Here is the problem:
if you could just help me get started in the right direction that would be great, I don't even know where to begin with this question
ellar Company was established to manufacture components for the auto industry. The components are shipped the same day they are produced. The following events took place during the first year of operations.
a. Issued common stock for a $50,000 cash investment.
b. Purchased a delivery truck at the beginning of the year at a cost of $10,000 cash. The truck is expected to last five years and will be worthless at the end of that time.
c. Manufactured and sold 500,000 components the first year. The costs incurred to manufacture the components are (1) $1,000 monthly rent on a facility that included utilities and insurance; (2) $400,000 of raw materials purchased on account; $100,000 is still unpaid as of year-end but all materials were used in manufacturing; and (3) $190,000 paid in salaries and wages to employees and supervisors.
d. Paid $100,000 to sales and office staff for salaries and wages.
e. Sold all components on account for $2 each. _ As of year-end, $150,000 is due from customers.
1. How much revenue will Hellar recognize under the cash basis and under the accrual basis?
2. Describe how Hellar should apply the matching principle to recognize expenses.
3. Prepare an income statement under the accrual basis. Ignore income taxes.
To answer these questions, we need to understand the difference between cash basis and accrual basis accounting and apply the matching principle.
Cash basis accounting recognizes revenue and expenses when cash is received or paid, while accrual basis accounting recognizes revenue and expenses when they are earned or incurred, regardless of when the cash is received or paid.
1. To determine revenue under the cash basis, we need to look at the cash received from sales. In this case, Hellar sold all components on account for $2 each, so the revenue under the cash basis would be $2 multiplied by the number of components sold, which is 500,000. Therefore, the revenue under the cash basis is $1,000,000.
Under the accrual basis, revenue is recognized when it is earned, which is when the components are sold. Since all components were sold on account, we need to consider the amount due from customers. As of year-end, $150,000 is due from customers, so the revenue under the accrual basis would be $2 multiplied by the number of components sold, which is again 500,000, plus the amount due from customers, which is $150,000. Therefore, the revenue under the accrual basis is $1,150,000.
2. The matching principle states that expenses should be recognized in the same period as the revenue they help generate. In this case, the costs incurred to manufacture the components, including rent, raw materials, and salaries and wages, should be matched with the revenue generated from selling the components.
To apply the matching principle, Hellar should recognize the rent expense of $1,000 monthly for the entire year, totaling $12,000. The unpaid portion of the raw materials purchased on account, which is $100,000, should also be recognized as part of the cost of goods sold. The salaries and wages paid to employees and supervisors, as well as to the sales and office staff, should also be recognized as expenses.
3. To prepare an income statement under the accrual basis, we need to compile all the revenues and expenses that have been recognized. Based on the information provided, the income statement under the accrual basis would include the following:
Revenue: $1,150,000 (from the previous calculation)
Cost of Goods Sold:
- Raw materials (unpaid portion): $100,000
- Salaries and wages (manufacturing): $190,000
Gross Profit: Revenue - Cost of Goods Sold
Operating Expenses:
- Rent: $12,000
- Salaries and wages (sales and office staff): $100,000
Net Income: Gross Profit - Operating Expenses
Please note that this is a simplified income statement example, and additional expenses, such as taxes, may need to be considered in a more comprehensive statement.