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

31. Royalties revenue --------------------------------------------------------------- 28,000

 
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 =