Preparing Financial Statements, Income Statement, Balance Sheet, Variance Analysis

This article explains how to prepare financial statements, income statement, balance sheet, and variance analysis. It also includes explanations of service revenue, salary expenses, depreciation expense, advertising expense, and supplies expenses. The article also discusses the balance sheet for Tanilba Bay Didgeridoo’s and the variance analysis of FY2017 income statement.

ACCOUNTING:CONCEPTS & PRINCIPLES
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Question B1
The objective is to prepare the financial statements for Ralph based on the information
provided. The income statement is indicated below.
Explanation
 Service Revenue = $80700 (Received) + $1000 (Cash not received but earned) –
4100(Cash Received but revenue not earned) + 800(Revenue earned)
 Salary Expenses = $ 17000 (Paid) + $1200 (Due for the year)
 Depreciation expense, advertising expense, supplies expenses are provided in the
question. The fact that these are not paid does not matter since income statement is
prepared on an accrual basis.
 Profit = Revenue – Total Expenses
 It has been assumed that there is no tax on the profit
It is apparent from the above income statement that the yearly profit has come out to be $
47,900 which is lesser than the drawings of $ 50,000. The net result would be that the overall
equity of the company would be lesser from the original $ 40,000 balance and hence the
company would not be eligible for the loan (Damodaran, 2015). Also, the concern that the
drawings would exceed the annual profits of the business on the part of Collins is correct.

Question B2
1) No, I would not congratulate them due to the presence of serious discrepancies in the
income statement which comprises solely of the balance sheet items. It is expected that the
income statement should comprise of the revenue generated from sales and the various
expenses should be taken into account for delivering the product being sold. This would
include the cost of goods sold besides other operating costs (Brigham & Houston, 2014).
The costs incurred for asset acquisition are not operating expenses and therefore should
not be recorded in the income statement. Additionally, the cash obtained by way of equity
or bank loan does not constitute revenue. Further, the cash balance does not necessarily
indicate profit as the cash balance highlights the closing cash balance on a given date
which is derived from cash flow statement. The income statement on the other hand is
usually prepared on accrual basis (Brealey, Myers & Allen, 2014).
2) The balance sheet for Tanilba Bay Didgeridoo’s based on the given data is shown below
(Brigham & Houston, 2014).
Explanation: It is imperative to note that since business has not yet commenced hence no
receivables or payables and also the retained earnings is zero. Land and building includes
the cost of the house along with renovation.

Question B3
The full year income statement is available for FY2017 which has been taken as the current
year for this task. Using FY2016 income statement as the reference point, the budgeted
income statement of FY2017 has been estimated which is captured in the tabular manner
shown below (JB Hi Fi, 2017).
In order to produce the variance analysis, the budgeted income statement of FY2017 needs to
be compared with the actual reported income statement of FY2017 so as to comment on the
performance of the management for the given year. The requisite variance analysis is
indicated below (Brealey, Myers & Allen, 2014).
Requisite Formula Used

1) Variance = 2017 Actual - 2017 Budgeted
2) Variance (%) = (2017 Actual - 2017 Budgeted)/2017 Budgeted
3) F indicates favourable variance whereas NF indicates not favourable or unfavourable
variance
Comment
From the above variance analysis, it is apparent that in terms of top line growth the year was
better than the management expected but in terms of operating or net profit, the year was
worse than management expected. This is apparent from the fact that favourable variances
have been witnessed only for the revenue and the gross profit while for all the underlying
costs the variances are unfavourable thus implying that the actual costs incurred were
significantly higher than estimated (Damodaran, 2015). This may be attributed to the
acquisition that the company has undertaken owing to which the revenues and related costs
have both jumped significantly (JB Hi Fi, 2017).

References
Brealey, R. A., Myers, S. C., & Allen, F. (2014) Principles of corporate finance (2nd ed.).
New York: McGraw-Hill Inc.
Brigham, E. F. & Houston, J. F., (2014) .Fundamentals of Financial Management (14th ed.).
Boston: Cengage Learning.
Damodaran, A. (2015). Applied corporate finance: A user’s manual (3rd ed.). New York:
Wiley, John & Sons.
JBHiFi (2017) Annual Report 2017, Retrieved from
https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf