Income Statement

QUESTION

Noah Briscoe is a college student at Regent University. He is a rising senior and majors in business administration. He wants to own his own business one day so that is why he is majoring in business. He wanted to work a summer job but did not want to be inside all the time due to Covid. He came up with the idea of starting a landscaping business so he could be outside and make some money for college. Noah formed a small business with a small loan from his uncle for $1,200 at 10% and $800 of his own money. The Noah Briscoe Lawn Service issued $800 of common stock to Noah. Noah rented lawn equipment, purchased the supplies he needed and hired other students to mow lawns and trim shrubbery. At the end of each month Noah would mail bills to the customers. On August 31, he was ready to dissolve the business so he could return to college class’s full time. Because he was so busy he kept few records except for his checkbook, his receipts and a list of all his customers.

On August 31, the business checkbook shows a positive balance, and customers still owed $1,500. During the four months the business was open the business collected $12,000 from customers. The business checkbook lists payments for supplies totaling $700, and it still has gasoline, week trimmer cord and other supplies that costs a total of $100. The business paid employees $3,600 and still owes them $600 for the final week of the summer. Noah rented some equipment from the local machine shop. On May 1 when the business began, the business signed a six-month rental agreement on mowers and paid $1,200 for the full rental period in advance. The machine shop will refund the unused portion of the prepayment if the equipment is returned in good condition. In order to get the refund, Noah has kept the mowers in excellent condition. In fact, the business had to pay $500 to repair a few of the mowers. In order to transport employees and equipment to various mowing jobs, Noah used an old truck his grandfather gave him that was worth about $500 and a trailer that the business bought for $600. The business estimates that the summer’s work used up one-fourth of the truck and trailers service potential. The business checkbook lists a payment of $500 for cash dividends paid to Noah during the summer. The business paid the loan back during August as well. Other than that Noah has kept all the money in the business so he can have a nice amount at the end of the summer to help pay for his college tuition.

1. Prepare the income statement

1. Prepare the statement of retained earnings

1. Prepare the balance sheet in good form.

1. Was the business successful this summer? Give reasons not just a yes or no question!

1. Ethics question-Please answer the ethics questions and back it up with reasons, not just yes or no. Please include scripture references as well to receive full credit! 

Management and Earnings-revenues for most businesses are recognized when the services are completed. But because GAAP allows for some freedom in the revenue concept, some managers believe it is necessary to manage earnings. Some managers use rational judgment to justify earnings management because they believe they can better provide investors and creditors with reported earnings, which usually shows the company in a positive light.

A. List at least 4 parties affected by earnings management at companies.

B. Is earnings management good or bad?

C. Is earnings management legal and ethical?

D. What corporate governance is in place at most organizations and companies, whether for profit or nonprofit to limit earnings management?

ANSWER

Income Statement

Statement of Retained Earnings:

Balance Sheet:

Now, let’s analyze whether the business was successful this summer:

The business was successful in generating revenue, collecting $12,000 from customers over the summer. However, success is not solely determined by revenue. It’s essential to consider other factors:

Profitability: The business generated a net income of $6,600, which is a positive sign. It indicates that Noah was able to cover his expenses and make a profit.

Cash Flow: The business has a positive balance in the checkbook, indicating that it has sufficient cash on hand.

Financial Management: The business repaid the loan from Noah’s uncle, indicating financial responsibility.

Assets: The business acquired assets like lawn equipment and a truck and trailer. The rental equipment is in good condition, potentially allowing for a refund.

Ethical Consideration: The $500 paid as cash dividends to Noah during the summer might raise ethical questions since it’s important to retain earnings for the business’s growth.

Overall, considering the financial numbers, the business can be deemed successful for the summer. However, success should also be evaluated in terms of the business’s long-term goals and ethical considerations.

Ethics Questions

Parties Affected by Earnings Management

1. Shareholders/Investors
2. Creditors
3. Regulators
4. Employees

Is Earnings Management Good or Bad? Earnings management can be both good and bad. When it involves manipulating financial data to deceive stakeholders or meet short-term goals at the expense of long-term sustainability, it’s unethical and harmful. However, when it involves reasonable judgment to present a more accurate picture of the company’s performance, it can be seen as beneficial.

Is Earnings Management Legal and Ethical? Earnings management, when used to deceive stakeholders, is illegal and unethical. It violates the principles of transparency and honesty. However, some degree of earnings management is allowed within Generally Accepted Accounting Principles (GAAP) to account for uncertainties and judgment in financial reporting. The key is to ensure that it is used within legal and ethical boundaries.

Corporate Governance to Limit Earnings Management: Corporate governance measures to limit earnings management include:

Independent boards of directors.

Oversight by audit committees.

Strict adherence to accounting standards.

External audits by independent auditors.

Ethical guidelines and codes of conduct for management.

Scripture Reference: Proverbs 11:1 (NIV) – “The Lord detests dishonest scales, but accurate weights find favor with him.” This verse emphasizes the importance of honesty in financial dealings.

In conclusion, while some discretion is allowed in financial reporting, the ethical principles of transparency and honesty should always guide a business’s financial management. Noah’s business was successful in terms of profit, but the payment of dividends should be carefully evaluated to ensure ethical practices and long-term sustainability.