Unit 6 assignment
Balance sheet and income statement
Understanding Revenue Recognition
For this assignment turn to page 364 in your textbook (Chapter 6 of Financial Statements Analysis) and complete Case 6-1 Understanding Revenue Recognition.
BIKE Company starts with $3000 cash to finance its business plan to produce bike helmets with a simple assembly process. During the first month of business the company signs sales contracts for 1300 units ( sales price of $9 per unit) produces 1200 units ( production cost of $7 per unit) ships 1100 units and collects in full for 900 units. Production costs are paid at the time of production. The company has only two other costs:
commission of 10% of the selling price when the company collects from the customer;
shipping costs of $0.20 per unit paid at time of shipment. Selling price and all costs per unit have been constant and are likely to remain the same.
Prepare comprehensive (side by side) balance sheets and income statements for the first month of BIKE Company for each of the following three alternatives:
Revenue is recognized at the time of shipment
Revenue is recognized at the time of collection
Revenue is recognized at the time of production
Note: net income for each of the three alternatives is (1) $990 (2) $810 and (3) $1080 respectively.
The method where revenue is recognized at the time of collection known as the installment method is except the bull for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax purposes? (one line simple answer)
Comment on the usefulness of the installment method for a credit analyst is using both the balance sheet and income statement. (one line simple answer)
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