ACC 205 Principles of Accounting I (updated SEPT 2013)

ACC 205 Week 1

DQ 1

Accounting Equation. As you have learned in this week’s readings, the Accounting

Equation is Assets = Liabilities + Owners’ Equity. Is the accounting equation true in all instances? Provide

sample transactions from your own experiences to demonstrate the validity of the Accounting Equation.

Guided Response:

Review several of your peers’ posts and identify some core components that you feel should be included in every

transaction. Respond to at least two of your peers and provide recommendations to extend their thinking.

Challenge your peers by asking a question that may cause them to reevaluate or add components to their transactions.

DQ 2

Accounts. What does the term account mean? What are the different classifications of

accounts? How do the rules for debits and credits impact accounts? Please provide an example of how debits and credits impact accounts.

Guided Response:

Analyze several of your peers’ posts. Let at least two of your peers know if this knowledge could be used in their everyday lives. Is so, how? If not, why not?

Assignment

Basic Accounting Equations. Please complete each of the exercises below in a word document. Save the

document, and submit it in the appropriate week using the Assignment Submission button.

1. Recognition of normal balances. The following items appeared in the accounting records of Triguero's, a

retail music store that also sponsors concerts. Classify each of the items as an asset, liability; revenue; or

expense from the company's viewpoint. Also indicate the normal account balance of each item.

a. Amounts paid to a mall for rent.

b. Amounts to be paid in 10 days to suppliers.

c. A new fax machine purchased for office use.

d. Land held as an investment.

e. Amounts due from customers.

f. Daily sales of merchandise sold.

g. Promotional costs to publicize a concert.

h. A long-term loan owed to Citizens Bank.

i. The albums, tapes, and CDs held for sale to customers.

2. Basic journal entries. The following transactions pertain to the Jennifer Royall Company:

May 1 Jennifer Royall invested cash of $25,000 and land valued at

$15,000 into the business.

5 Provided $1,000 of services to Jason Ratchford, a client, on account.

9 Paid $1,250 of salaries to an employee.

14 Acquired a new computer for $4,200, on account.

20 Collected $800 from Jason Ratchford for services provided on May 5.

24 Borrowed $2,500 from BestBanc by securing a six-month loan.

Prepare journal entries (and explanations) to record the preceding transactions and events.

3. Balance sheet preparation.

The following data relate to Preston Company as of December 31, 20XX:

Building $40,000 Accounts receivable $24,000

Cash 21,000 Loan payable 30,000

J. Preston, capital 65,000 Land 21,000

Accounts payable ?

Prepare a balance sheet as of December 31, 20XX.(See Exhibit 1.1 and 1.4)

4. Basic transaction processing. On November 1 of the current year, Richard Simmons established a sole proprietorship. The following transactions occurred during the month:

1: Simmons invested $32,000 into the business for $32,000 in common stock.

2: Paid $5,000 to acquire a used minivan.

3: Purchased $1,800 of office furniture on account.

4: Performed $2,100 of consulting services on account.

5: Paid $300 of repair expenses.

6: Received $800 from clients who were previously billed in item 4.

7: Paid $500 on account to the supplier of office furniture in item 3.

8: Received a $150 electric bill, to be paid next month.

9: Simmons withdrew $800 from the business.

10: Received $250 in cash from clients for consulting services rendered. 13

Instructions

a. Arrange the following asset, liability, and owner’s equity elements of the accounting equation: Cash,

Accounts Receivable, Office Furniture, Van, Accounts Payable, Common Stock/Dividends, and

Revenues/Expenses. (See Exhibit 1.5)

b. Record each transaction on a separate line. After all transactions have been recorded, compute the balance in each of the preceding items.

c. Answer the following questions for Parker.

(1) How much does the company owe to its creditors at month-end? On which financial statement(s) would this information be found?

(2) Did the company have a “good” month from an accounting viewpoint? Briefly explain.

