Scenario:

Multi-Step Running, Inc. ("MSR" or the "Company") was established in 2011 and is owned by

Shannon and Kirk Smith. The store caters to both new and experienced runners and offers

everything from running shoes, clothes and supplies to fun runs and a sponsored running club.

The highlight of its fun runs is the annual Father's Day 10-K each year (mid June). The Company

has a handful of sales employees and one person in the office, Claudia, who handles most

administrative matters including best efforts accounting. This is Claudia's first year working with

the accounting information. In prior years the Company worked with a small accounting firm, but

chose to have Claudia, a family friend with limited bookkeeping experience do the accounting this

year to try to save a little on expenses.

In fact, Shannon and Kirk are considering selling the store as soon as possible and they are doing

their very best to make the store look as successful as possible. To that end they are asking for

your assistance. They have heard that you and your team are taking an accounting course and

are always looking to give back to the community (...a little "pro bono" assistance). You have

agreed as you have been a long-time customer of MSR and do appreciate the great times you

have had with the running group - running and accounting, your two favorite things!

So you have agreed to help with the current year accounting and preparing a short write-up for

the Smith's to use for offering the store for sale. You know how important it is that the financial

statements be prepared in accordance with accounting rules (i.e., U.S. GAAP) so that the Smiths

are not later criticized (or worse, sued) over an improper financial presentation.

To get started, Claudia has provided you with the following (assume the prior year trial balances

are prepared correctly):

Appendix A - Post-closing trial balance for the year ended June 30, 2017 (the Company has a

June 30th year-end).

Appendix B - Adjusted trial balance for the year ended June 30, 2018 ("fiscal 2018").

Appendix C - Adjusted trial balance for the year ended June 30, 2019 ("fiscal 2019").

Appendix D - Preliminary unadjusted trial balance at May 31, 2020.

Appendix E - Additional information needed to prepare the Statements of Cash Flow

Question 1

Prepare the journal entries for the Company for the year ended June 30, 2020 ("fiscal 2020") based on the following information:

June Transactions

1. $26,000 of vendor invoices were paid during June. These invoices had already been accrued

into accounts payable in May.

2. The Company received a shipment of shoes on June 12th. The invoice cost totaled $25,800

and the shipping costs were an additional $500. Both are expected to be paid in July.

3. The following invoices totaling $22,410 were also received and recorded (to be paid in July):

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- $4,360 for banners and other supplies related to the 10-K run (all expenses associated

with the 10-K are considered promotion expense).

- $2,200 for liability insurance expense for the month of June.

- $3,850 for utilities expense for the month of June.

- $12,000 for rent for the month of June.

4. June sales records indicate that $64,913 of products (e.g., running shoes, workout clothes,

etc.) were sold. These products had a cost of goods sold of $31,850. Of the sales, $54,913

were cash sales and $10,000 were sales on account.

5. On June 1st Oregon City High School placed an order for shoes for cross-country season and

made full payment of $5,000. The sale had a gross margin of 50%. The School will take

delivery of half of the shoes in June and the other half in July.

6. Total June wages were $6,400 and associated payroll taxes were $415. Of the total payroll,

$5,000 was paid in June and the remainder will be paid in July. All of payroll taxes are to be

paid in July.

7. On June 15th, the Company paid an estimated federal income tax payment of $15,000.

Adjustments

Claudia also provided you the following information that she thought may be helpful in preparing

the year-end financial statements.

8. On April 30th, the Company had acquired new furniture for $3,000. It was incorrectly

entered in books as office supplies expense.

9. On October 1, 2019, "We be losin' Weight Loss & Running Club" had paid MSR $12,000

advance fee to provide coaching services for the end of 2019 and the first nine months of

2020. Claudia had been properly recording coaching revenue each month.

10. It is Company's policy to follow GAAP and record sales when the product is shipped. You

discover that a product which is scheduled to be shipped on July 1, 2020 was recorded as a

sale on June 30 (sale on account - no cash received). The amount of the sale and associated

cost of goods sold are $2,700 and $1,300, respectively.

11. The Company has determined that 100% of the receivables in its allowance for doubtful

accounts at May 31, 2020 will never be collected. In addition, bad debt expense has been

estimated at $403 for the current year.

