Abstract The intent of this paper is to prepare an income statement

    Abstract

    The intent of this
    paper is to prepare an income statement for Nybrostrand Company in good format,
    compare the income or loss compare to the original income statements and
    explain the importance of the matching concept.

    1. Income statement for Nybrostrand Company.

    Nybrostrand
    Company

    Balance
    Sheet from 01January to 31-December-2011

    Particulars

    Amount

    Assets:

    Accounts Receivable

    $36,500.00

    Cash

    $16,700.00

    Inventory

    $76,500.00

    Total Current Assets

    $129,700.00

    Equipment

    $395,000.00

    Total Fixed Assets

    $395,000.00

    Total Assets

    $524,700.00

    Liabilities & Shareholders’ Equity:

    Accounts Payable

    $78,000.00

    Total Current Liabilities

    $78,000.00

    Long Term Debt

    $127,000.00

    Total Long-Term Liabilities

    $127,000.00

    Total Liabilities

    $205,000.00

    Common Stock

    $10,000.00

    Paid in Capital

    $50,000.00

    Retained Earnings

    $259,700.00

    Total Shareholder’s Equity

    $319,700.00

    Total Liabilities & Shareholder’s Equity

    $524,700.00

    2. There is a huge
    difference in the original report compared to the second statement since the
    income statement became inaccurate due to the error made by the bookkeeper
    which is contrary to the guidelines established by the generally accepted
    accounting principles (GAAP).
    The expenses of an
    enterprise should be matched with the revenues of the reporting period so as to
    show the company’s correct profitability in the reporting period. It is based
    on the cause and effect relationship. The sale of goods leads to the cost of
    goods sold and the sales commission expense. If the cost incurred is not
    related to the revenue or to a particular accounting period, then it should be
    recorded immediately. Example – Advertising Expense and Research and
    Development expenditure is to be recorded immediately because the measurement
    of future economic benefit cannot be made.
    The Income Statement and Balance Sheet are used to report the
    financial results of the company. The income statement gives information about
    the revenues and expenses of a business so that the Net Income earned can be
    determined. The Balance Sheet provides the details about the asset, liabilities
    and shareholder’s equity of the business enterprise. It shows the overall
    results of the business. The company is able to earn income of $150,150 for the
    year ended 31st December, 2011. The proportion of shareholders
    equity is greater than the proportionof
    liabilities in the capital structure of the company.
    The
    retained earnings are calculated by adding the net income of $150,150 and
    previous retained earnings balance of $108,550. The previous balance of
    retained earnings is calculated by difference of debit and credit side of trial
    balance. ($959,550 – $851,000).
    According to www.finance-lib.com (n.d.),
    a .businessdictionary.com/definition/fundamental.html”>fundamental .businessdictionary.com/definition/concept.html”>concept of .businessdictionary.com/definition/accrual-basis-accounting.html”>accrual basis accounting
    that .businessdictionary.com/definition/offset.html”>offsets .businessdictionary.com/definition/revenue.html”>revenue
    against .businessdictionary.com/definition/expense.html”>expenses on
    the basis of their cause-and-effect .businessdictionary.com/definition/relationship.html”>relationship.
    It .businessdictionary.com/definition/state.html”>states that,
    in measuring .businessdictionary.com/definition/net-income.html”>net income
    for an .businessdictionary.com/definition/accounting-period.html”>accounting period,
    the .businessdictionary.com/definition/costs.html”>costs .businessdictionary.com/definition/incurred.html”>incurred in
    that .businessdictionary.com/definition/period.html”>period should
    be matched against the revenue generated in the same period. Failure to report
    an accurate income statement during the appropriate reporting period can
    mislead investors and stockholders.

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