Preparing financial statements is perhaps the most important step in the accounting cycle. In this activity, you will work on a company's income statement and balance sheet.

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Directions and Analysis

Task 1: Preparing an Income Statement

In 2012, XYZ Inc., a medical equipment distributor, sold 10,000 units of its hospital beds at an average price of $500 per unit. The company reported estimated returns and allowances of $200,000. The company purchased 11,000 units of its product from its manufacturer in 2012 at an average cost of $350 per unit. XYZ began 2012 with 1,000 units of its product in inventory (carried at an average cost of $300 per unit). Operating expenses (excluding depreciation) in 2012 were $400,000, and the depreciation expense was $100,000. XYZ had $2,000,000 in debt outstanding throughout all of 2012, which carried an average interest rate of 10%. The company's tax rate is 40%. Its fiscal year runs from January 1 through December 31. Given this information, prepare the following documents:

a.XYZ's 2012 income statement

b.XYZ's 2012 ending inventory balance (both in unit and in dollar terms)

XYZ Income Statement Year 2012

Units

Per Unit Cost

Total($)

Sales

10,000

500

5,000,000

Less

Returns & Allowances

400

500

-2,000,000

Net Sales

4,800,000

Cost of Goods Sold

Beginning Inventory

1,000

300

300,000

Add

Purchases

11,000

350

3,850,000

Less

Ending Inventory

2,400

350

-840,000

3,310,000

Gross Profit

1,490,000

Expenses

Operating Expenses

400,000

Depriciation

100,000

Interest

200,000

Total Operating Expenses

700,000

Operating Income

790,000

Tax @ 40%

-316,000

Net Income

474,000

Part B

Closing balance units= opening balance+ purchases- sales + sales returns

(# of units in a sales return is 200,000/500=400)

=1000+11000-10000+400

=2400 units in inventory

Assuming the company uses the FIFO:

Then (1000x300)+ (11,000x350)- (2400x350)

=$840,000

Task 2: Preparing a Balance Sheet

Transfer the net income from the income statement in Task 1 to retained earnings, and make balance sheet in the given format with the following additional information for the year ending December 31, 2012.

Particulars

Amount ($)

Accounts payable

39,000

Accrued expenses

18,000

Accumulated depreciation

(65,000)

Additional paid-in capital

164,000

Allowance for doubtful accounts

(5,000)

Cash

25,000

Common stock ($0.20 par)

45,000

Current portion of long-term debt

6,000

Gross accounts receivable

45,000

Gross fixed assets

500,000

Inventories

50,000

Prepaid expenses

384,000

Long-term debt

200,000

Net accounts receivable

40,000

Net fixed assets

435,000

Retained earnings

60,000

Short-term bank loan (notes payable)

18,000

Task 3: Preparing a Cash Flow Statement

Nikea Inc.'s income statement for the year 2013 is shown below:

During the year, the balances for the sales account, cost of goods sold, and gross profit increased. This information is provided to you. Prepare the cash flow for operating activities, using both the direct method and the indirect method.

Nikea's income statement for the year 2013 is shown below.

Accounts

Amount ($)

Sales

600,000

Cost of Goods Sold

(400,000)

Gross Profit

200,000

Operating Expenses

(30,000)

Deprecation

(20,000)

Net Income

150,000