5. Transaction analysis and statement preparation. The transactions that follow relate to Burton Enterprises

for March 20X1, the company’s first month of activity.

3/1: Joanne Burton, the owner invested $20,000 cash into the business.

3/4: Performed $2,400 of services on account.

3/7: Acquired a small parcel of land by paying $6,000 cash.

3/12: Received $500 from a client, who was billed previously on March 4.

3/15: Paid $200 to the Journal Herald for advertising expense.

3/18: Acquired $9,000 of equipment from Park Central Outfitters by paying $7,000 down and agreeing to remit the balance owed within the next 2 weeks, (Accounts Payable).

3/22: Received $300 cash from clients for services.

3/24: Paid $1,500 on account to Park Central Outfitters in partial settlement of the balance due from the

transaction on March 18.

3/28: Rented a car from United Car Rental for use on March 28. Total charges amounted to $125, with

United billing Burton for the amount due.

3/31: Paid $600 for March wages.

3/31: Processed a $600 cash withdrawal from the business for Joanne Burton.

Instructions

a. Determine the impact of each of the preceding transactions on Burton’s assets,

liabilities, and owner’s equity. See exhibit 1.5. Use the following format: 14

Assets = Liabilities + Owner’s Equity

Cash, Accounts Receivable, Land, Equipment Accounts Payable (+)Investments (+) Revenues

(-) Withdrawals (-) Expenses

a. Record each transaction on a separate line. Calculate balances only after the last transaction has been

recorded.

b. Prepare an income statement, a statement of owner’s equity, and a balance sheet, (See Exhibit 1.1, 1.3 and 1.4)

6. Entry and trial balance preparation.

Lee Adkins is a portrait artist. The following schedule represents Lee’s combined chart of accounts and

trial balance as of May 31.

Account number Account name Debit Credit

110 Cash $ 2,700

120 Accounts Receivable 12,100

130 Equipment and Supplies 2,800

140 Studio 45,000

210 Accounts Payable $2,600

310 Lee Adkins, Capital 57,400

320 Lee Adkins, Drawing 30,000

410 Professional Fee Revenue 39,000

510 Advertising Expense 2,300

520 Salaries Expense 2,100

540 Utilities Expense 2,000

$99,000 $99,000

The general ledger also revealed account no. 530, Legal and Accounting Expense. The following transactions occurred during June:

6/2: Collected $3,000 on account from customers.

6/7: Sold 25% of the equipment and supplies to a young artist for $700 for cash

6/10: Received a $300 invoice from the accountant for preparing last quarter’s financial

statements.

6/15: Paid $1,900 to creditors on account.

6/27: Adkins withdrew $2,000 cash for personal use.

6/30: Billed a customer $3,000 for a portrait painted this month.

a. Record the necessary journal entries for June on page 2 of the company’s general journal. (See Exhibit

2.6)

b. Open running balance ledger “T” accounts by entering account titles, account numbers, and May 31

balances. (See exhibit 2.3 and 2.4)

c. Post the journal entries to the “T” accounts.

d. Prepare a trial balance as of June 30. (See exhibit 2.9)

7. Journal entry preparation

On January 1 of the current year, Peter Houston invested $80,000 cash into his company MuniServ. The

cash was obtained from an owner investment by Peter Houston of $50,000 and a $30,000 bank loan.

Shortly thereafter, the company acquired selected assets of a bankrupt competitor. The acquisition

included land ($10,000), a building ($40,000), and vehicles ($10,000). MuniServ paid $45,000 at the time

of the transaction and agreed to remit the remaining balance due of $15,000 (an account payable) by

February 15.

During January, the company had additional cash outlays for the following items:

Purchases of store equipment $4,600

Loan payment 500

Salaries expense 2,300

Advertising expense 700

The January utilities bill of $200 was received on January 31 and will be paid next month. MuniServ

rendered services to clients on account amounting to $9,400. All customers have been billed; by month

end, $3,700 had been received in settlement of account balances.

