33:010:325 Lecture Notes - Lecture 6: Accounts Receivable, Accrual, Current Liability

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sangriaalpaca540

13 Oct 2017

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Document Summary

Scf = divided into 3 sections: operating: cash derived from whatever you do in your business, investing: buying stocks/bonds, property, etc. ; outside of normal course of business: financing: borrowing money, issuing bonds, paying dividends, etc. Scf = self-checking statement; looks at change in cash from one year to the next. There are some things that are uniquely de ned in operating cash ows: cash receipts from interest & dividends, cash payments for taxes, cash payments for interest. Format of scf: you need to go from accrual basis to cash basis (in order to see how much cash actually went in/out) Need to make adjustments (in order to convert everything back to cash) Indirect method adjustments: current assets: if acc. receivable go down, add. If acc. receivable go up, deduct: current liabilities: if acc payable go up, add. Operating activities: cash effects of transactions that affect net income. Thursday, september 28, 2017: changes current assets & liabilities.

Related Questions

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The comparative balance sheets of Posner Company, for Years 1 and 2 ended December 31, appear below in condensed form.

1		Year 2	Year 1
2	Cash	$53,000.00	$50,000.00
3	Accounts Receivable (net)	37,000.00	48,000.00
4	Inventories	108,500.00	100,000.00
5	Investments		70,000.00
6	Equipment	573,200.00	450,000.00
7	Accumulated Depreciation-Equipment	(142,000.00)	(176,000.00)
8		$629,700.00	$542,000.00
9	Accounts Payable	$62,500.00	$43,800.00
10	Bonds Payable, Due Year 2		100,000.00
11	Common Stock, $10 par	325,000.00	285,000.00
12	Paid-In Capital in Excess of ParâCommon Stock	80,000.00	55,000.00
13	Retained Earnings	162,200.00	58,200.00
14		$629,700.00	$542,000.00

The income statement for the current year is as follows:

1	Sales		$625,700.00
2	Cost of merchandise sold		340,000.00
3	Gross profit		$285,700.00
4	Operating expenses:
5	Depreciation expense	$26,000.00
6	Other operating expenses	68,000.00	94,000.00
7	Income from operations		$191,700.00
8	Other revenue and expense:
9	Gain on sale of investment	$4,000.00
10	Interest expense	(6,000.00)	(2,000.00)
11	Income before income tax		$189,700.00
12	Income tax		60,700.00
13	Net income		$129,000.00

Additional data for the current year are as follows:

(a)	Fully depreciated equipment costing $60,000 was scrapped, no salvage, and new equipment was purchased for $183,200.
(b)	Bonds payable for $100,000 were retired by payment at their face amount.
(c)	5,000 shares of common stock were issued at $13 for cash.
(d)	Cash dividends declared and paid, $25,000.

Required:

Prepare a statement of cash flows using the indirect method of reporting cash flows from operating activities. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries. Be sure to complete the heading of the statement. Use the minus sign to indicate cash outflows, cash payments, decreases in cash, or any negative adjustments.

Labels and Amount Descriptions

Labels
For the Year Ended December 31, Year 2
Amount Descriptions
Cash from sale of common stock
Cash from sale of investments
Cash paid for dividends
Cash paid for purchase of equipment
Cash paid to retire bonds payable
Decrease in accounts payable
Decrease in accounts receivable
Decrease in cash
Decrease in inventories
Depreciation
Gain on sale of investment
Increase in accounts payable
Increase in accounts receivable
Increase in cash
Increase in inventories
Loss on sale of investment
Net cash flow from financing activities
Net cash flow from investing activities
Net cash flow from operating activities
Net cash flow used for financing activities
Net cash flow used for investing activities
Net cash flow used for operating activities
Net income
Net loss

Statement of Cash Flows

Posner Company

Statement of Cash Flows

1	Cash flows from operating activities:
2
3	Adjustments to reconcile net income to net cash flow from operating activities:
4
5
6	Changes in current operating assets and liabilities:
7
8
9
10
11	Cash flows from investing activities:
12
13
14
15	Cash flows from financing activities:
16
17
18
19
20
21	Cash at the beginning of the year
22	Cash at the end of the year

violetclam852

Business Description

You will assume the role of an entrepreneur to start a smallcompany. Your company will rent a retail cart inside the Mall ofAmerica to imprint T-shirts with exclusive original designs by afamous artist who has agreed to design these T-shirt pictures foryou each year at a special discount. Your target customers areaffluent teenagers and young adults. Your business is scheduled tolaunch on January 1, 2017.

