Question

Question 1

Company XYZ had the following information during 2020:

1. Beginning inventory was $50,000. Purchases of inventory was $120,000. Ending inventory was 35% of beginning inventory at the end of the year.

2. Cash on hand was $325,000.

3. Sales revenue was $225,000.

4. Operating expenses were half of cost of goods sold.

5. Income tax rate was 20%.

Prepare an income statement for 2020 using the (1) single-step approach and (2) multiple-step approach. What are the advantages and disadvantages of each?

Question 2

Company XYZ had the following information in their stockholder’s equity section of the balance sheet during 2020:

1) 5% preferred stock, $10 par, 10,000 shares: $100,000

2)Common stock, $0.01 par, 5,000,000 authorized shares, 3,000,000 outstanding shares: $30,000

3)Retained earnings: $122,500

The company had net income of $21,300 for the year. They declared and paid preferred dividends of $5,000. They also declared and paid dividends to common shareholders of $3,200. Compute EPS.

Answer 1

Answer:
Part-A:
Single step approach:
Income statement for 2020 of xyz ltd
Particulars		Amount
revenues and gains:
Sales revenue		225,000
Less:Expenses and losses;
cost of goods sold(working note)	152500
Operating expenses (152500*50%)	76250	228,750
Net loss		3,750
Multi step approach:
Income statement for 2020 of xyz ltd
Particulars		Amount
Sales		225,000
Less:cost of goods sold(working note)		(152,500)
Gross profit		72,500
Less:Operating expenses (152500*50%)		(76,250)
Net loss		(3,750)
Working Note: Cost of Goods Sold
Particulars		Amount
Opening Inventory		50,000
Add:Purchases		120,000
Less: Closing Inventory		17,500
Cost of Goods Sold		152,500
Advantages of single step income statement:
1.Easy to prepare:Because single step income statements require you to make fewer calculations and because they don’t break down operating versus non operating line items, single step reports take less time and effort to prepare.
2.Easy to read ; The single step income statement is a streamlined document.It focuses on the bottom line, net income, so its easy to see at a glance how well the business is performing financially
Disadvantages of single step income statement:
While its simplicity is an advantage, it also becomes a disadvantage in situations where the user requires more information. Many financial decisions do require more information about a business's financial health than net income alone can provide.
Adavantages of multistep income statement
1.A multiple-step income statement includes an itemized list of a company's various sources of revenues and expenses.
2.Investors and financial analysts often use the data from multiple-step income statements to determine a company's overall health, such as its gross margin and profit margin.
Disadvantages of multistep income statement
1.While the multiple-step income statement provides some extensive information on the company's operations, the processes involved in producing details in these statements can be complex and time-consuming.
2. Accountants must specify categories for each type of revenue and expense, then record each transaction and place the proper amounts in each category. If a transaction is entered into an improper category, the mistake could affect how the income statement displays its results. Erroneous data on an income statement can lead investors into making faulty assumptions about the company's well-being.
Part-B:
Given Information
10,000 5% preferred stock of $10 each	$100,000
3,000,000 common stock of $0.01 each	$30,000
Retained earnings	$122,500
Net Income	$21,300
Less: Preference dividend (100,000*5%)	$5,000
Net Income available to common shareholders	$16,300
Earnings per share =	Net inome available to common sharholders
No.of Common Stock
Earnings per share =	16300
3000000
Earnings per share =	0.0054
Note : Authorised capital will not be considered for EPS Calculation
Only the current income will be considered and retained earnings will not be considered for EPS
Income before paying dividend to common shareholders has to be considered for EPS