PREPARE INCOME STATEMENTS PART 1: In 2015, Patsy Jackson opened Patsy\'s Posies,

Question

PREPARE INCOME STATEMENTS

PART 1: In 2015, Patsy Jackson opened Patsy's Posies, a small retail shop selling floral arrangements. On December 31, 2016, her accounting records show the following:

REQUIREMENT:

Prepare an income statement for Patsy's Posies, a merchandiser, for the year ended December 31, 2016.

PART 2: Patsy's Posies was so successful that Patsy decided to manufacture her own brand of floral supplies: Floral City Manufacturing. At the end of December 2017, her accounting records show the following:

Sales revenue S53,000 Utilities for shop S 1,100 Inventory on December 31, 2016 S 9,100 Inventory on January 1, 2016 S12,000 Rent for shop $ 4,600 Sales commissions $ 4,000 Purchases of merchandise $36,000

Explanation / Answer

Part 1)

Step 1: Calculate Cost of Goods Sold

The value of cost of goods sold is calculated as below:

Cost of Goods Sold = Opening Inventory + Purchases - Closing Inventory = 12,000 + 36,000 - 9,100 = $38,900

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Step 2: Prepare Income Statement

The income statement for the year ended 2016 is prepared as below:

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Part 2)

1)

The value of cost of goods manufactured for Floral City Manufacturing for the year ended December 31, 2017 is derived as follows:

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2)

The income statement for Floral City Manufacturing for the year ended December 31, 2017 is prepared as below:

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3)

The only difference between the income statement of Patsy's Posies and Floral City Manufacturing is the way in which the cost of goods sold is calculated. In case of Patsy's Posies (which is a merchandiser), we take merchandise purchases in the calculation of cost of goods sold. However, for Floral City Manufacturing (which is a manufacturer), we use cost of goods manufactured in the determination of cost of goods sold.

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Part 3)

The ending inventories in the balance sheet of Patsy's Posies and Floral City Manufacturing would be shown as below:

1)

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2)

Patsey's Posies Income Statement For the Year Ended December 2016 Sales Revenue 53,000 Less Cost of Goods Sold 38,900 Gross Profit 14,100 Less Operating Expenses Rent Expense 4,600 Sales Commissions Expense 4,000 Utilities Expense 1,100 Operating Income $4,400

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