Instructions

a. Present journal entries that reflect MuniServ's January transactions, including the $80,000 raised

from the owner investment and loan. (See exhibit 2.6)ACC205: b. Compute the total debits, total credits, and ending balance that would be found in the company's

Cash account. (Post to “T” Accounts, see exhibit 2.3 and 2.4)

c. Determine the amount that would be shown on the January 31 trial balance for Accounts Payable.

Is the balance a debit or a credit?

Week 2

DQ 1

Accounting Cycle. Financial statements are a product of the accounting cycle. Think

about two different companies: a manufacturing company, and a retail company. Why would different companies have different accounting cycles? Would you expect the steps of the accounting cycle to be the same for each company? Why, or why not?

Guided Response:

Review several of your peers’ posts and identify what steps of the accounting cycle that you feel are the most critical. Respond to at least two of your peers and provide recommendations to extend their thinking. Challenge your peers by asking a question that may cause them to reevaluate their positions on the accounting cycle.

DQ 2

Bank Reconciliation. What is the purpose of a bank reconciliation? What are the

reasons for differences between the cash reported in the accounting records, and the cash balance in the bank statements?

Analyze several of your peers’ posts. Let at least two of your peers know what happens to the discrepancies between the book balance and the bank balance. Could these differences just be written off?

Guided Response:

A bank reconciliation reconciles the bank account balance per the books to the actual bank balance. Outstanding checks, deposits in transit, and bank errors are reasons there are differences between the cash reported in the accounting records and the cash balance in the bank statements.

Assignment

Recognition of concepts. Jim Armstrong operates a small company that books entertainers for theaters, parties, conventions, and so forth. The company’s fiscal year ends on June 30. Consider the following items and classify each as either:

(1) prepaid expense, (2) unearned revenue, (3) accrued expense, (4)

accrued revenue, or (5) none of the foregoing.

a. Interest owed on the company's bank loan, to be paid in early July

b. Professional fees earned but not billed as of June 30

c. Office supplies on hand at year-end

d. An advance payment from a client for a performance next month at a convention

e. The payment in part (d) from the client's point of view

f. Amounts paid on June 30 for a 1-year insurance policy

g. The bank loan payable in part (a)

h. Repairs to the firm's copy machine, incurred and paid in June

2. Understanding the closing process. Examine the following list of accounts:

Note Payable Accumulated Depreciation: Building

Alex Kenzy, Drawing Accounts Payable

Product Revenue Cash

Accounts Receivable Supplies Expense

Utility Expense

Which of the preceding accounts

a. appear on a post-closing trial balance?

b. are commonly known as temporary, or nominal, accounts?

c. generate a debit to Income Summary in the closing process?

d. are closed to the capital account in the closing process?

3. Adjusting entries and financial statements. The following information pertains to Sally Corporation:

? The company previously collected $1,500 as an advance payment for services to be rendered in the future. By the end of December, one half of this amount had been earned.

? Sally Corporation provided $1,500 of services to Artech Corporation; no billing had been made by December 31.

? Salaries owed to employees at year-end amounted to $1,000.

? The Supplies account revealed a balance of $8,800, yet only $3,300 of supplies were actually on hand at the end of the period.

? The company paid $18,000 on October 1 of the current year to Vantage Property Management.

The payment was for 6 months’ rent of Sally Corporation’s headquarters, beginning on

November 1.

Sally Corporation’s accounting year ends on December 31.

Instructions

Analyze the five preceding cases individually and determine the following:

a. The type of adjusting entry needed at year-end (Use the following codes: A, adjustment of a prepaid expense; B, adjustment of an unearned revenue; C, adjustment to record an accrued expense; or D, adjustment to record an accrued revenue.)

b. The year-end journal entry to adjust the accounts

c. The income statement impact of each adjustment (e.g., increases total revenues by $500)

4. Adjusting entries. You have been retained to examine the records of Mary’s Day Care Center as of December 31, 20X3, the close of the current reporting period. In the course of your examination, you discover the following:

On January 1, 20X3, the Supplies account had a balance of $1,350. During the year, $5,520 worth of supplies was purchased, and a balance of $1,620 remained unused on December 31.

