Preparation of an Income Statement for The Serious Reader Company

The first case of this course provides an opportunity to prepare a segmented variable costing (contribution margin, behavioral) income statement and analyze the information. This is a very small company and the information may seem simplistic at first glance. Don’t forget that numbers and hands-on practice best illustrate many basic accounting concepts.

The Serious Reader Company is a small online retailer operating out of a garage apartment. The owner buys books at garage sales, thrift shops, library sales, and whenever an opportunity arises. The company classifies all books into five categories based on cost of acquisition and estimated sales price. See below for details about books purchased and sold during the last year (20XX).

In addition to purchasing inventory (used books), the company incurs some operating expenses.

Case Assignment

Required:

Computations (use Excel)

Prepare a segmented variable costing (behavioral) income statement for the company in good format.

Prepare a second variable costing statement assuming 90% of all the books in each category purchased were actually sold.

Prepare a third variable costing statement assuming that the price is increased by 50% for all five categories (use original sales information).

The owner enjoys the used-book business. Any suggestions as how to turn this into a full-time business venture so the owner can quit his other job? Prepare another income statement to support your idea.

Memo (use Word)

Interpret the results from the computations and explain how the information is useful. Write a 4- or 5-paragraph memo to the owner of the business. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.

Short essay to comment on the questions below (use Word). Start with an introduction and end with a summary or conclusion. Use headings. Maximum length of two pages.

Why do many organizations make the effort to prepare a different type of income statement for internal purposes?

Variable costing is not just about preparing income statements. Provide at least three scenarios in which understanding how costs behave is useful.

B. Please read the brief description and respond to the questions. Please be clear and specific. Check your work as this is not an easy problem. Situation: A small Canadian company has contracted to purchase 200,000 toys for 3.50 British pounds each, from a British company. The Canadians have agreed to pay for the toys in British pound sterling. The Canadians have also agreed to sell the toys to a U.S. company for USD$ 5.50 per toy. The Canadian company has agreed to accept U.S. dollars from the U.S. sales but plans to convert these revenues to Canadian dollars. The Canadian company estimates its marginal (additional cost per unit) costs (warehousing, insurance, transportation, and so on) as an additional Cnd$.75 per toy. Exchange rates at the time of signing the agreements are as follows: Cnd$ 1 = USD$ .68 Cnd$ 1 = British pound .54 Questions:

1. On the line below indicate whether the firm earned a profit or loss from this deal and what was the dollar amount of the profit or loss in total. (Clearly state if a profit or loss was earned, what it was in total (not per unit) and show profit or loss calculation clearly with labels in space below)
_________Place word profit or loss on line.
_________Place amount on line. Show work clearly below: 2. a) What impact would a depreciation of the U.S. dollar relative to the Canadian dollar have on the Canadian company’s profits/loss? You must look at the impact on Revenue and/or Costs for # 2,3, and 4. (chose increase profit, increase loss, decrease profit, decrease loss, or no change and place on line below) _________Ans. Why?

3. a) What impact would a depreciation of the British pound relative to the Canadian dollar have on the Canadian company’s profit/loss? (increase profit, decrease profit, increase loss, decrease loss, or no change on line below) ____________Ans. Why?
4. a) What impact would a depreciation of the British pound relative to the U.S. dollar have on the Canadian company’s profit/loss? ((increase profit, decrease profit, increase loss, decrease loss, or no change on line below) ____________Ans. Why?
5. If exchange rates changed to the exchange rate shown below, state/show the amount of the Canadian company’s total profit or loss on the deal now? (Show profit or loss calculation clearly). Cnd$ 1 = USD$ .64 Cnd$ 1 = British pound .40 _________Place word profit or loss on line. _________Place amount on line. Show work clearly below:

Listed below are the transactions of Rock Medical Company (a service company organized as a corporation), for the month of March. Record the following transactions for Rock Medical Company.

Mar    1       Jim Rock invests $50,000 cash in exchange for common stock in

                  Rock Medical Company.

         1       Takes out a $5,000, 30-day short term note payable with an annual

                  interest rate of 6%.

         1       Purchases medical equipment on account from JK Enterprises

                  for $22,800.

         3       Pays rent for office space, $1,500 for the month.

         3       Employs a receptionist, Michelle Kwin.

         4      Purchases medical supplies for cash, $1,165.

         10      Receives cash of $850 from patients for services performed.

         15      Bills patients $11,560 for services performed.

         21      Pays JK Enterprises on account, $7,600.

         26      Receives $2,600 from patients on account.

         30      Bills patients $6,890 for services performed.

         31      Pays the following expenses in cash: Salaries and

                  wages $2,500; miscellaneous office expenses $910.

