1. Income statement for Nybrostrand Company.
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Nybrostrand Company
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Balance Sheet from 01January to 31-December-2011
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Particulars
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Amount
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Assets:
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Accounts Receivable
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$36,500.00
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Cash
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$16,700.00
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Inventory
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$76,500.00
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Total Current Assets
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$129,700.00
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Equipment
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$395,000.00
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Total Fixed Assets
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$395,000.00
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Total Assets
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$524,700.00
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Liabilities & Shareholders' Equity:
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Accounts Payable
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$78,000.00
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Total Current Liabilities
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$78,000.00
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Long Term Debt
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$127,000.00
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Total Long-Term Liabilities
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$127,000.00
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Total Liabilities
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$205,000.00
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Common Stock
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$10,000.00
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Paid in Capital
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$50,000.00
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Retained Earnings
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$259,700.00
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Total Shareholder's Equity
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$319,700.00
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Total Liabilities & Shareholder's Equity
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$524,700.00
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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 proportion of 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 fundamental concept of accrual basis accounting that offsets revenue against expenses on the basis of their cause-and-effect relationship. It states that, in measuring net income for an accounting period, the costs incurred in that 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.