 for the
year ended 31st December, 2011. The proportion of shareholders
equity is greater than the proportionof
liabilities in the capital structure of the company.
The
retained earnings are calculated by adding the net income of $150,150 and
previous retained earnings balance of $108,550. The previous balance of
retained earnings is calculated by difference of debit and credit side of trial
balance. ($959,550 – $851,000).
According to www.finance-lib.com (n.d.),
a fundamental concept of accrual basis accounting
that offsets revenue
against expenses on
the basis of their cause-and-effect relationship.
It states that,
in measuring net income
for an accounting period,
the costs incurred in
that period should
be matched against the revenue generated in the same period. Failure to report
an accurate income statement during the appropriate reporting period can
mislead investors and stockholders.
