Your firm has been hired to help several small businesses with their year-end financial statements.
- Based on the following account balances, prepare the Marbella Design Enterprises balance sheet as of December 31, 2018:
Cash $30,250 Accounts payable 28,500 Fixtures and furnishings 85,000 Notes payable 15,000 Retained earnings 64,450 Accounts receivable 24,050 Inventory 15,600 Equipment 42,750 Accumulated depreciation on fixtures and furnishings 12,500 Common shares (50,000 shares at $1) 50,000 Long-term debt 25,000 Accumulated depreciation on equipment 7,800 Marketable securities 13,000 Income taxes payable 7,500 - The following are the account balances for the revenues and expenses of the Windsor Gift Shop for the year ending December 31, 2018. Prepare the income statement for the shop. (Resources, Information)
Rent $ 15,000 Salaries 23,500 Cost of goods sold 98,000 Utilities 8,000 Supplies 3,500 Sales 195,000 Advertising 3,600 Interest 3,000 Taxes 12,120
- Based on the following account balances, prepare the Marbella Design Enterprises balance sheet as of December 31, 2018:
During the year ended December 31, 2018, Lawrence Industries sold $2 million worth of merchandise on credit. A total of $1.4 million was collected during the year. The cost of this merchandise was $1.3 million. Of this amount, $1 million has been paid, and $300,000 is not yet due. Operating expenses and income taxes totaling $500,000 were paid in cash during the year. Assume that all accounts had a zero balance at the beginning of the year (January 1, 2018). Write a brief report for the company controller that includes calculation of the firm’s (a) net profit and (b) cash flow during the year. Explain why there is a difference between net profit and cash flow. (Information, Systems)
A friend has been offered a sales position at Draper Media, Inc., a small publisher of computer-related publications, but wants to know more about the company. Because of your expertise in financial analysis, you offer to help analyze Draper’s financial health. Draper has provided the following selected financial information:
Account balances on December 31, 2018: Inventory $ 72,000 Net sales 450,000 Current assets 150,000 Cost of goods sold 290,000 Total liabilities 180,000 Net profit 35,400 Total assets 385,000 Current liabilities 75,000 Other information Number of common shares outstanding 25,000 Inventory at January 1, 2018 48,000 Calculate the following ratios for 2018: acid-test (quick) ratio, inventory turnover ratio, net profit margin, return on equity, debt-to-equity ratio, and earnings per share. Summarize your assessment of the company’s financial performance, based on these ratios, in a report for your friend. What other information would you like to have to complete your evaluation? (Information, Systems)
Use the internet and business publications to research how companies and accounting firms are implementing the provisions of the Sarbanes-Oxley Act. What are the major concerns they face? What rules have other organizations issued that relate to Act compliance? Summarize your findings. (Information)
Team Activity Two years ago, Rebecca Mardon started a computer consulting business, Mardon Consulting Associates. Until now, she has been the only employee, but business has grown enough to support hiring an administrative assistant and another consultant this year. Before she adds staff, however, she wants to hire an accountant and computerize her financial recordkeeping. Divide the class into small groups, assigning one person to be Rebecca and the others to represent members of a medium-sized accounting firm. Rebecca should think about the type of financial information systems her firm requires and develop a list of questions for the firm. The accountants will prepare a presentation making recommendations to her as well as explaining why their firm should win the account. (Resources, Interpersonal)
One of the best ways to learn about financial statements is to prepare them. Put together your personal balance sheet and income statement, using Table 14.1 and Table 14.2 as samples. You will have to adjust the account categories to fit your needs. Here are some suggestions:
- Current assets—cash on hand, balances in savings and checking accounts
- Investments—stocks and bonds, retirement funds
- Fixed assets—real estate, personal property (cars, furniture, jewelry, etc.)
- Current liabilities—charge-card balances, loan payments due in one year
- Long-term liabilities—auto loan balance, mortgage on real estate, other loan balances that will not come due until after one year
- Income—employment income, investment income (interest, dividends)
- Expenses—housing, utilities, food, transportation, medical, clothing, insurance, loan payments, taxes, personal care, recreation and entertainment, and miscellaneous expenses
After you complete your personal financial statements, use them to see how well you are managing your finances. Consider the following questions:
- Should you be concerned about your debt ratio?
- Would a potential creditor conclude that it is safe or risky to lend you money?
- If you were a company, would people want to invest in you? Why or why not? What could you do to improve your financial condition? (Information)