Cost information:

Mall of America charges you $2,750 rent per month, whichincludes utilities, cleaning, and maintenance.

You will order white, cotton T-shirts from a T-shirt wholesaler.Each T-shirt costs $2.00 to purchase (cost includes taxes,shipping, and handling).

You agreed to pay the artist a $3,000 annual contract fee fortwelve T-shirt designs. This same term is renewable for the next 3years. Each T-shirt picture will only be used for one year.Therefore, in the second year, 12 new pictures will be designed foranother $3,000 annual contract fee.

Equipment that will be required to be acquired at the start ofbusiness includes a computer, printer, and direct to garmentprinter. Total cost will be $25,000. The equipment is expected tolast 5 years without salvage value. Straight-line method ofdepreciation should be used.

Production cost per shirt is $5.20 (ink, etc.)

Bags for shirts cost $0.10 each.

Students are hired as part-time workers. On average it takes onelabor hour to print 10 shirts. Each worker is paid $10 perhour.

Sales personnel are required 80 hours per week and are paid $10per hour.

Business insurance is purchased at a cost of $2,000 peryear.

Advertising costs are expected to be $12,000 per year.

Requirements:

1. Name your company (5 points)

2. What and how much are the variable costs? Present each itemin cost per T-shirt basis (5 points).

3. What and how much are the fixed costs? Present each item intotal cost per year (5 points).

4. Write out the annual cost formula in Y = a + bX format (5points).

5. Calculate the total amount of cash that will be needed at thestart of the business in order to buy all necessary equipment andmachines, purchase sufficient materials and supplies for 1,000shirts, and cover the first three months of fixed expenses. Thisamount will be your initial investment in the business. Note thatthe equipment will be paid in full on the first day of business aswell as the first annual payment to the artist. Other expenses willbe paid on a monthly basis (10 points).

6. Develop a price using a target price (what are similarT-shirts selling for) (5 points).

7. Develop a price using cost-based pricing and what you wouldlike to see as a return on your business (i.e. 10%, 15%, 25%) (5points).

8. Calculate contribution margin per T-shirt and contributionmargin ratio based on the price you decided upon (either the pricefrom item 6 or 7 above) (5 points).

9. Based on the price you decided upon, calculate how manyT-shirts need to be sold in order to break-even. Calculate how muchsales in dollars are needed to break-even (10 points).

10. Prepare a cost/volume/profit chart (10 points).

11. Based on the estimated sales level of 12,000 T-shirts forthe first year, prepare the companyâs forecasted functional incomestatement for the year ended on 12/31/2017 (10 points).

12. If sales could increase by 10% (to 13,200 T-shirts), by howmuch in dollars would net operating income increase? By whatpercentage would net operating income increase? (5 points)

13. Prepare a contribution format income statement assuming asales increase of 10%. Compare your new net operating income withyour answer in 11 (10 points).

14. Calculate how many T-shirts need to be sold in order to makea $25,000 target profit for the year (5 points).

15. Based on the assumption that the number of shirts calculatedin item 14 are made and sold during the first year of business,calculate the margin of safety and the operating leverage for thebusiness. What do these figures tell you about how risky thebusiness is? (10 points)

16. Prepare a cash budget for the companyâs first year ofoperations based on the sales calculated in item 14. Assume allsales are cash sales and that all costs and expenses are paid incash. The initial cash balance is the amount calculated in #5. Youdecide to maintain a minimum cash balance of $10,000 at December31, 2017 (15 points).

17. Calculate the first yearâs estimated return on equity basedon the sales calculated in item 14 (note that beginning equity willequal the initial investment in the business calculated in #5). (5points).

18. After reviewing the budgeted income statement and theestimated return on equity for the first year of operations,consider business strategies that will help to improveprofitability. Describe your strategies clearly and justify why youbelieve the strategies will work. Provide the variable cost perT-shirt, total fixed cost, selling price per T-shirt, andcontribution margin per T-shirt under your new strategies. Providethe new cost formula. What is the new break even? (15 points).

19. After your thorough analyses of costs, sales, andprofitability of your T-shirt business throughout this project,what is your overall impression of the future potential of thebusiness? Provide a short assessment (10 points).

