Advanced accounting week 3

INCOME STATEMENT:

Net income: Revenues > expenses

Net loss: Revenues < expenses

Basic accounting equation: Assets = Liabilities + Stockholders equity

Expanded version: Assets = Liabilities + contributions – distributions + revenues – expenses

Net income increases owner’s equity, while net loss decreases owner’s equity.

Income statement reports the revenues and expenses and resulting net income or loss of a
company for a SPECIFIC PERIOD of time.

Revenues are the GROSS increase in owner’s equity resulting from business activities entered
into for the purpose of earning income.

Expenses are the cost of assets consumed or service rendered in the process of earning
revenue.

ABC Co.
Incme statement
Jan.1 – dec.31,2018

REVENUES:
Sales a
Other revenues b
Total revenues = I

EXPENSES:
Cost of good sold c
Salaries and wages exp. d
Marketing exp. e
Administrative exp. f
Interest exp. g
Depreciation exp. h
Total expenses= (II)

PRE-TAX income = III = I-II

Income taxes expenses = (IV)

NET INCOME/LOSS = III – IV

Example1:
Kellogg Company is the world’s leading producer of ready-to-eat cereal and a leading
producer of grain-based convenience foods such as frozen waffles and cereal bars.
Suppose the following items were taken from its 2014 income statement and balance
sheet (all dollars are in millions)
 _ Retained earnings $ 5 481 _ Bonds payable $ 4 835
_ cost of goods sold $ 7 184 _ Inventory $ 910
_ Selling and administrative exp. $ 3 390 _ Sales revenue $ 12 575
_ Cash $ 334 _ Accounts payable $ 1 077
_ Notes payable $ 44 _ Common stock $ 105
_ Interest exp. $ 295 _ Income tax exp. $ 498

Instructions:
a/ In each case, identify whether the item is an A, L, SE, R or E
b/ Prepare an income statement for Kellogg Company for the year ended December 31,2018.

a/
(SE) Retained earnings $ 5 481 (L) Bonds payable $ 4 835
(E) Cost of goods sold $ 7 184 (A) Inventory $ 910
(E)Selling and administrative exp. $ 3 390 (R) Sales revenue $ 12 575
(A) Cash $ 334 (L) Accounts payable $ 1 077
(L) Notes payable $ 44 (SE) Common stock $ 105
(E) Interest exp. $ 295 (E) Income tax exp. $ 498

b/

Kellogg Co.
Incme statement
Jan.1 – dec.31,2014

REVENUES:
Sales revenue $ 12 575
Total revenues = $ 12 575

EXPENSES:
Cost of good sold ($ 7 184)
Selling and adm exp. ($ 3 390)
Interest exp. ($ 295)
Total expenses= ($ 10 869)

PRE-TAX income = $ 1 706

Income tax expenses* = ($ 498)

NET INCOME/LOSS = $ 1 208

* In Turkey income Tax expenses is about 22%.

Example 2:
Here are incomplete financial statement for Riedy, Inc
 BALANCE SHEET
ASSETS: LIAB:
Cash $7,000 Acc.Payable $ 5,000
Inventory $10,000 SE:
Buildings $45,000 Common Stock (d)
Retained earning (c)
Total assets = (a) Total liab + SE = (b)

Income statement

Revenues $ 85,000
Cost of goods sold $ (e)
Salaries and wages expenses $ 10,000
NET INCOME = (f)

Retained earning statement

Beginning ret.ear. $12,000

(+) net income $ (g)
(-) dividends $ 5,000
Ending ret. Ear. $ 27,000

Instruction: complete the missing information

Answer
(a) = summation of all assets = 7,000 + 10,000+ 45,000 = $ 62,000
(b) = total liab + SE must be equal to total assets  a=b= $62,000
(c) = from the retained earnings statement we know that the ending retained earning =
$27,000
(d) = total (liab + SE) – liab – retained earnings
= 62,000 – 5,000 – 27,000 = $ 30,000
(g) = ending retained earning + dividends – beginning retained earning
= 27,000 + 5,000 – 12,000 = $ 20,000
(f) = from the retained earnings statement we know that f=g= $ 20,000
(e) = revenues - net income - salaries and wages exp.
= 85,000 - 20,000 - 10,000 = $ 55,000