Collect the cash

from the customer

Customer acknowledges Collection Method Purchase raw material

receipt of the item

Ship the product to the Convert the raw material

customer and send a “Usual” Method to a finished product
sales invoice (Delivery Method)

Receive an order for the product Inspect the product

from a customer Production Method

Store the product in

a warehouse
 GRENNELL FARM
Income Statements
Method:
Sales Collection Production
Sales .................................................................................. $522,000 $462,4001 $614,1004
Cost of goods sold
Beginning inventory............................................. 0 0 0
Production ............................................................ 107,7302 107,730 107,730
Less: Ending inventory ........................................ 15,390 25,6503 05
Cost of goods sold................................................ 92,340 82,080 107,730
Gross margin ..................................................................... 429,660 380,320 506,370
Other expenses ................................................................. 183,000 183,000 183,000
Net Income ........................................................................ $246,660 $197,320 $323,370

Notes:
1
180,000 bushels @ $2.90 - 20,000 bushels @ $2.98 = 160,000 but @ $2.89.
2
210,000 bushels @ $.513 = $107,730.
3
30,000 bushels physically in inventory plus 20,000 bushels “inventory” at the elevator, reflecting
payment not yet received from the elevator operator.
4
30,000 bushels @ $3.07 + 180,000 bushels @ S2.90.
5
Although there are 30,000 bushels physically in inventory, under the production method all wheat is
counted as sold, and hence is not in inventory in an accounting sense.
 Balance Sheets
Cash................................................................................... $ 30,900 $ 30,900 $ 30,900
Accounts receivable .......................................................... 59,600 06 151,7007
Inventory ........................................................................... 15,390 25,650 0
Land .................................................................................. 375,000 375,000 375,000
Buildings and machinery (net) .......................................... 112,500 112,500 112,500
Total assets ........................................................... 593,390 544,050 670,100
Liabilities (current) ........................................................... 33,000 33,000 33,000
Owners’ equity8.................................................................
Common stock and APIC .................................... 457,500 457,500 457,500
Retained earnings ................................................. 102,890 53,550 179,600
Total owners’ equity ......................................................... 560,390 511,050 637,100
Total liabilities and owners’ equity ................................... $593,390 $544,050 $670,100

6
Under the collection method, there ae no accounts receivable since sales revenues are not recognized
until the collection is made.
7
This includes the $59,600 “real” receivable plus $92,100 recorded as revenue on the 30,000 bushels
produced but not physically sold.
8
If you assume that the case statement “Grennell withdrew most of the earnings” means that Retained
Earnings at the beginning of the year was zero, then the 2005 drawings can be determined as follows:
Sales Collections Production
Beginning Retained Earnings ........................................... $0 $0 $0
Plus: Net Income............................................................... 246,660 197,320 323,370
Less: Ending Retained Earnings ....................................... 102,890 53,550 179,600
Drawings .............................................................. $143,770 $143,770 $143,770