The document provides guidance on recognizing expenses and losses according to principles of associating cause and effect, systematic allocation, and immediate recognition. It also describes the components of a multiple-step income statement, including operating sections for revenue, cost of goods sold, and operating expenses, as well as non-operating sections for other revenues/gains and other expenses/losses. An exercise is included to illustrate preparing a multiple-step income statement using sample financial data for a company.
The document provides guidance on recognizing expenses and losses according to principles of associating cause and effect, systematic allocation, and immediate recognition. It also describes the components of a multiple-step income statement, including operating sections for revenue, cost of goods sold, and operating expenses, as well as non-operating sections for other revenues/gains and other expenses/losses. An exercise is included to illustrate preparing a multiple-step income statement using sample financial data for a company.
The document provides guidance on recognizing expenses and losses according to principles of associating cause and effect, systematic allocation, and immediate recognition. It also describes the components of a multiple-step income statement, including operating sections for revenue, cost of goods sold, and operating expenses, as well as non-operating sections for other revenues/gains and other expenses/losses. An exercise is included to illustrate preparing a multiple-step income statement using sample financial data for a company.
LO1: VERIFY VALIDITY AND ACCURECY OF PAYMENT ENQUES
Information Sheet One
1.1. Recognition of Expenses and Losses Expenses are outflows of cash or other using up of assets or incurrence’s of liabilities during an accounting period from the sale of goods or rendering of services. Initially, costs are incurred to acquire assets, and as the assets are consumed, they become expenses with the passage of time. Losses are decreases in a business enterprise’s owner’s equity from incidental transactions and other events except those that result from expenses or distributions to owners. Losses result when assets are consumed, costs are expired or liabilities are incurred without producing any benefit for either the current or any future accounting period; this losses are not deferred because they have not future service potential. Expenses and losses generally are recognized in the accounting records when business enterprise economic benefits are consumed in revenue-earning activities. 1.2.1. Principles of expense recognition The expenses incurred by a business enterprise during an accounting period may be classified in the following three groups. Costs directly associated with revenue recognized in the period. Costs associated with the period on the period other than a direct relationship with the revenue. Cost that cannot reasonable be associated with any other period. The principles that provide accountants with guidelines with the recognition of expenses are: a) Associating cause and effect, b) Systematic and rational allocation, and c) Immediate recognition, a) Associating cases and effect Cost may be recognized as expenses based on a direct association with specific revenues. Costs that appear to be related to specific revenue are recognized as expense with the recognition of the related revenue. Examples of costs related to specific revenue include the direct costs of goods sold or services provided, sales commission and direct cost incurred in relation to construction type contracts. b) Systematic and rational allocation This approach involves assumptions as to the pattern of benefits and as to the relationship between costs and benefits received. Examples of costs that are recognized as expenses under this principle are depreciation of plant assets, amortization of intangible assets, and allocated amounts of property taxes and insurances. c) Immediate recognition Expenses are recognized in the current accounting period when Costs incurred in the current period are not expected to provide any future benefits Costs deferred as assets in earlier periods no longer provide benefits and Allocation of costs to revenues or to accounting periods is impractical or is considered to serve no useful purpose. This principle requires research and development cost, general and administrative costs and amounts paid to settle litigation to be recognized as expenses in the period they are incurred. Costs deferred in earlier periods that have lost their service potential are written-off as soon as the loss becomes evident and measurable. LO2: PREPARE PAYMENT DOCUMENT INFORMATION SHEET TWO 2. Alternative forms of the income statement There are two alternative forms of an income statement. These are: 1. The multiple-step, and 2. The single-step. The choice between the multiple steps and the single step form of income statements is an unsettled question in the income reporting. Multiple-step income statement: In the multiple-step form of income statement, various intermediate balances such as gross profit on sales, income from operations, income before income taxes, income after income taxes and net income are computed and leveled in the statement. Some components referred to as sections and subsections within the multiple-step form of the income statement are stated below. i) Operating sections: This section is a report of the revenues and expenses of the company’s principal (major) operations and it includes the following subsections The sales revenue section. This section includes the following items: Gross sales ----------------------------------------------------------xxxxxxxx Less: sales returns and allowances ------------xxx Sales discounts -----------------------------xxx ----------------( xxxx) Net sales ----------------------------------------------------------------- xxxxxx b) The cost of goods sold section: This section includes the following items. Beginning merchandise inventory -----------------------------------xxxxxx Add: Gross purchases -----------------------------------------xxx Add: -fright in --------------------------------------------------xxx -Delivered cost of merchandise ------------------------xxxxx Less:-Purchase returns and allowances ------- (xxx) -------- -Purchase discounts ------------------------ (xxx) ------- (xxx) Net purchases -------------------------------------------------------------xxxxxxx Merchandise available for sale----------------------------------xxxxxxxx Less: Ending merchandise inventory ---------------------------------- (xxxx) Cost of merchandise sold --------------------------------------- xxxxxx