         31      Pays principal and interest on the note payable.

         31      Medical supplies used during the month, $695.

         31     Record depreciation expense on the equipment using the straight line

                  method; the equipment has a 5-year life and no salvage value.

         31     Record utility expense of $200 incurred for the month; bill not

                  paid at month end

Chart of Accounts:

Cash

Accounts Receivable

Supplies

Equipment

Accumulated Depreciation—Equipment

Accounts Payable

Notes Payable (short term)

Common Stock

Note Payable

Service Revenue

Rent Expense

Office Expense

Salaries and Wages Expense

Supplies Expense

Depreciation Expense

Interest Expense

Utility Expense

Income Summary

Instructions

(a) Prepare journal entries to record the above transactions for Rock Medical Company; journal entries can be hand written or typed in Word/Excel; put on a separate page(s).

(b) Enter the transactions shown above in appropriate general ledger accounts (use T-accounts); t-accounts can be hand written; put on a separate page from journal entries prepared in (a).

(c) Prepare a trial balance in EXCEL; use formulas to total the debits and credits; PRINT on one page.

(d) Prepare an income statement, a statement of retained earnings, and an unclassified balance sheet in EXCEL; use formulas as appropriate; PRINT each on a SEPARATE page

(e) Prepare closing entries and enter the transactions in the T-accounts (from part (b); journal entries can be handwritten or typed in Word/Excel; put on a separate page(s).

(f) Prepare a post-closing trial balance in EXCEL; use formulas to total the debits and credit; PRINT on one page

Here are the transactions of Rock Medical Company (a service company organized as a corporation), for the month of March. Record the following transactions for Rock Medical Company.

Mar    1       Jim Rock invests $50,000 cash in exchange for common stock in

                  Rock Medical Company.

         1       Takes out a $5,000, 30-day short term note payable with an annual

                  interest rate of 6%.

         1       Purchases medical equipment on account from JK Enterprises

                  for $22,800.

         3       Pays rent for office space, $1,500 for the month.

         3       Employs a receptionist, Michelle Kwin.

         4      Purchases medical supplies for cash, $1,165.

         10      Receives cash of $850 from patients for services performed.

         15      Bills patients $11,560 for services performed.

         21      Pays JK Enterprises on account, $7,600.

         26      Receives $2,600 from patients on account.

         30      Bills patients $6,890 for services performed.

         31      Pays the following expenses in cash: Salaries and

                  wages $2,500; miscellaneous office expenses $910.

         31      Pays principal and interest on the note payable.

         31      Medical supplies used during the month, $695.

         31     Record depreciation expense on the equipment using the straight line

                  method; the equipment has a 5-year life and no salvage value.

         31     Record utility expense of $200 incurred for the month; bill not

                  paid at month end

Chart of Accounts:

Cash

Accounts Receivable

Supplies

Equipment

Accumulated Depreciation—Equipment

Accounts Payable

Notes Payable (short term)

Common Stock

Note Payable

Service Revenue

Rent Expense

Office Expense

Salaries and Wages Expense

Supplies Expense

Depreciation Expense

Interest Expense

Utility Expense

Income Summary

Instructions

(a) Prepare journal entries to record the above transactions for Rock Medical Company; journal entries can be hand written or typed in Word/Excel; put on a separate page(s).

(b) Enter the transactions shown above in appropriate general ledger accounts (use T-accounts); t-accounts can be hand written; put on a separate page from journal entries prepared in (a).

(c) Prepare a trial balance in EXCEL; use formulas to total the debits and credits; PRINT on one page.

(d) Prepare an income statement, a statement of retained earnings, and an unclassified balance sheet in EXCEL; use formulas as appropriate; PRINT each on a SEPARATE page

(e) Prepare closing entries and enter the transactions in the T-accounts (from part (b); journal entries can be handwritten or typed in Word/Excel; put on a separate page(s).

(f) Prepare a post-closing trial balance in EXCEL; use formulas to total the debits and credit

Listed below are the transactions of Rock Medical Company (a service company organized as a corporation), for the month of March. Record the following transactions for Rock Medical Company.

Mar    1       Jim Rock invests $50,000 cash in exchange for common stock in

                  Rock Medical Company.

         1       Takes out a $5,000, 30-day short term note payable with an annual

                  interest rate of 6%.

         1       Purchases medical equipment on account from JK Enterprises

                  for $22,800.