Unrecorded interest owed to the center totaled $275 as of December 31.

All clients pay tuition in advance, and their payments are credited to the Unearned Tuition Revenue account. The account was credited for $65,500 on August 31. With the exception of $15,500 all amounts were for the current semester ending on December 31.

Depreciation on the school’s van was $3,000 for the year.

On August 1, the center began to pay rent in 6-month installments of $24,000. Mary wrote a check to the owner of the building and recorded the check in Prepaid Rent, a new account.

Two salaried employees earn $400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday.

Kathy’s Day Care paid insurance premiums as follows, each time debiting Prepaid Insurance:

Date Paid Policy No. Length of Policy Amount

Feb. 1, 20X2 1033MCM19 1 year $540

Jan. 1, 20X3 7952789HP 1 year 912

Aug. 1, 20X3 XQ943675ST 2 years 840

Instructions

The center’s accounts were last adjusted on December 31, 20X2. Prepare the adjusting entries necessary

under the accrual basis of accounting.ACC205: Principles of Accounting I

5. Bank reconciliation and entries. The following information was taken from the accounting records of

Palmetto Company for the month of January:

Balance per bank $6,150

Balance per company records 3,580

Bank service charge for January 20

Deposits in transit 940

Interest on note collected by bank 100

Note collected by bank 1,000

NSF check returned by the bank with the

bank statement 650

Outstanding checks 3,080

Instructions:

a. Prepare Palmetto’s January bank reconciliation.

b. Prepare any necessary journal entries for Palmetto.

6. Direct write-off method. Harrisburg Company, which began business in early 20X7, reported $40,000 of

accounts receivable on the December 31, 20X7, balance sheet. Included in this amount was $550 for a

sale made to Tom Mattingly in July. On January 4, 20X8, the company learned that Mattingly had filed

for personal bankruptcy. Harrisburg uses the direct write-off method to account for uncollectibles.

a. Prepare the journal entry needed to write off Mattingly’s account.

b. Comment on the ability of the direct write-off method to value receivables on the year-end balance

sheet.

7. Allowance method: analysis of receivables. At a January 20X2 meeting, the president of Sonic Sound directed the sales staff “to move some product this year.” The president noted that the credit evaluation department was being disbanded because it had restricted the company’s growth. Credit decisions would now be made by the sales staff.

By the end of the year, Sonic had generated significant gains in sales, and the president was very pleased.

The following data were provided by the accounting department:

20X2 20X1

Sales $23,987,000 $8,423,000

Accounts Receivable, 12/31 12,444,000 1,056,000

Allowance for Uncollectible Accounts,

12/31

? 23,000 cr.

The $12,444,000 receivables balance was aged as follows:

Age of Receivable Amount Percentage of Accounts

Expected to Be

Collected

Under 31 days $5,321,000 99%

31260 days 3,890,000 90

61290 days 1,067,000 80

Over 90 days 2,166,000 60

Assume that no accounts were written off during 20X2.

Instructions

a. Estimate the amount of Uncollectible Accounts as of December 31, 20X2.

b. What is the company’s Uncollectible Accounts expense for 20X2?

c. Compute the net realizable value of Accounts Receivable at the end of 20X1 and 20X2.

d. Compute the net realizable value at the end of 20X1 and 20X2 as a percentage of respective year-end receivables balances. Analyze your findings and comment on the president’s decision to close the credit evaluation department.

Week 3

DQ 1

LIFO vs. FIFO. The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods?

Guided Response:

Analyze several of your peers’ posts. Let at least two of your peers know if a company is better off if it switches

from a LIFO method to a FIFO method. Explain your reasoning.

