Problem 2-1: Recording Transactions, Posting to T-Accounts, Preparing Financial Statements, and Commenting on What Financial Statements Tell Potential Investors
Audrey Jhingree opened an ice cream parlor in a university town. The parlor specializes in ice cream combinations named after popular professors in the business department of the university. You have been hired as a manger. Your duties include maintaining the store’s financial records. The following transactions occurred in April 2012, the first month of operations:
Received cash of $40,000 total ($10,000 each) from four investors. Each investor received 100 shares of common stock. This took place on April 01.
Paid three months’ rent for the store on April 01 at $2,000 per month (recorded as prepaid expenses).
Purchased ice cream and cones for $6,000 on account payable, due in 60 days. This took place on April 02.
Purchased supplies for $1,000 cash on April 02.
Received a two-year $11,000 loan at the bank. The note payable is dated April 02.
Used the money from (e) to purchase a computer for $3,000 (for record keeping and inventory tracking) and to purchase used $8,000 of furniture and fixtures for the store.
Placed a grand opening advertisement in the local paper for $600 cash.
Made sales in the first half of the month totaling $5,000: $4,250 was in cash and the rest was on accounts receivable. The cost of the ice cream sold was $2,000.
Made a $600 payment on accounts payable on April 18.
Incurred and paid employee wages of $2000 for the month of April.
Collected accounts receivable of $700 from customers.
Made a repair to one of the refrigerators for $300.
Made sales in the last half of the month for $6,000, all for cash. The cost of the ice cream sold was $2,400.
Using the information provided above, complete the following for Audrey Jhingree’s ice cream parlor. To complete this problem, you may wish to use the Excel template provided in the resources.
Set up appropriate T-accounts for cash, accounts receivable, supplies, inventory, prepaid expenses, equipment, furniture and fixtures, accounts payable, notes payable, contributed capital, sales revenue, cost of goods sold (expense), advertising expense, wage expense, and repair expense. All accounts begin with zero balances.
Record in the T-accounts the effects of each transaction for Audrey’s shop in April, referencing each transaction in the accounts with the transaction letter. Show the ending balances in the T-accounts. Note that transactions (h) and (m) require two types of entries, one for sales and one for cost of goods sold. Prepare trial balanaces for 4/30/12.
Prepare financial statements at the end of the month ended April 30, 2012. Hint: Do the income statement first, followed by the statement of stockholders’ equity, and then the balance sheet. Properly label each statement: Does it cover a period of time or just a point in time?
Write a short memo to Audrey offering your opinion on the results of operations during the first month of business.
After three years in business, you are being evaluated for a promotion. One measure is how efficiently you have managed the assets of the business. Using the data in the following table, compute the total asset turnover ratio for 2014 and 2013 and evaluate the results. Also compute the return on invested capital (net Income divided by total stockholders’ equity). Do you think you should be promoted? Why or why not?
Problem 2-1: Audrey’s Ice Cream Parlor
Account
2014
2013
2012
Total assets$93,000$78,000$61,000
Total liabilities$23,000$23,000$16,500
Total contributed capital plus retained earnings$70,000$55,000$44,500
Total sales$100,000$82,500$57,250
Net income$15,000$10,500$4,500
Problem 2-2: Preparing a Statement of Cash Flows
For the transactions listed in Problem 2-1, prepare a statement of cash flows for the month of April 2012. Use textbooks or Internet sources for information on the format and contents of a statement of cash flows. To complete this problem, you may wish to use the Excel template provided in the resources.