c) Operating expenses section: - This section includes the following sub-sections: Selling (marketing) expenses section and General and administrative section a) Selling or marketing section: In this section, all expenses incurred in making a sales effort are reported. Sales salaries expense ------------------------------------xxxx Commissions’ expense -----------------------------------xxxx Advertising and promotion expense ------------------xxxx Fright-out (transportation expense) (delivery expense)----xxxx Depreciation expense of sales equipment ------------xxxx Depreciation expense of delivery truck -------------- xxxx Store supplies expense -----------------------------------xxxx Other selling expense -------------------------------------xxxx Total selling/marketing/expenses ----------------------------- xxxxxxxxx b) General and administrative expense This section includes all expense incurred in the general administration of the company’s operations. Office salaries expenses ---------------------------------------------------xxxx Legal and professional services ------------------------------------------ xxxx Utilities expenses ------------------------------------------------------------xxxx Insurance expense-general ------------------------------------------------xxxx Depreciation expense of building ----------------------------------------xxxx Depreciation expense of equipment -------------------------------------xxxx Uncolletible accounts expense -------------------------------------------xxxx Stationery expense ---------------------------------------------------------xxxx Office supplies expense --------------------------------------------------- xxxx Postage expense ------------------------------------------------------------xxxx Property tax expense ------------------------------------------------------xxxx Other general and administrative expense ----------------------------xxxx Total general and administrative expense -------------------------xxxxxxxx Total selling and general and administrative expenses ------ xxxxxxxxxx ii. Non-Operating Section:- This section reports revenues and expenses resulting from the secondary activities of the business. This section has two subsections: 1) Other revenues and gains section and 2) Other expenses and losses section 1) Other Revenues and gains section: this section includes a list of revenues and gains earned from non-operating transactions. In this section the following items are includes:- Interest income -------------------------------------------------------xxx Dividends revenue ---------------------------------------------------xxx Rental revenue -------------------------------------------------------xxx Royalty revenue ------------------------------------------------------xxx Gain on disposal of plant assets ----------------------------------xxx Total other revenues and gains ------------------------------------------------xxxxxx 2) Other expenses and losses: this section includes a list of expenses and losses incurred from non operating transactions. The multiple-step form is more likely to be found in more detailed in financial statements prepared for the use of management, bankers, and other creditors; it is particularly appropriate when financial statements are prepared for both internal and external users. Exercise To illustrate the presentation of a multiple –step income statement, assume the following data for ABC Company for its operations for the year ended Dec-31-2017. 1. Employers pension contribution birr 290,000 2. Delivery expense 425,000 3. Depreciation expenses delivery truck 29,000 4. Depreciation expenses office building 20,000 5. Depreciation expenses office equipment 15,000 6. Depreciation expenses store equipment 25,000 7. Dividends 150,000 8. Dividends revenue 5,000 9. Uncollectible account expense 22,000 10. Income tax rate 40% 11. Fright in 145,000 12.Gain on sale of office equipment 10,000 13.Interest revenue 1,500 14. Loss on sale of delivery truck 50,000 15. Loss from writing off of absolute inventory 125,000 16. Inventory on January 1-2017 (beginning inventory) 1,050,000 17. Other general expenses 45,000 18. Other selling expenses 50,000 19. Officers and office salaries 950,000 20. Purchase discounts 47,700 21. Purchase returns and allowances 30,500 22. Purchases 4,633,200 23. Retained earnings on January 1-1997(beginning) 550,000 24. Sales 9,125,000 25. Sales discounts 55,000 26. Sales returns and allowances 95,000 27. Sales salaries 601,000 28. Property taxes 100,000 29. Store supplies expense 50,000 30. Interest expense 7,000
Additional data Inventory on dec-31-2017 (ending merchandise inventory) was valued at birr 750,000 The company has 100,000 shares of common stock outstanding and has no preferred stock holders Required: Prepare a multiple-step income statement for ABC-company Prepare a retained earnings statement Prepare a combined statement of income and retained earnings for the given period. ABC-Company Multiples step income statement For the year ended 31-Dec-2017 1) Sales revenue: Gross sales ----------------------------------------------------------------------------9,125,000 Less: Sales returns and allowances ---------------------------------95,000 Sales discounts --------------------------------------------------55,000 ----------- (150,000) Net sales ---------------------------------------------------------------------------------------8,975,000 2) Cost of merchandise sold: Beginning merchandise inventory ---------------------------------------------1,050,000 Add: Purchases --------------------------------------- 4,633,200 Add: Fright –in----------------------------------------- 145,000 Delivered cost of merchandise----------------------------------4,778,200 + Less: purchases returns & allowance----30,500 Less: Purchase discounts -----------------47,700------- (78,200) Net purchase ----------------------------------------------- ---------------------4,700,000 Merchandise available for sale ----------------------------------------------------------5,750,000 Less: Ending merchandise inventory -------------------------------- (750,000) - Cost of merchandise sold -------------------------------------------------------------- (5,000,000) Gross profit -----------------------------------------------------------------------------------3,975,000 3) Operating expenses i) Selling expenses Delivery expense ------------------------------------------------425,000 Depreciation expense of delivery truck --------------------29,000 Depreciation expense of store equipment -----------------25,000 Sales salaries expense -------------------------------------------601,000 Store supplies expense ------------------------------------------50,000 Other selling expense --------------------------------------------50,000 Total selling expense ------------------------------------------------------1,180,000 ii) General &administrative expense: Employers pension contribution-------------------------------290,000 Depreciation expense of office equipment -------------------15,000 Depreciation expense of office building ------------------------20,000 + Uncollectible accounts expense ----------------------------------22,000 Officers and office salaries ------------------------------------------950,000 Property tax expense--------------------------------------------------100,000 Other general and administrative expense-----------------------45,000 Total general and administrative expense----------------------------1,442,000 Total selling and general expenses --------------------------------------------- (2,622,000) Income from operations -----------------------------------------------------------------------1,353,000 4) Other revenues and gains: Dividend revenues ---------------------------------50,000 Gain on sale of office equipment -----------------10,000
Interest income --------------------------------------1,500
Royalties’ revenue ------------------------------- --28,000 Total other revenues and gains ------------------------------------------------------44,500 Income from operation and other revenues and gains -------------------1,397,500 5) Other expenses and losses: Loss on sale of delivery truck-----------------------50,000 Loss from written off of obsolete inventory-----125,000 Interest expense -----------------------------------------7,000 Total other expenses -------------------------------------------------------------- (182,000) Income before income tax -------------------------------------------------------1,215,500 Less: income tax expense (40% x 1,215,500) ------------------------------------ Net income for common 729,300 (486,200) $7.293 / Share No of shares of common 100,000 Net income for the year ended Dec-31-2017------------------------------------ 729,300 Statement of retained earnings The statement of retained earnings generally is included with every set of financial statements, though it is not considered to be one of the major financial statements. The typical statement of the retained earnings includes the beginning retained earnings balance, the net income or net loss resulted from the period’s operations (if net income addition, if net loss deduction), and the dividends as deductions and concludes with the ending balance of retained earnings. Generally the statement of retained earnings shows, the beginning balance on the retained earnings, the changes made as a result of additional investments, dividends (withdrawals) net income or net loss from operations and the end retained earnings balance.
LO3: AOUTHARIZE PAYMENT INFORMATION SHEET THREE A statement of retained earnings for a sample company of ABC-for the data given earlier is presented below. ABC –Company Statement of Retained Earnings For the Year Ended Dec-31-2017 Beginning retained earnings (January 1-2017) -----------------------550,000 Add: Net income from operations -------------------729,300 Less: Dividends paid during the year --------------- (150,000) Change in retained earnings (increase) ----------------------579,300 Ending retained earnings (Dec-31-2017) -------------------1,129,300 ABC – Company Combined Statement of Income and Retained Earnings For the Year Ended Dec –31-2017 Net sales and other revenues and gains -------------------------------- 9,019,500 Less: Costs, expenses and losses ------------------------------------ (7,804,000) Income before income tax ----------------------------------------------- 1,215,500 Less: Income tax expense (40% of 1,215,500) ----------------------- (486,200) Net income ----------------------------------------------------------- 729,300 Less: Dividends ------------------------------------------------------------ (150,000) Change in retained earnings during the year -----------------------------579,300 Add: Beginning retained earnings ---------------------------------------- 550,000 Ending Retained earnings----------------------------------------1,129,300.00 The Single Step Form of an Income Statement The single step form presents a grouping of revenue in one category, all expenses in another and drives a single net income figure. This form of income statement is widely used by publicity owned companies. The single-step form of income statement for ABC-company is given below. ABC Company Single-Step Income Statement For the Year Ended Dec-31-2017 1) Revenues: Net sales ------------------------------------------------------------------------------8,975,000 Dividends Revenue------------------------------------------------------------------50,000 Gain on sale of office equipment -----------------------------------------------10,000 Interest income ----------------------------------------------------------------------1,500 Royalties’ revenues -----------------------------------------------------------------28,000 Total revenues ----------------------------------------------------------------------------------9,064,500 2) Costs and expenses: Cost of merchandise sold -----------------------------------------------------5,000,000 Selling expenses ---------------------------------------------------------------1,180,000 General and administrative expenses ------------------------------------1,442,000 Loss on sale of delivery truck ------------------------------------50,000 _ Loss from written-off of absolute inventory-------------------------------125,000 Interest expense ------------------------------------------------------------------7,000 Income tax expense ------------------------------------------------------------486,200 Total costs and expenses -------------------------------------------------------------- $729,300 (8,335,200) $7.293 / share Net income -------------------------------------------------------------------------------------------729,300 100,000 Earnings per share of common =