The Income Statement Implications for Spencer Co.
The net income for Spencer is $192,000. The total impact of the income statement on the balance sheet will be an increase of $219,000 on each side. Retained earnings will increase by $192,000. Liabilities will increase by $27,000. The assets of the company rose $219,000. The operating income, or earnings before interest, tax, adjustments, is also $219,000.
Not all of the sales were paid for in cash. The cash provided by operations is $148,000. This is less than the operating income of $219,000. The difference of $71,000 would be sales not paid for in cash but by debt, normally accounted for in accounts receivable.
Neither was all of the company's inventory paid for with cash. The fact that there is $85,000 left in accounts payable suggests a remaining inventory balance of about the same amount.
Research and development costs, interest expense, and selling and administrative expenses are assumed to have been paid with cash. The decreased both assets and retained earnings by offsetting amounts of $51,000 for selling and administrative expenses, $64,000 for interest expense, and $37,000 for costs related to research and development. Unless research and development are related to a specific product or service that will be launched in the foreseeable future, the costs must be expensed rather than capitalized into an asset.
The gain from retirement of bonds results from the difference in the cash paid out to retire the bonds and the bonds payable amount, which is $132,000. An allowance of $28,000 must be made to taxes payable, since this gain is considered to be taxable income. The remaining $104,000 is added to retained earnings as a non-operating gain.
The loss from discontinued operations is the markdown of $21,000. Assets are generally valued at historical cost. The principal of going concern suggests that they should be valued as if the company woul...