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Financial Accounting
Nybrostrand Company had a moderately successful year last year. Correcting the bookkeeper's error brings the revenue down to $421,500. It also brings the cost of goods sold down to $219,500, since those goods were never sold and need to be deleted from that line. The company's net income after these adjustments is $70,650. This represents a net margin of 16.7%, which could be a good number or a mediocre one, depending on the nature of the company's business.
This income statement gives the same bottom line as the previous income statement. The matching principle means that an adjustment to the credit side must be offset with an equal adjustment to the debit side. Thus, in this situation, the cost of goods sold (debt side) was lowered $34,500 as was the revenues (credit side) $34,500. It is not indicated whether or not the bookkeeper made a separate entry to record payment for the transaction, so no adjustment could be made here. It is important that each transaction be matched against another. In this case, it appears that only one transaction was entered in error, so the adjustment simply undoes that single transaction.
There is the possibility of further error, however, since the two sides of the statements do not match. This error would have arisen from the use of a physical count to determine the inventory, rather than the books. There are no means of reconciliation for this number, but it clearly is not what it should be. The $34,500 would presumably have been taken out of the inventory account, meaning at least $9,500 that was considered to have already been sold has in fact not yet even been produced. A proper reconciliation on the inventory will need to be done for the firm's benefit, but the inventory figure on the statement needs to reflect the journal entries, not a physical count.
Nybrostrand Company
31-Dec-11
Income Statement
Revenue
421,500
Cost of Goods Sold
219,500
Gross Profit
202,000
less
Depreciation expense
24,350
Insurance expense
1,400
Marketing expense
4,500
Rent expense
18,000
Property tax expense
8,900
Salaries
67,500
Utilities expense
6,700
Subtotal Operating Expenses
131,350
Operating Profit (Loss)
70,650
Provision for Income Taxes
Net Income
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This is the result of the decline in inventory levels. If the inventory levels had not changed, there would have been no difference between the net profit for the two methods. If the company sold another 10,000 units, it would have a higher profit. This calculation was based on the contribution margin method. What occurs in this method is that the company sells more, but it does not produce more.
An example here may be income from an original Rembrandt that one possesses and, occasionally, loans for parties, or income from one's continuing retail business, or income that is still coming in from last month's rental payment even though the original inhabitants have discontinued their lease. This part of the income statement remains unchanged. The only element that SFAS 130 appends is the category of other comprehensive income. 3. Definition
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