DQ 2

Depreciation. A variety of depreciation methods are used to allocate the cost of an asset to all of the accounting periods benefited by the use of the asset. Your client has just purchased a piece of equipment for $100,000. Explain the concept of depreciation. Which of the following depreciation methods would you recommend: straight-line depreciation, double declining balance method, or an alternative method?

Guided Response:

Let at least two of your peers know if a company would use an accelerated depreciation method for their financial statements or their tax returns. Why do you believe this would be the case?

Assignment

Inventory. Please complete each of the exercises below in a word document. Save the document, and

submit it in the appropriate week using the Assignment Submission button.

1. Specific identification method. Boston Galleries uses the specific identification method for inventory

valuation. Inventory information for several oil paintings follows.

Painting Cost

1/2 Beginning inventory Woods $21,000

4/19 Purchase Sunset 21,800

6/7 Purchase Earth 31,200

12/16 Purchase Moon 4,000

Woods and Moon were sold during the year for a total of $35,000. Determine the firm’s

a. cost of goods sold.

b. gross profit.

c. ending inventory.

2. Inventory valuation methods: Basic computations

The January beginning inventory of the Gilette Company consisted of 300 units costing $40 each. During

the first quarter, the company purchased two batches of goods: 700 Units at $44 on February 21 and 800 units at $50 on March 28. Sales during the first quarter were 1,400 units at $75 per unit. The White Company uses a periodic inventory system. Using the White Company data, fill in the following chart to compare the results obtained under the FIFO, LIFO, and weighted-average inventory methods.

FIFO LIFO Weighted

Average

Goods available for sale $ $ $

Ending inventory, March 31

Cost of goods sold

b. Which of the three methods would be chosen if management’s goal is to:

(1) Produce an up-to-date inventory valuation on the balance sheet?

(2) Show the lowest net income for tax purposes?

3.Perpetual inventory system: journal entries.At the beginning of 20X3, Beehler Company implemented a computerized perpetual inventory system. The first transactions that occurred during 20x3 follow:

1/2/20X3 Purchases on account: 500 units @ $6 = $3,000

1/15/20X3 Sales on account: 300 units @ $8.50 = $2,550

1/20/20X3 Purchases on Account: 200 units @ $5 = $1,000

1/25/20X3 Sales on Account: 300 units @ $8.50 = $2,550

The company president examined the computer-generated journal entries for these transactions and was confused by the absence of a Purchases account.

a. Duplicate the journal entries that would have prepared on the computer printout under FIFO & LIFO.

b. Calculate the balance in the firm’s Inventory account under each method.

c. Briefly explain the absence of the Purchases account to the company president

5. Depreciation methods. Mike Davis Enterprises purchased a delivery van for $40,000 in January

20X7. The van was estimated to have a service life of 5 years and a residual value of $6,000. The

company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by

using each of the following methods:

a. Units-of-output, assuming 17,000 miles were driven during 20X8

b. Straight-line

c. Double-declining-balance

6. Depreciation computations. Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty

washing machine on January 1, 20X3. The machine, which cost $2,000, had an estimated residual value

of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:

4. Inventory valuation methods:computations and concepts.

Wild Riders Surfboard Company began business on January 1 of the current year. Purchases of

surfboards were as follows: Date Quantity Unit Cost Total Cost

1/3 100 $125 $12,500

4/3 200 $135 $27,000

6/3 100 $145 $14,500

7/3 100 $155 $15,500

Total 500 $69,500

Wild Riders sold 400 boards at $250 per board on the dates listed below. The company uses a perpetual inventory system.

Date Quantity Sold Unit Price Total Sales

3/17 50 $250 $12,500

5/17 75 $250 $18,750

8/10 275 $250 $68,750

Total 400 $100,000

Instructions

a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:

First-in, first-out

Last-in, first-out

Weighted average

a. The machine’s book value on December 31, 20X5, assuming use of the straight-line

depreciation method

b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method.

