An inexperienced accountant for Prestwick Company prepared the following income statement for the...

Question:

An inexperienced accountant for Prestwick Company prepared the following income statement for the month of August 2015:

PRESTWICK COMPANY
AUGUST 31, 2015

Revenues:
Services provided to customers $17,000
Investment by stockholders 5,000
Loan from bank 15,000 $37,000
Expenses:
Payments to long-term creditors $11,700
Expenses required to provide services to customers 7,800
Purchase of land 16.000 35,500
Net income $1,500

Prepare a revised income statement in accordance with generally accepted accounting principles.

Income Statement:

The income statement is a statement of net earnings of an entity and includes all revenues, income, expenses, and losses. All transactions are classified into capital transactions and revenue transactions depending on the nature of the transactions. Revenue transaction are reported in the income statement whereas capital transactions are reported in the balance sheet.

Answer and Explanation:


Revised income statement under the US GAAP:


Revenues: Amount ($)
Services provided to customers $17,000.00
Expenses:
Expenses required to provide services to customers $7,800.00
Net income $9,200.00


Note:

1. Investment by stockholders: this is an equity transaction and must be reported in the balance sheet under stockholders' equity.

2. A loan from bank: this is a debt-transaction and must be reported as a liability in the balance sheet.

3. Payments to long-term creditors: This is an operating transaction and must be reported as a deduction from the cash account. Also, it is reported in the Statement of cash flow if prepared under the direct method.

4. Purchase of land: this is a capital transaction and must be reported as an asset in the balance sheet.


Learn more about this topic:

Loading...
What Is an Income Statement? - Purpose, Components & Format

from Accounting 101: Financial Accounting

Chapter 2 / Lesson 2
45K

Related to this Question

Explore our homework questions and answers library