ACC201:PRINCIPLES OF ACCOUNTING - Coursework Example

Week Assignment # 2: ATC 4   Business Applications Case  Following information was drawn from annual report of Machine Import Company (MIC) For the Years 2001 2002Income Statements Revenue $600,000 $690,000Operating Expenses 480,000 552,000Income from Continuing Operations 120,000 138,000Extraordinary Item – Lottery Win 62,000Net Income $120,000 $200,000 Balance SheetsAssets $880,000 $880,000 Liabilities 200,000 $ 0Stockholders’ EquityCommon Stock 380,000 380,000Retained Earnings 300,000 500,000Total Liabilities and Stockholders’ Equity $880,000 $880,000 Requireda) Compute the percentage of growth in net income from 2001 to 2002.

Can stockholders expect a similar increase between 2002 and 2003?b) Assuming that MIC collected $200,000 cash from earnings (net income), explain how this money was spent in 2002.c) Assuming that MIC experiences the same percentage of growth from 2002 to 2003 as it did from 2001 to 2002, determine the amount of income from continuing operations that the owners can expect to see on the 2003 income statement.d) During 2003, MIC experienced a $40,000 loss due to storm damage (note that this would be shown as an extraordinary loss on the income statement).

Liabilities and common stock were unchanged from 2002 to 2003. Use the information that you computed in Part c plus the additional information provided in the previous two sentences to prepare an income statement for 2003 and balance sheet as of December 31, 2003.Solutiona) Percentage Growth in Net Income (2002): Net Income in 2002 – Net Income in 2001 Net Income in 2001$200,000 – $120,000 $120,00066.67 percentIn the year 2002, annual net income of MIC increased remarkably by 66.67 percent due to an infrequent gain from the Lottery win – an extraordinary item.

Since the gain of $62,000 from Lottery was an unexpected / extraordinary gain, it shouldn’t be accounted for in the expected income for next years. Stakeholders, thus, can’t expect the income growth for the year 2002-2003 as high as 67 percent. b) It can be seen in the Balance Sheet that MIC had liabilities of $200,000 in the year 2001, which became cleared in 2002 as depicted by null figure of liabilities in 2002. Thus, MIC utilized its net income of $200,000 in paying all of its liabilities. c) Ignoring the extraordinary gain of $62,000 from the Lottery win, the expected growth for the year 2002-03 should be based on the growth in income from continuing operations.

In 2002, growth in income from continuing operations is:$138,000 – $120,000 = 15 percent$120,000Now if we assume that MIC experiences the same percentage of growth from 2002 to 2003, we can expect the income from continuing operations as well as the net income – since extraordinary gain / loss is not expected year to year – to grow by the 15 percent. Based on this, the amount of income from continuing operations that the owners can expect for 2003 is: $138,000 (1.15) = $158,700The same amount can also be expected for the net income in 2003.d) Since growth in Revenue and Operating expenses from 2001-2002 is also 15 percent, we can expect their same growth for the year 2002-03 too.

In this way, we can expect all the main figures: revenue, operating expenses, and thus the income from continuing operation to grow by 15 percent in 2003. Machine Import Company (MIC)Income StatementAs of December 31, 2003Revenue $793,500 ($690,000 x 1.15) Operating Expenses ($634,800) ($552,000 x 1.15) Income from $158,700 ($138,000 x 1.15) Continuing Operations Extraordinary Loss - ($40,000) Storm Damage Net Income $118,700Machine Import Company (MIC)Balance Sheet As of December 31, 2003Assets $998,700 (Liabilities + Equity)Liabilities $0Stockholders’ Equity Common Stock $380,000Retained Earnings $618,700 (500,000 + 118,700)Total Liabilities and $998,700