         3       Pays rent for office space, $1,500 for the month.

         3       Employs a receptionist, Michelle Kwin.

         4      Purchases medical supplies for cash, $1,165.

         10      Receives cash of $850 from patients for services performed.

         15      Bills patients $11,560 for services performed.

         21      Pays JK Enterprises on account, $7,600.

         26      Receives $2,600 from patients on account.

         30      Bills patients $6,890 for services performed.

         31      Pays the following expenses in cash: Salaries and

                  wages $2,500; miscellaneous office expenses $910.

         31      Pays principal and interest on the note payable.

         31      Medical supplies used during the month, $695.

         31     Record depreciation expense on the equipment using the straight line

                  method; the equipment has a 5-year life and no salvage value.

         31     Record utility expense of $200 incurred for the month; bill not

                  paid at month end

Chart of Accounts:

Cash

Accounts Receivable

Supplies

Equipment

Accumulated Depreciation—Equipment

Accounts Payable

Notes Payable (short term)

Common Stock

Note Payable

Service Revenue

Rent Expense

Office Expense

Salaries and Wages Expense

Supplies Expense

Depreciation Expense

Interest Expense

Utility Expense

Income Summary

Instructions

(a) Prepare journal entries to record the above transactions for Rock Medical Company; journal entries can be hand written or typed in Word/Excel; put on a separate page(s).

(b) Enter the transactions shown above in appropriate general ledger accounts (use T-accounts); t-accounts can be hand written; put on a separate page from journal entries prepared in (a).

(c) Prepare a trial balance in EXCEL; use formulas to total the debits and credits; PRINT on one page.

(d) Prepare an income statement, a statement of retained earnings, and an unclassified balance sheet in EXCEL; use formulas as appropriate; PRINT each on a SEPARATE page

(e) Prepare closing entries and enter the transactions in the T-accounts (from part (b); journal entries can be handwritten or typed in Word/Excel; put on a separate page(s).

(f) Prepare a post-closing trial balance in EXCEL; use formulas to total the debits and credit; PRINT on one page

Listed below are the transactions of Rock Medical Company (a service company organized as a corporation), for the month of March. Record the following transactions for Rock Medical Company.

Mar    1       Jim Rock invests $50,000 cash in exchange for common stock in

                  Rock Medical Company.

         1       Takes out a $5,000, 30-day short term note payable with an annual

                  interest rate of 6%.

         1       Purchases medical equipment on account from JK Enterprises

                  for $22,800.

         3       Pays rent for office space, $1,500 for the month.

         3       Employs a receptionist, Michelle Kwin.

         4      Purchases medical supplies for cash, $1,165.

         10      Receives cash of $850 from patients for services performed.

         15      Bills patients $11,560 for services performed.

         21      Pays JK Enterprises on account, $7,600.

         26      Receives $2,600 from patients on account.

         30      Bills patients $6,890 for services performed.

         31      Pays the following expenses in cash: Salaries and

                  wages $2,500; miscellaneous office expenses $910.

         31      Pays principal and interest on the note payable.

         31      Medical supplies used during the month, $695.

         31     Record depreciation expense on the equipment using the straight line

                  method; the equipment has a 5-year life and no salvage value.

         31     Record utility expense of $200 incurred for the month; bill not

                  paid at month end

Chart of Accounts:

Cash

Accounts Receivable

Supplies

Equipment

Accumulated Depreciation—Equipment

Accounts Payable

Notes Payable (short term)

Common Stock

Note Payable

Service Revenue

Rent Expense

Office Expense

Salaries and Wages Expense

Supplies Expense

Depreciation Expense

Interest Expense

Utility Expense

Income Summary

Instructions

(a) Prepare journal entries to record the above transactions for Rock Medical Company; journal entries can be hand written or typed in Word/Excel; put on a separate page(s).

(b) Enter the transactions shown above in appropriate general ledger accounts (use T-accounts); t-accounts can be hand written; put on a separate page from journal entries prepared in (a).

(c) Prepare a trial balance in EXCEL; use formulas to total the debits and credits; PRINT on one page.

(d) Prepare an income statement, a statement of retained earnings, and an unclassified balance sheet in EXCEL; use formulas as appropriate; PRINT each on a SEPARATE page

(e) Prepare closing entries and enter the transactions in the T-accounts (from part (b); journal entries can be handwritten or typed in Word/Excel; put on a separate page(s).