Actual washing cycles in 20X4 totaled 500.

c. Accumulated depreciation on December 31, 20X5, assuming use of the double-decliningbalance depreciation method.

7. Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of

machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have

a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of

operations (20X3 - 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours,

respectively.

Instructions

a. Compute depreciation for 20X3 - 20X7 by using the following methods: straight line, units of output,

and double-declining-balance.

b. On January 1, 20X5, management shortened the remaining service life of the machine to 15 months.

Assuming use of the straight-line method, compute the company’s depreciation expense for 20X5.

c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800

for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight

charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.

Week 4

DQ 1

Current Liability. What is a current liability? From the perspective of a user of financial statements, why do you believe current liabilities are separated from long-term liabilities? Based on your current experience as well as any additional research you may have done, provide two examples of situations where businesses collect monies from customers and employees and report these amounts as a current liability.

Guided Response:

Review several of your peers’ posts and identify the core components of a current liability. Respond to at least two of your peers and provide recommendations to extend their thinking. Challenge your peers by asking a question that may cause them to reevaluate if their example is a current liability.

DQ 2

Client Recommendations. A client comes to you thinking about starting a consulting business. Your client is specifically interested in what type of entity should be created for this new business.

Based on your readings, or any additional research you may have done, discuss the advantages and disadvantages of the following: sole proprietorship, partnership, and corporation. Based on these advantages and disadvantages,provide a clear recommendation to your client.

Guided Response:

Let at least two of your peers know if an alternative choice of entity would be possible. What would be the benefits of this new entity choice? Would there be any disadvantages associated with this new entity selectio

Assignment

Liability. Please complete each of the exercises below in a word document. Save the document, and

submit it in the appropriate week using the Assignment Submission button.

1. Payroll accounting. Assume that the following tax rates and payroll information pertain to Brookhaven

Publishing:

Social Security taxes: 6% on the first $55,000 earned per employee

Medicare taxes: 1.5% on the first $130,000 earned per employee

Federal income taxes withheld from wages: $7,500

State income taxes: 4% of gross earnings

Insurance withholdings: 1% of gross earnings

State unemployment taxes: 5.4% on the first $7,000 earned per employee

Federal unemployment taxes: 0.8% on the first $7,000 earned per employee

The company incurred a salary expense of $50,000 during February. All employees had earned

less than $5,000 by month-end and no wages have been paid during the month.

a. Prepare the necessary entry to record Brookhaven’s February payroll. The entry will

include deductions for the following:

Social Security taxes

Medicare taxes

Federal income taxes withheld

State income taxes

Insurance

b. Prepare the journal entry to record Brookhaven’s payroll tax expense. The entry will

include the following:

Matching Social Security taxes

Matching Medicare taxes

State unemployment taxes

Federal unemployment taxes

2. Current liabilities: entries and disclosure. A review of selected financial activities of Visconti’s

during 20XX disclosed the following:

Instructions

a. Prepare journal entries to record the transactions.

b. Prepare adjusting entries on December 31 to record accrued interest.

c. Prepare the Current Liability section of Red Bank’s balance sheet as of December 31. Assume

that the Accounts Payable account totals $203,600 on this date.

3. Notes payable. Red Bank Enterprises was involved in the following transactions during the fiscal

year ending October 31:

8/2: Borrowed $55,000 from the Bank of Kingsville by signing a 90-day, 12% note.

12/1 Borrowed $10,000 from the First City Bank by signing a 3- month, 15% note payable.

Interest and principal are due at maturity.

2/10 Established a warranty liability for the XY-80, a new product. Sales are expected to total

1,000 units during the month. Past experience with similar products indicates that 3% of

the units will require repair, with warranty costs averaging $27 per unit (parts only).

12/22 Purchased $16,000 of merchandise on account from Oregon Company, terms 2/10, n/30.

12/26 Borrowed $5,000 from First City Bank; signed a 15% note payable due in 60 days.

(Assume 360 day year for interest)

12/31 Repaired six XY-80s during the month at a total cost of $162.

