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Accounting
There are a couple of different issues with the Smith Company statements. The first question relates to the $45,500 worth of products. This would not be recorded as income, because the customer has not committed to the purchase. Revenue recognition rules hold that revenue cannot be recognized until the sale has been finalized (Investopedia, 2013). This revenue must be removed from the income statement. While the description of the situation is unclear, it appears that this amount was removed from the revenue already, so that the $406,000 in revenue on the income statement is the correct amount.
The next issue is the inventory problem. The inventory account is currently showing $25,000, which was the result of a physical count. There was no adjusting entry to the inventory for the $45,500 that was added to and subsequently removed from revenue. The question appears to be implying, when it should be stating clearly, that the $45,500 was removed from inventory when the sale was recorded, but was not added...
Also, it is never stated whether that $45,500 was actually produced. Since the balance sheet is not the concern, the key issue is that the adjustment was also not reflected on the cost of goods sold account. This would be reduced by $45,500 to reflect that this sale did not occur.
The new income statement would therefore be:
Smith Company
Income Statement
Revenue
$406,000
Cost of Goods Sold
$188,500
Gross Profit
$217,500
Salaries
$67,500
Marketing
$4,500
Insurance
$1,400
Rent
$18,000
Utilities
$6,700
Property Taxes
$8,900
Operating Profit
$110,500
Depreciation Expense
$24,350
Net Income
$86,150
The company…
Works Cited:
AccountingTools.com. (2013). The matching principle. AccountingTools.com. Retrieved March 9, 2013 from http://www.accountingtools.com/matching-principle
Investopedia. (2013). Revenue recognition. Investopedia. Retrieved March 9, 2013 from http://www.investopedia.com/terms/r/revenuerecognition.asp#axzz2N52vD1oy
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