Question
Financial Accounting Project I. The Howit Department store is located in midtown Metro. During the past several years, net income has been declining because of
Financial Accounting Project I.
The Howit Department store is located in midtown Metro. During the past several years, net income has been declining because of suburban shopping centers. At the close of the year ended December 31,2007, the following accounts appeared in two of its trial balances.
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| Trial Balances | |||
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| Unadjusted | Adjusted | Difference Increase/(Decrease) |
| Accounts Payable | $37,310 | $37,310 | $0 |
| Accounts Receivable | 12,770 | 12,770 | 0 |
| Accumulated Depreciation-Delivery Equipment | 15,680 | 19,680 | 4,000 |
| Accumulated Depreciation-Store Equipment | 32,300 | 41,800 | 9,500 |
| Cash | 7,000 | 7,000 | 0 |
| Delivery Expense | 8,200 | 8,200 | 0 |
| Delivery Equipment | 57,000 | 57,000 | 0 |
| Depreciation Expense-Delivery Equipment | 4,000 | 4,000 | |
| Depreciation Expense-Store Equipment | 9,500 | 9,500 | |
| Freight-in | 5,060 | 5,060 | 0 |
| Common Stock | 70,000 | 70,000 | 0 |
| Retained Earnings | 14,200 | 14,200 | 0 |
| Dividends | 12,000 | 12,000 | 0 |
| Insurance Expense | 9,000 | 9,000 | |
| Interest Expense | 8,000 | 8,000 | 0 |
| Interest Revenue | 5,000 | 5,000 | 0 |
| Merchandise Inventory | 34,360 | 34,360 | 0 |
| Notes Payable | 46,000 | 46,000 | 0 |
| Prepaid Insurance | 13,500 | 4,500 | (9,000) |
| Property Tax Expense | 3,500 | 3,500 | |
| Purchases | 640,000 | 640,000 | 0 |
| Purchase Discounts | 7,000 | 7,000 | 0 |
| Purchase Returns and Allowances | 3,000 | 3,000 | 0 |
| Rent Expense | 19,600 | 19,600 | 0 |
| Salaries Expense | 120,000 | 120,000 | 0 |
| Sales | 860,000 | 860,000 | 0 |
| Sales Commissions Expense | 8,000 | 14,000 | 6,000 |
| Sales Commissions Payable | 6,000 | 6,000 | |
| Sales Returns and Allowances | 10,000 | 10,000 | 0 |
| Store Equipment | 125,000 | 125,000 | 0 |
| Property Taxes Payable | 3,500 | 3,500 | |
| Utilities Expense | 10,000 | 10,000 | 0 |
Analysis reveals the following additional data:
1. Salaries expense is 70% selling and 30% administrative.
2. Insurance expense is 50% selling and 50% administrative.
3. A physical inventory was conduced for year ended December 31, 2007 and the inventory was valued at $36,200.
4. Rent expense, utilities expense, and property tax expense are administrative expenses.
5. $10,000 of the Notes payable is due for payment next year.
6. The beginning balance of accounts receivable is $10,750.
7. The amount of total assets at the beginning of the year is $198,275.
Instructions
1)Journalize the adjusting entries that were made by the company.
2)Prepare a multiple-step income statement and a retained earnings statement for the year and a classified balance sheet as of December 31, 2007.
3)Journalize the closing entries.
4)Prepare a post-closing trial balance.
5)Prepare the following ratios and show all support for your computations:
a) Current Ratio
b) Quick Ratio
c) Working Capital
d) Accounts Receivable Turnover
e) Average Collection Period
f) Inventory Turnover
g) Days in Inventory
h )Debt to Total Assets Ratio
i) Gross Profit Ratio
j) Profit Margin Ratio
k) Return on Assets Ratio
l) Asset Turnover Ratio
6) Based on the ratios computed in 5) above, answer the following questions and use the financial statement ratios to support your answers where appropriate:
Do you feel that the company is able to meet its current and long term obligations as they become due?
Comment on the profitability of the company with respect to the various profitability ratios that you computed.
Would you lend money to this company for the long term?
Comment on the ability of the company to collect its receivables and mange inventory.
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| 2004 | 2005 | 2006 | Industry Average |
| Liquidity |
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| Current | 1.13 | 1.31 | 1.45 | 1.34 |
| Quick | 0.98 | 1.15 | 1.29 | 1.05 |
| Working Capital | $ 12,500.00 | $ 13,000.00 | $ 13,990.00 | $ 15,000.00 |
| Leverage |
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| Debt to Total Assets (%) | 51.06% | 49.89% | 47.99% | 46.84% |
| Times Interest Earned | 5.12 | 5.99 | 6.31 | 6.89 |
| Activity |
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| Inventory Turnover (sales) | 18.20 | 19.52 | 20.03 | 26.52 |
| Fixed Asset Turnover | 6.89 | 7.21 | 7.84 | 8.15 |
| Total Asset Turnover | 4.99 | 5.25 | 5.32 | 5.61 |
| Average Collection Period (days) | 5.78 | 5.37 | 5.15 | 4.99 |
| Accounts Receivable Turnover | 62.31 | 67.02 | 69.87 | 72.15 |
| Days in Inventory | 20.05 | 18.70 | 18.22 | 19.20 |
| Profitability |
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| Gross Profit Margin (%) | 24.56% | 25.22% | 26.87% | 27.81% |
| Net Profit (%) | 1.99% | 2.56% | 3.58% | 4.60% |
| Return on Total Assets (%) | 7.50% | 8.20% | 9.23% | 9.89% |
| Return on Equity (%) | 16.79% | 17.56% | 18.03% | 19.02% |
| Payout Ratio | 56.00% | 65.00% | 71.00% | 45.00% |
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