12/31 Accrued 3 days of salaries at a total cost of $1,400.

8/20: Issued a $50,000 note to Harris Motors for the purchase of a $50,000 delivery truck. The

note is due in 180 days and carries a 12% interest rate.

9/10: Purchased merchandise from Pans Enterprises in the amount of $15,000. Issued a 30-

day, 12% note in settlement of the balance owed.

9/11: Issued a $60,000 note to Datatex Equipment in settlement of an overdue account payable

of the same amount. The note is due in 30 days and carries a 14% interest rate.

10/10:

10/11

11/30

The note to Pans Enterprises was paid in full.

The note to Datatex Equipment was paid in full.

Paid note to Bank of KingsvilleACC205: Principles of Accounting I

Week 5

DQ 1

Ratios. Ratios provide the users of financial statements with a great deal of information

about the entity. Do ratios tell the whole story? How could liquidity ratios be used by investors to determine whether or not to invest in a company?

Guided Response:

Let at least two of your peers know how debt service ratios can be used by a lender in determining whether or not

to lend money to a company.

DQ 2

Profit Margin.

Year Ending

December 2012

Year Ending December

2011

Year Ending December

2010

Revenues 40,000 35,000 33,000

Operating Expenses

Salaries 15,000 10,000 9,

Maintenance and Repairs 6,000 9,000 10,000

Rental Expense 2,500 2,500 2,500

Depreciation 2,000 2,000 2,000

Fuel 4,000 3,500 2,500

Total Operating Expenses 29,500 27,000 26,000

Operating Income 10,500 8,000 7,000

Sales and Administrative

Expenses

6,000 4,000 3,000

Interest Expense 2,500 2,000 1,000

Net Income 2,000 2,000 3,000

Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the profit margin for each of these years. Comment on the profit margin trend.

Guided Response:

Let at least two of your peers know what you changes you would recommend to improve the net margin of the company.

Assignment

Financial Ratios. Please complete each of the exercises below in a word document. Save the document,

and submit it in the appropriate week using the Assignment Submission button.

1. Liquidity Ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

Edison Stagg Thornton

Cash $6,000 $5,000 $4,000

Short-term investments 3,000 2,500 2,000

Accounts receivable 2,000 2,500 3,000

Inventory 1,000 2,500 4,000

Prepaid expenses 800 800 800

Accounts payable 200 200 200

Notes payable: short-term 3,100 3,100 3,100

Accrued payables 300 300 300

Long-term liabilities 3,800 3,800 3,800

Instructions

a. Compute the current and quick ratios for each of the three companies. (Round calculations to two

decimal places.) Which firm is the most liquid? Why?

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc.:

20X5 20X4

Net credit sales $832,000 $760,000

Cost of goods sold 530,000 400,000

Cash, Dec. 31 125,000 110,000

Accounts receivable, Dec. 31 205,000 156,000

Average Inventory, Dec. 31 70,000 50,000

Accounts payable, Dec. 31 115,000 108,000

Instructions

a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all

calculations to two decimal places

3. Profitability ratios, trading on the equity

Digital Relay has both preferred and common stock outstanding. The company reported the following

information for 20X7:

Net sales $1,750,000

Interest expense 120,000

Income tax expense 80,000

Preferred dividends 25,000

Net income 130,000

Average assets 1,200,000

Average common stockholders' equity 500,000

Instructions

a. Compute the gross profit margin ratio, the return on equity and the return on assets, rounding

calculations to two decimal places.

b. Does the firm have positive or negative financial leverage? Briefly explain.

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the

20X1 and 20X2 financial statements follow.

20X2 20X1

Current Assets $86,000 $80,000

Property, Plant, and Equipment (net) 99,000 90,000

Intangibles 25,000 50,000

Current Liabilities 40,800 48,000

Long-Term Liabilities 153,000 160,000

Stockholders’ Equity 16,200 12,000

Net Sales 500,000 500,000

Cost of Goods Sold 322,500 350,000

Operating Expenses 93,500 85,000

Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

5. Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1

and 20X2 financial statements follow.