*** 1-5 completed below***

Variable Costs:

Purchase cost per T-shirt

Total variable cost perT-shirt

Annual fees of artist

$3,000.00

Depreciation expense

$5,000.00

Salaries of sales peronnel (80 x 52 x $ 10)

Equipment	$25,000.00
Supplies	$7,300.00
Contract	$3,000.00
Fixed Expenses	$23,400.00

Investment	$58,700.00

indigolouse891

Prepare a multiple-step income statement for the year endedDecember 31, 2016, concluding with earnings per share. In computingearnings per share, assume that the average number of common sharesoutstanding was 100,000 and preferred dividends were $100,000.(Round earnings per share to the nearest cent.)

â¢

Refer to the Chart of Accounts for exact wording of accounttitles.

â¢

Refer to the Labels and Amount Descriptions for exact wording oftext entries.

Prepare a retained earnings statement for the year endedDecember 31, 2016.

â¢	Refer to the Chart of Accounts for exact wording of accounttitles.
â¢	Refer to the Labels and Amount Descriptions for exact wordingof text entries.
â¢	You will need to enter the word âLessâ or âAddâ asnecessary.

Prepare a balance sheet in report form as of December 31, 2016.You are not required to present the details of Preferred and CommonStock (i.e., number of shares authorized, issued and outstanding).

â¢	Refer to the Chart of Accounts for exact wording of accounttitles.
â¢	Refer to the Labels and Amount Descriptions for exact wordingof text entries.
â¢	âLessâ , âDeductâ, âAddâ and colons will appearautomatically.
â¢	Available-for-sale investments should be reported as a singleasset on the balance sheet, regardless of how many accounts existin the ledger for such assets.
â¢	Recall that current assets are to be reported in order ofliquidity. Available-for-sale investments are considered to be moreliquid that accounts receivable.
â¢	Report fixed assets and paid-in capital accounts inaccount-number order.
â¢	Omit the description of bonds and stocks (i.e., percentagerates, due date, number of shares, etc.)
â¢	Enter all amounts as positive numbers, with one exception: Ifan unrealized loss has occurred, it must be reported as a negativeamount on the balance sheet.

Labels

In CengageNOW, a Label is a text entry that does not have anamount associated with it.

Current assets

Current liabilities

December 31, 2016

For the Year Ended December 31, 2016

Intangible assets

Investments

Less dividends

Long-term liabilities

Operating expenses

Other income and expenses

Paid-in capital

Add dividends

Property, plant, and equipment

Amount Descriptions

In CengageNOW, an Amount Description is a text entry other thanan Account that has an amount associated with it.

Available-for-sale investments

Decrease in retained earnings

Excess of issue price over par

Gross profit

Income before income tax

Income from operations

Increase in retained earnings

Miscellaneous selling expense

Net income

Net loss

Retained earnings, January 1, 2016

Retained earnings, December 31, 2016

Sales commissions

Sales salaries expense

Store supplies expense

Total administrative expenses

Total assets

Total (before treasury stock)

Total current assets

Total current liabilities

Total liabilities

Total liabilities and stockholdersâ equity

Total long-term liabilities

Total investments

Total operating expenses

Total paid-in capital

Total property, plant, and equipment

Total selling expenses

Total stockholdersâ equity

Unamortized premium

Unamortized discount

Income Statement data:
Advertising expense	$ 150,000
Cost of merchandise sold	3,700,000
Delivery expense	30,000
Depreciation expense-office buildings and equipment	30,000
Depreciation expense-store buildings and equipment	100,000
Dividend revenue	4,500
Gain on sale of investments	4,980
Income from Pinkberry Co. investment	76,800
Income tax expense	140,500
Interest expense	21,000
Interest revenue	2,720
Miscellaneous administrative expense	7,500
Miscellaneous selling expense	14,000
Office rent expense	50,000
Office salaries expense	170,000
Office supplies expense	10,000
Sales	5,254,000
Sales commissions	185,000
Sales salaries expense	385,000
Store supplies expense	21,000

