2 Financial statement preparers have two choices in preparing the statement of cash flows: the indirect method and the direct method. The indirect method is used extensively in practice even though the F.A.S.B. has expressed a preference for the direct method. Discuss the similarities and differences between the direct and indirect methods, and the advantages of using each method.

Your answer should illustrate understanding of the cash flow statement.

3 Discuss the horizontal and vertical analysis of a financial statement, and how each is used to help financial statement users make better decisions. Also, explain the liquidity, solvency, and profitability ratios introduced throughout the text. Describe how the ratios are used in analyzing a firms liquidity, solvency, and profitability. Your answer should illustrate understanding of financial statement analysis, including ratios.

Question 2 Cookie Creations is gearing up for the winter holiday season. During the month of December 2014, the following transactions occur.

Dec. 1 Natalie hires an assistant at an hourly wage of $8 to help with cookie making and some administrative duties.

5 Natalie teaches the class that was booked on November 25. The balance outstanding is received.

8 Cookie Creations receives a check for the amount due from the neighborhood school for the class given on November 30.

9 Cookie Creations receives $750 in advance from the local school board for five classes that the company will give during December and January.

15 Pays the cell phone invoice outstanding at November 30.

16 Issues a check to Natalies brother for the amount owed for the design of the website.

19 Receives a deposit of $60 on a cookie class scheduled for early January.

23 Additional revenue during the month for cookie-making classes amounts to $4,000. (Natalie has not had time to account for each class individually.) $3,000 in cash has been collected and $1,000 is still outstanding. (This is in addition to the December 5 and December 9 transactions.)

23 Additional baking supplies purchased during the month for sugar, flour, and chocolate chips amount to $1,250 cash.

23 Issues a check to Natalies assistant for $800. Her assistant worked approximately 100 hours from the time in which she was hired until December 23.

28 Pays a dividend of $500 to the common shareholder (Natalie).

As of December 31, Cookie Creations year-end, the following adjusting entry data are provided.

1. A count reveals that $45 of brochures and posters were used.

2. Depreciation is recorded on the baking equipment purchased in November. The baking equipment has a useful life of 5 years. Assume that 2 months worth of depreciation is required.

3. Amortization (which is similar to depreciation) is recorded on the website. (Credit the Website account directly for the amount of the amortization.) The website is amortized over a useful life of 2 years and was available for use on December 1.

4. Interest on the note payable is accrued. (Assume that 1.5 months of interest accrued during November and December.) Round to nearest dollar.

5. One months worth of insurance has expired.

6. Natalie is unexpectedly telephoned on December 28 to give a cookie class at the neighborhood community center on December 31. In early January Cookie Creations sends an invoice for $450 to the community center.

7. A count reveals that $1,025 of baking supplies were used.

8. A cell phone invoice is received for $75. The invoice is for services provided during the month of December and is due on January 15.

9. Because the cookie-making class occurred unexpectedly on December 31 and is for such a large group of children, Natalies assistant helps out. Her assistant worked 7 hours at a rate of $8 per hour.

10. An analysis of the unearned revenue account reveals that two of the five classes paid for by the local school board on December 9 still have not been taught by the end of December. The $60 deposit received on December 19 for another class also remains unearned.

Prepare General ledger account after reading the first question to enable you answer the above questions. Do this question number 1 first before answering the above questions that are asked below.

Question 1 In November 2014, after having incorporated Cookie Creations Inc., Natalie begins operations. She has decided not to pursue the offer to supply cookies to Biscuits. Instead, she will focus on offering cooking classes. The following events occur. Nov. 8 Natalie cashes in her U.S. Savings Bonds and receives $520, which she de-posits in her personal bank account.

8 Natalie opens a bank account for Cookie Creations Inc.

8 Natalie purchases $500 of Cookie Creations common stock.

11 Cookie Creations purchases paper and other ofce supplies for $95. (Use Supplies.)

14 Cookie Creations pays $125 to purchase baking supplies, such as our, sugar, butter, and chocolate chips. (Use Supplies.)

15 Natalie starts to gather some baking equipment to take with her when teach-ing the cookie classes. She has an excellent top-of-the-line food processor and mixer that originally cost her $550. Natalie decides to start using it only in her new business. She estimates that the equipment is currently worth $300, and she transfers the equipment into the business in exchange for ad-ditional common stock.

16 The company needs more cash to sustain its operations. Natalies grand-mother lends the company $2,000 cash, in exchange for a two-year, 9% note payable. Interest and the principal are repayable at maturity.

17 Cookie Creations pays $900 for additional baking equipment.

18 Natalie schedules her rst class for November 29. She will receive $100 on the date of the class. 25 Natalie books a second class for December 5 for $150. She receives a $60 cash down payment, in advance.

29 Natalie teaches her rst class, booked on November 18, and collects the $100 cash.

30 Natalies brother develops a website for Cookie Creations Inc. that the com-pany will use for advertising. He charges the company $600 for his work, payable at the end of December. (Because the website is expected to have a useful life of two years before upgrades are needed, it should be treated as an asset called Website.)

30 Cookie Creations pays $1,200 for a one-year insurance policy. 30 Natalie teaches a group of elementary school students how to make Santa Claus cookies. At the end of the class, Natalie leaves an invoice for $300 with the school principal. The principal says that he will pass it along to the busi-ness ofce and it will be paid some time in December.

30 Natalie receives a $50 invoice for use of her cell phone. She uses the cell phone exclusively for Cookie Creations Inc. business. The invoice is for ser- vices performed in November, and payment is due on December 1

Instructions

Using the information that you have gathered and the general ledger accounts that you have prepared through Chapter 3, plus the new information above, do the following.

(a) Journalize the above transactions.

(b) Post the December transactions to the general ledger accounts. (c) Totals $8,160

(c) Prepare a trial balance at December 31, 2014.

(d) Prepare and post adjusting journal entries for the month of December.

(e) Prepare an adjusted trial balance at December 31, 2014.

(f ) Prepare an income statement and a retained earnings statement for the 2-month period ending December 31, 2014, and a classified balance sheet as of December 31, 2014.

(g) Prepare and post closing entries as of December 31, 2014.

(h) Prepare a post-closing trial balance.

(c) Totals $8,160 (e) Totals $8,804

(f) Net income $3,211

(h) Totals $6,065