20X2 20X1

Current Assets $86,000 $80,000

Property, Plant, and Equipment (net) 99,000 90,000

Intangibles 25,000 50,000

Current Liabilities 40,800 48,000

Long-Term Liabilities 153,000 160,000

Stockholders’ Equity 16,200 12,000

Net Sales 500,000 500,000

Cost of Goods Sold 322,500 350,000

Operating Expenses 93,500 85,000

Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

6. Ratio computation. The financial statements of the Lone Pine Company follow.

LONE PINE COMPANY

Comparative Balance Sheets

December 31, 20X2 and 20X1 ($000 Omitted)

20X2 20X1

Assets

Current Assets

Cash and Short-Term Investments $400 $600

Accounts Receivable (net) 3,000 2,400

Inventories 3,000 2,300

Total Current Assets $6,400 $5,300

Property, Plant, and Equipment

Land $1,700 $500

Buildings and Equipment (net) 1,500 1,000

Total Property, Plant, and Equipment $3,200 $1,500

Total Assets $9,600 $6,800

Liabilities and Stockholders’ Equity

Current Liabilities

Accounts Payable $2,800 $1,700

Notes Payable 1,100 1,900

Total Current Liabilities $3,900 $3,600

Long-Term Liabilities

Bonds Payable 4,100 2,100

Total Liabilities $8,000 $5,700

Stockholders’ Equity

Common Stock $200 $200

Retained Earnings 1,400 900

Total Stockholders’ Equity $1,600 $1,100

Total Liabilities and Stockholders’ $9,600 $6,800

Equity

LONE PINE COMPANY

Statement of Income and Retained Earnings

For the Year Ending December 31,20X2 ($000 Omitted)

Net Sales* $36,000

Less: Cost of Goods Sold $20,000

Selling Expense 6,000

Administrative Expense 4,000

Interest Expense 400

Income Tax Expense 2,000 32,400

Net Income $3,600

Retained Earnings, Jan. 1 900

Ending Retained Earnings $4,500

Cash Dividends Declared and Paid 3,100

Retained Earnings, Dec. 31 $1,400

*All sales are on account.

Instructions

Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two decimal

places when necessary:

a. Quick ratio

b. Current ratio

c. Inventory-turnover ratio

d. Accounts-receivable-turnover ratio

e. Return-on-assets ratio

f. Net-profit-margin ratio

g. Return-on-common-stockholders’ equity

h. Debt-to-total assets

i. Number of times that interest is earned

Week 5 Final paper

Write a five page financial statement analysis of a public company, formatted according to APA style with sources documented. In this analysis you will discuss the financial health of this company with the ultimate goal of making a recommendation to other investors. Your paper should consist of the following sections: introduction, company overview, horizontal analysis, ratio analysis, final recommendation, and conclusions.

Here is a breakdown of the sections within the body of the assignment:

Company Overview
Provide a brief overview of your company (one to two paragraphs at most). What industry is it in? What are its main products or services? Who are its competitors?

Horizontal Analysis of Income Statement and Balance Sheet
Prepare a three-year horizontal analysis of the income statement and balance sheet of your selected company. Discuss the importance and meaning of horizontal analysis. Discuss both the positive and negative trends presented in your company.

Ratio Analysis
Calculate the current ratio, quick ratio, cash to current liabilities ratio, over a two-year period. Discuss and interpret the ratios that you calculated. Discuss potential liquidity issues based on your calculations of the current and quick ratios. Are there any factors that could be erroneously influencing the results of the ratios? Discuss liquidity issues of competitive companies within the same industry.

Recommendation
Based on your analysis would you recommend an individual invest in this company? What strengths do you see? What risks do you see? It is perfectly acceptable to state that you would recommend avoiding this company as long as you provide support for your position.