Retained earnings and balance sheet data:
Accounts payable	$ 194,300
Accounts receivable	545,000
Accumulated depreciationâoffice buildings and equipment	1,580,000
Accumulated depreciationâstore buildings and equipment	4,126,000
Allowance for doubtful accounts	8,450
Available-for-sale investments (at cost)	260,130
Bonds payable, 5%, due 2024	500,000
Cash	246,000
Common stock, $20 par
(400,000 shares authorized; 100,000 shares issued, 94,600outstanding)	2,000,000
Dividends:
Cash dividends for common stock	155,120
Cash dividends for preferred stock	100,000
Goodwill	500,000
Income tax payable	44,000
Interest receivable	1,125
Investment in Pinkberry Co. stock (equity method)	1,009,300
Investment in Dream Inc. bonds (long term)	90,000
Merchandise inventory (December 31, 2016),
at lower of cost (FIFO) or market	778,000
Office buildings and equipment	4,320,000
Paid-in capital from sale of treasury stock	13,000
Excess of issue price over par:
-Common	886,800
-Preferred	150,000
Preferred 5% stock, $80 par
(30,000 shares authorized; 20,000 shares issued)	1,600,000
Premium on bonds payable	19,000
Prepaid expenses	27,400
Retained earnings, January 1, 2016	9,319,725
Store buildings and equipment	12,560,000
Treasury stock
(5,400 shares of common stock at cost of $33 per share)	178,200
Unrealized gain (loss) on available-for-sale investments	(6,500)
Valuation allowance for available-for-sale investments	(6,500)

none

Chart of Accounts

CHART OF ACCOUNTS

Equinox Products Inc.

General Ledger

	ASSETS
110	Cash
121	Accounts Receivable
122	Allowance for Doubtful Accounts
131	Merchandise Inventory
132	Interest Receivable
133	Prepaid Expenses
141	Investments-Solstice Corp.
142	Investment in Pinkberry Co. Stock
143	Investment in Dream Inc. Bonds
144	Valuation Allowance for Available-for-Sale Investments
181	Store Buildings and Equipment
182	Accumulated Depreciation-Store Buildings and Equipment
183	Office Buildings and Equipment
184	Accumulated Depreciation-Office Buildings and Equipment
191	Goodwill

	LIABILITIES
211	Accounts Payable
221	Income Tax Payable
225	Cash Dividends Payable
251	Bonds Payable
252	Discount on Bonds Payable
253	Premium on Bonds Payable

	EQUITY
311	Preferred Stock
312	Paid-in Capital in Excess of Par-Preferred Stock
321	Common Stock
322	Paid-in Capital in Excess of Par-Common Stock
331	Retained Earnings
341	Cash Dividends
351	Treasury Stock
352	Paid-in Capital from Sale of Treasury Stock
361	Unrealized Gain (Loss) on Available-for-Sale Investments

	REVENUE
410	Sales
611	Dividend Revenue
621	Interest Revenue
631	Income from Pinkberry Co.
641	Gain on Sale of Investments

	EXPENSES
511	Cost of Merchandise Sold
512	Bad Debt Expense
520	Sales Salaries Expense
521	Sales Commissions
522	Office Salaries Expense
531	Advertising Expense
532	Delivery Expense
537	Store Supplies Expense
538	Office Supplies Expense
539	Office Rent Expense
541	Income Tax Expense
551	Depreciation Expense-Store Equipment
552	Depreciation Expense-Office Equipment
591	Miscellaneous Selling Expense
592	Miscellaneous Administrative Expense
710	Interest Expense
731	Loss on Sale of Investments

none

Labels and Amount Descriptions

Labels In CengageNOW, a Label is a text entry that does not have anamount associated with it.
Current assets
Current liabilities
December 31, 2016
For the Year Ended December 31, 2016
Intangible assets
Investments
Less dividends
Long-term liabilities
Operating expenses
Other income and expenses
Paid-in capital
Add dividends
Property, plant, and equipment
Amount Descriptions In CengageNOW, an Amount Description is a text entry other thanan Account that has an amount associated with it.
Available-for-sale investments
Decrease in retained earnings
Excess of issue price over par
Gross profit
Income before income tax
Income from operations
Increase in retained earnings
Miscellaneous selling expense
Net income
Net loss
Retained earnings, January 1, 2016
Retained earnings, December 31, 2016
Sales commissions
Sales salaries expense
Store supplies expense
Total administrative expenses
Total assets
Total (before treasury stock)
Total current assets
Total current liabilities
Total liabilities
Total liabilities and stockholdersâ equity
Total long-term liabilities
Total investments
Total operating expenses
Total paid-in capital
Total property, plant, and equipment
Total selling expenses
Total stockholdersâ equity
Unamortized premium
Unamortized discount

copperwombat133

33:010:325 Lecture Notes - Lecture 6: Accounts Receivable, Accrual, Current Liability

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