Financial Interpretation statement comparability

Questions: 1. You are required to record the following transactions into the transaction analysis char? 2. Prepare the fully classified Income Statement and Balance Sheet for March 2017 for GS Engineering? 3. Advise Georgie on the differences between straight line and reducing balance depreciation methods and explain the impact on the income statement over the assets life. How does a business determine which is the appropriate depreciation method to use? Answers: 1. TRANSACTION ANALYSIS:- Date Transaction Assets Liabilities Equity 1-Mar Capital Investment 10000 10000 2-Mar Purchase of Property 250000 225000 3-Mar Purchase of Equipment 10000 Three-months' subscription paid 2400 4-Mar Purchase of Furniture 3000 Insurance paid for 12 months 2400 5-Mar Purchase of Computer Equipment 15000 Purchase of Vehicle in Credit 24000 24000 6-Mar Sales on Credit 2000 2000 7-Mar Office Stationery Purchased on credit 1200 1200 8-Mar Tools equipment contributed by owner 6500 6500 15-Mar Sales on Credit 4800 4800 17-Mar Collection from 1st Customer 2000 21-Mar Sales on Credit 7200 7200 Withdrawn by owner 1500 1500 23-Mar Wages paid after deducting PAYG 1600 1600 24-Mar Collection from Customers 2300 26-Mar Telephone Bill Paid 270 270 28-Mar Sales on Credit 8400 8400 30-Mar Wages paid after deducting PAYG 1300 500 1800 31-Mar Paid Motor Vehicle Expenses 240 240 Paid Membership Fees 1200 1200 Withdrawn by owner 1000 1000 Payment made for Office Stationery 200 200 Office Supplies Consumed 400 400 Interest Accrued om Mortgage 950 950 Utilities owed for the month 375 375 Depreciation on Computer Equipment 375 375 Depreciation on Motor Vehicle 400 400 Depreciation on Engineering Tools Equipment 206.25 206.25 Insurance Expenses expired 200 200 2. In the Books of GS Engineering Income Statement for the period ended 31st March,2017 Particulars Amount Amount Sales Revenue $22,400.00 Total Revenue $22,400.00 Operating Expenses: Wages Expenses ($3,400.00) Telephone Expenses ($270.00) Motor Vehicle Expenses ($240.00) Membership Fees ($1,200.00) Office Supplies Expenses ($400.00) Interest Expenses ($950.00) Utilities Expenses ($375.00) Depreciation on Com. Equipment ($375.00) Depreciation on Motor Vehicle ($400.00) Depreciation on Eng. Tools Equipment ($206.25) Depreciation on Furniture Fittings ($25.00) Subscription Expenses ($800.00) Insurance Expenses ($200.00) Total Operating Expenses ($8,841.25) Net Profit/(Loss) for the period $13,558.75 In the Books of GS Engineering Balance Sheet as on 31st March,2017 Particulars Amount Amount Current Assets: Cash at Bank $39,590 Prepaid Subscription $1,600 Prepaid Insurance $2,200 Accounts Receivable $18,100 Office Supplies $800 Total Current Assets $62,290 Non-Current Assets: Property Equipment $250,000 Motpr Vehicle $24,000 Less: Accm. Depreciation ($400) $23,600 Engineering Tools Equipment $16,500 Less: Accm. Depreciation ($206) $16,294 Furniture Fittings $3,000 Less: Accm. Depreciation ($25) $2,975 Computer Equipment $15,000 Less: Accm. Depreciation ($375) $14,625 Total Non-Current Assets $307,494 Total Assets $369,784 Current Liabilities: Accounts Payable $25,375 PAYG Payable $900 Interest Payable $950 Total Current Liabilities $27,225 Non-Current Liabilities: Loan from Bank $225,000 Total Non-Current Liabilities $225,000 Total Liabilities $252,225 Owners' Contribution: Capital $106,500 Less: Drawings ($2,500) Less: Net Loss $13,559 $117,559 Total Owner's Contribution $117,559 Total Liability Equity $369,784 3. Difference between Straight Line Method and Reducing Balance Method: There are many methods, used for depreciating any fixed asset. However, amongst all the methods, straight-line depreciation method and reducing balance depreciation method are the most popular and widely used methods. Though both the methods are used to depreciate the fixed assets over a specified time period, there are many differences between these methods. The differences are stated below: Straight Line Method Reducing Balance Method - In this method, the depreciation amounts for every year use to be same. - The depreciation amounts, computed under this method, use to decrease in every year. - The depreciation amount is computed on the basis of the purchase cost of the assets. - The depreciation amount is calculated on the basis of the net opening balance of the assets for the depreciation period. - Under this method, the depreciation rate charged on the net opening balance of the asset increases over the year. - In reducing balance method, the depreciation rate remains constant on every year. - At the end of the useful life, the asset value becomes zero or equal to the estimated residual value. - The asset value at the end of the estimated life does not become zero or equal to the expected residual value (Henderson et al. 2015). Impact of the Income Statement:- he depreciation is considered as a non-cash operating expenses for the business. Therefore, in the income statement, it is deducted from the total revenue of the business for determining the net income for the period. It is clear from the above discussion that the depreciation amounts of any asset, computed under straight-line and reducing balance method may become same for the first year of the asset, but in the following year, it will differ from each other. Therefore, the impacts of this method on the net incomes of any business for the useful life of any asset will also vary significantly. Impact of Straight-Line Method: Under this method, the depreciation amount remained same throghout the useful life of any asset. Therefore, if the sales revenue and other expenses would remain unchanged over the useful life of any asset, then the net income on each year would be same due to the fixed depreciation cost. Impact of Reducing Balance Method: In reducing balance method, the depreciation rate, charged on the assets remains same, but the depreciation amount reduces over the useful life of the assets. Due to the reducing value of depreciation, the net income of the business would increase over the useful life of the assets if the amounts of all other income and expense items remain unchanged (Schroeder et al. 2016). Selection of Depreciation Method: The business firms use to consider and evaluate many factors for selecting the appropriate depreciation method to depreciate any asset. The factors are stated below: Nature and type of the asset Utilization of the asset Nature of the business and business operations Depreciation policies, described under various accounting standards Taxation rules (Brochet et al. 2013) References Bibliography: Brochet, F., Jagolinzer, A.D. and Riedl, E.J., 2013. 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