Nybrostrand Company

  • Uncategorized

NybrostrandCompany

Student’sname:

NybrostrandCompany

Acc201 Slp

Thebalance sheet –

Adjustments

Fromthe additional information, the bookkeeper failed to adjust all thebooks of account for the unrealized revenue. The unsold goods worthof $42,500 required adjustments in various accounts such as revenueaccount, the cost of goods account, and inventory account. However,the bookkeeper did not adjust the end of period inventory, and thistherefore, affects the balance sheet. This adjustment increases theending inventory or the current assets by the full amount of $42,500.Therefore, the new inventory level will be as follows $34,000 +42,500 = $76,500. This affects the balance sheet in the currentassets section as it is shown in the new balance sheet of NybrostrandCompany below.

Theissuance of new shares will help the company in raising more cashfrom the public. The main impact of this move on the financialstatements of the company is that, the issuance of shares will changethe capital structure of the company. Secondary offering of stockwill raise the paid in capital from $50,000 to $200,000. The newcapital structure is also as indicated in the new balance sheet shownbelow (Kieso &amp Weygandt, 2011).

Thecompany also paid dividends worth of $15,000. Dividends are paid fromthe retained earnings of a firm, and since this amount was paidbefore deciding the offering, the adjustments will be to reduce theamount of the retained earnings by the full amount of $15,000. It isalso important to note that dividend payment is not an expense to thefirm, but it is the distribution of the company’s profit to theshareholders (Fridson &amp Alvarez, 2012). However, dividends haveno impact on the balance sheet until they are declared by the boardof directors. Assuming that the payment of dividends was made bycash, this implies that the cash in hand balance will reduce by$15,000. However, in the company just reserve cash to pay dividendsin future has no effect on the cash balance.

Anotheradjustment is on the purchase of the new land. This is a fixed assetand therefore, affects the balance sheet. It will be assumed that the$40,000 paid for the land were from the retained earnings of thefirm. Therefore, the adjustment will reduce the retained earnings by$40,000 and increase the fixed assets by $400,000. The restsettlement for the land was made through note payable, and thisincreases the current liabilities of the firm. The new balance sheetwith the above necessary adjustments is as shown below.

Nybrostrand Company

The balance sheet as of 31/12/2014

Book value

Accm. Dept

Net book value

Non-current assets:

$

$

$

Land

400,000

0

400,000

Equipment

439,350

24,350

415,000

Current assets:

Inventory

76,500

Accounts receivable

36,500

Cash

15,000

128,000

Total Assets

943,000

Financed by: (liabilities and capital)

Common stock

10,000

Paid in capital

200,000

Retained Earnings

124,410

Capital

43,590

Totals Equity

378,000

Current liabilities:

Account payables

78,000

Notes payable

360,000

Non-current liabilities:

Long term debt

127,000

Total liabilities and equity

943,000

Theeffect of paying out dividends is on the retained earnings. As it isshown from the above-updated balance sheet, the retained earningshave reduced by $15,000 which was used for the payment of dividends.This therefore, makes a difference between initial balance sheet andthe new balance sheet of NybrostrandCompany.

Reference

Collis,J., &amp Hussey, R. (2007). Businessaccounting: Introduction to financial and management accounting.Basingstoke: Palgrave Macmillan.

Fridson,M., &amp Alvarez, F. (2012). Financialstatement analysis: A practitioner`s guide (4thed.).Hoboken, N.J.: Wiley.

Kieso,D., &amp Weygandt, J. (2011). Intermediateaccounting(14th ed.). Hoboken, NJ: Wiley.

Nybrostrand Company

  • Uncategorized

NybrostrandCompany

Student’sname:

Dateof Submission:

NybrostrandCompany

Originalincome statement

Nybrostrand Company

The income statement as at 31/12/2014

$

$

Sales

586,000

Cost of goods sold

(307,000)

Gross profit

279,000

Less other expenses

Depreciation expense

24,350

Insurance

1,400

Marketing

4,500

Property taxes

16,900

Rent

28,000

Salaries

78,500

Utilities

6,700

(160,350)

Net profit / retained earnings

118,650

Adjustingaccounts

Thefollowing are the workings to adjust the appropriate accounts

(Adjustingfor the Revenue)

Revenue Account

Unrealized Revenue $42,500

Revenue $628,500

Bal c/d 586,000

628,500

628,500

Adjustingfor the cost of goods sold:

628,500= $307,000

586,000= = $286,240

Cost of Goods Sold Account

Bank $307,000

Unrealized Revenue$22,265

Balance c/d 284,735

307,000

307,000

Theadjusted income statement will be as shown below.

Nybrostrand Company

The income statement as at 31/12/2014

$

$

Sales

586,000

Cost of goods sold

(286,240)

Gross profit

299,760

Less other expenses

Depreciation expense

24,350

Insurance

1,400

Marketing

4,500

Property taxes

16,900

Rent

28,000

Salaries

78,500

Utilities

6,700

(160,350)

Net profit / Retained Earnings

139,410

Comparingthe income/loss with that of the original income statement

Theincome of the original income statement had been understated. This isbecause the cost of goods sold included part of the amount that wasassociated with unrealized revenue. The profit is therefore,understated by the full amount of the overstated cost of goods sold.The adjusted income statement shows a higher profit than the originalincome statement.

TheGenerally Accepted Accounting Principle (GAAP) provides that revenueshould only be recognized when it is realized or when the activitiesin which it arises from has been taken place (Edwards &ampHermanson, 2007). In this case of , the client hadshown the interest of purchasing goods worth of $42,500. However, theclient had not actually committed the purchase by the end ofaccounting period. The sale is therefore associated with lots ofuncertainties, and hence, it is against to recognize such revenuejust explained in the realization concept. The concept also providesthat revenue should be recognized after an invoice has been prepared(Edwards &amp Hermanson, 2007). It was a good decision for thebookkeeper to not include the $42,500 in the revenue account and inthe income statement of the company.

Thematching concept

Thematching concept provides that revenue should be matched or comparedwith the expenses incurred in earning that revenue for thatparticular accounting period (Collis &amp Hussey, 2007). The Conceptemphasize that revenue should be matched with the expenses incurredin generating it. For instance after proving that the sale of goodsworth $42,500, the bookkeeper adjusted the sales account but failedto adjust the cost of goods sold the account. This implied theunrealized revenue was charged for the expenses, and this is verycontrary with the matching concept. The concept states that all costsand expenses should be recognized after they have actually incurredor the transaction has taken place (Kieso &amp Weygandt, 2012). Itis, therefore, advisable for the bookkeeper to make necessaryadjustments to not only on the sales account but also to the cost ofgoods sold the account. The impact of this adjustment on the incomestatement will be on the gross profit as it will reduce by the fullamount of the overstated cost of goods.

Reference

Collis,J., &amp Hussey, R. (2007). Business Accounting: Introduction tofinancial and management accounting. Basingstoke: Palgrave Macmillan.

Kieso,D., &amp Weygandt, J. (2012). Intermediate Accounting (14th Ed.).Hoboken, NJ: Wiley.

Edwards,J.D. &amp Hermanson, R.H. (2007) Accounting Principles: A BusinessPerspective. First Global Text Edition

Close Menu