(f) Prepare a post-closing trial balance in EXCEL; use formulas to total the debits and credit; PRINT on one page

Compact Ltd is a parcel delivery business. Detailed below is selected information for the financial year ending 30 June 2019.

REQUIRED

(a) Prepare a fully classified Income Statement and Cash Flow Statement for the year ending 30 June 2019 based on the information above. Fully state any assumptions you have made in preparing these financial reports.

(b) Upon completing the Cash Flow and Income Statement Compact management are confused in that the Income Statement is indicating they made a net loss (negative profit) over the same period whilst reporting a positive cash inflow from operations. With reference to the question and your work in answering(a) above, explain to Compact management providing two possible reasons why this discrepancy could occur when comparing cash flow from operations (cash profit) with accrual accounting profit/ loss. For each cause identified highlight the impact on Assets= Liabilities +Owners Equity and profit versus cash flow to explain potential differences (80 word limit)

(c) Given the above differences discuss which statement (Income Statement or Cash Flow from Operations) better reflects the financial performance / wealth creation for the period ending 30 June 2019. (Justify your answer with reference to accrual accounting) (80 word limit)

Please provide a step by step solution

Instructions:

PART A

1. A friend has made several visits to the doctor in the past month because of a serious illness and has asked you to calculate what he will owe after the insurance company has paid its part of the bill. The insurance company usually takes about a month to process a claim and your friend is hoping you can help figure the amount right away so he can plan ahead.
2. Create a worksheet to include the following information from the visits to the doctor.
   1. Input the Date of Visit using the date function.
   2. Format the Cost of Visit to Currency.

3. Your friend has a co-payment of $25.00 and the insurance will pay 80% of the remaining cost. In Column D create a formula that displays how much the insurance company will pay. In Column E create a formula that displays the amount your friend will have to pay.
4. The insurance company is supposed to respond within 30 days of billing. The doctor’s office has said that they will bill 3 days after the visit. In Column F create a formula that calculates the insurance response date.
5. In cell A13, type the word Total. In cell C13 insert a formula that calculates the total cost of the visits. Copy this formula to cells D13 and E13.
6. In cell A14, type the word Average. In cell C14, input a formula that calculates the Average Cost of Visit.
7. Format the spreadsheet to make it easy to read and visually attractive. Add a footer that includes your name.
8. Name the worksheet Doctor Visits.

PART B

1. Copy the worksheet in the same workbook. Rename the second worksheet Bank Loan.
2. Sort the worksheet alphabetically by Doctor and then by Cost of Visit.
3. Since your friend already has some money saved, calculate whether or not he will need a loan if the total he has to pay is more than $600. In cell A15 type Bank Loan. In cell E15 create an IF statement that will display the words No Loan if your friend does not need a loan and Yes Loan if your friend needs a loan

6. Cash flow

You are planning to set up a new business with a partner, KU Enterprises, on 1 June 2020. You will each own 50% of the business and you will both work in the business. You estimate that your first 6 months in business will be as follows:

1. Sales, all on credit, will be £20,000 for June increasing by £5000 per month each month. You are giving your customers one month’s credit to encourage them to buy from your new business, so they will pay one month after receipt of the goods.
2. You will buy £15,000 of goods on the 3^rd of June as inventory paying for it immediately out of the bank.
3. From June onwards you will buy inventory goods each month costing 30% of the sales revenue figures. Your creditor is giving you one month’s credit on these purchases.
4. You will rent a van with a deposit of £5000 paid on July 2^nd and 36 monthly payments of £500, which will start on 27^th August and be paid on the 27^th of each month after that.
5. You buy a five year lease on a property for £65,000 with an option to renew after 5 years.
6. Insurance of £2400 per annum will be paid in two six monthly instalments with the first payment on 1^st June.
7. Annual Business rates of £3600 will be paid by monthly by direct debit on 28^th of the month starting in June.
8. You and you partner will take drawings of £1500 each every month by cash.
9. You and your partner will put £25,000 capital investment each into a bank account for the business on 1 June to cover initial expenses.

You are required to:

1. Draw up a cash budget month by month for the first 6 months showing clearly the amount of bank balance or overdraft at the end of each month. Use the template Appendix C to complete your answer using this template and include it in your MS Word answer document.
2. Identify the months, if any, when the business will require additional funds.
3. What is the maximum amount that the business needs to avoid cash flow problems?
4. Suggest solutions to the business’s cash flow problems.  
5. What effect would an increase of material costs of 25% have on the cash flow.

Appendix C. Refers to Question 6

Complete your answer using this template and include it in your MS Word answer document.