Question

The following transactions pertain to 2018, the first-year operations of Gibson Company. All inventory was started and completed during 2018. Assume that all transactions are cash transactions.
Acquired $12,000 cash by issuing common stock.

Paid $4,700 for materials used to produce inventory.
Paid $2,400 to production workers.
Paid $900 rental fee for production equipment.
Paid $350 to administrative employees.
Paid $400 rental fee for administrative office equipment.
Produced 400 units of inventory of which 360 units were sold at a price of $25 each.
Required
Prepare an income statement and a balance sheet in accordance with GAAP.

Answer 1

Answer:

Explanation:

The preparation is shown below:

                                         Gibson Company

                                        Income statement

                                        For the year 2018

Particulars                                                    Amount

Sales (360 units × $25)                               $9,000

Less: Cost of goods sold                           -$7,200

Gross profit                                                 $1,800

Less:  rental fee                                          -$400

Less: administrative employees                -$350

Net income                                                  $1,050

The computation of cost of goods sold would be

= Materials used to produce inventory + production workers + rental fee for production equipment

= $4,700 + $2,400 + $900

= $8,000

So, the cost of goods sold would be

= $8,000 × 360 units ÷ 400 units

= 7,200

And, the ending balance of finished goods inventory would be

= $8,000 - $7,200

= $800

                                        Gibson Company

                                        Balance sheet

                                        For the year 2018

Liabilities                           Amount      Liabilities                           Amount

Common stock                $12,000       Cash                                  $12,250

Add: Retained earning   $1,050          Finished goods inventory $800

Total                                  $13,050      Total                                  $13,050  

The cash balance would be

Cash flow from Operating activities  

Sales                          $9,000

Less: cost of goods sold -$7,200

Less: admin expenses     -$750

Less: Increase in inventory -$800

Net Cash flow from Operating activities -$250

Cash flow from Investing activities  $0

Net Cash flow from Investing activities $0

Cash flow from Financing activities  

Issuance of common  stock $12,000

Net Cash flow from Financing activities $12,000

The computation of the cash balance

Net Cash flow from Operating activities $250

Net Cash flow from Investing activities $0

Net Cash flow from Financing activities $12,000

Cash balance                                            $12,250