12. The Prepaid Expense account includes a two-year renter's insurance policy purchased on

January 1, 2020 for $12,000. Claudia has been properly recognizing insurance expense each

month.

13. The building has a useful life of 30 years with no salvage value. The equipment has a useful

life of 10 years with an estimated salvage value is $2,250. Depreciation is provided using the

straight line depreciation method. Company policy requires that any equipment purchased

during the first year will receive a full year of depreciation in the year of acquisition. Claudia

has not recorded any depreciation expense during this fiscal year.4

14. Interest expense accrued for the month of June on its long-term debt is $895. Interest is

accrued every month and is paid at the beginning of each quarter (i.e. July). The company

also makes a principle payment at the beginning of each quarter in the amount of $3,200

(and has since the inception of the loan in 2016). All principle payments have been properly

paid.

15. On June 1st MSR declared a dividend of $800, to be paid on July 15, 2020.

16. A review of the accounts at year end revealed that fees runners had been paying throughout

the fiscal year for the 2020 run had been incorrectly recorded as goodwill. A total of $36,540

of fees had been collected so far this year.

17. The Company has yet to receive an invoice, but legal fees for fiscal 2020 have totaled

$3,000.

18. Claudia admittedly knows little about income taxes and has not recorded income tax expense

in fiscal 2020. She does know that prior years' taxes were properly paid and the CPA has

mentioned that the Company should use a tax rate of 30% for financial statement purposes.

Question 2: Trial Balance

Record the May 31, 2020 balances (see Appendix D below)

Question 3: Financial Statements

Required

Using the amounts from Appendix B (for June 30, 2018), Appendix C (for June 30, 2019) and

the trial balance prepared in Problem 2, prepare classified Balance Sheets for MSR as of June 30,

2018, June 30, 2019 and June 30, 2020, respectively, and multiple-step Income Statements and

Statements of Retained Earnings for the years then ended in good form.

Using the amounts from Appendix A (for June 30, 2017), Appendix B (for June 30, 2018),

Appendix C (for June 30, 2019), the trial balance prepared in Problem 2 and the Additional

Information found in Appendix E, prepare Statements of Cash Flow for the years ended June 30,

2018, June 30, 2019 and June 30, 2020, respectively, in good form.

Question 4: Ratio Analysis

After preparing the financial statements in Problem 3, compute the following:

Common size balance sheets as of June 30, 2018, June 30, 2019 and June 30, 2020 and

common-size income statements for the years then ended.

Explain the trends you see in terms of revenue, expenses and profitability.

All of the ratios from the class list of Commonly Used Ratios for the years ended June 30,

2018, June 30, 2019 and June 30, 2020.

For each ratio, discuss the trend (time-series analysis) and compare the Company's results to

the following industry statistics (cross-sectional analysis). Explain what each ratio indicates

about the financial "health" and performance of the Company.

Asset turnover 1.25

- Net operating profit after tax ("NOPAT") margin 8.65%

- Return on assets 10.81%

- Common earnings ratio .96

- Capital structure leverage 2.04

- Return on common equity 10.79%

- Accounts receivable turnover (days) 24.4

- Inventory turnover (days) 30.9

- Gross operating cycle (days) 55.3

- Accounts payable turnover (days) 36.1

- Deferred revenue turnover (days) 3.2

- Net operating cycle (days) 16.0

- Ability of cash flow from operations to cover current debt and dividends 2.40

- Current ratio 1.36

- Quick ratio 0.76

- Total debt to equity 1.08

- Financing debt to equity 0.53

- Long term ability of cash flow from operations to cover

debt and dividends 3.89

Attached are the Appendixes. A, B, C, and D

Appendix E - Additional Information (for use in preparing the Statements of Cash Flow)

Year ended June 30, 2020

No sales of building, furniture and equipment or land during fiscal 2020

No new loans during fiscal 2020

The Company sold common stock for $10,100 in cash during fiscal 2020

No cash dividends were paid during fiscal 2020

Year ended June 30, 2019

No sales of building, furniture and equipment or land during fiscal 2019

No new loans during fiscal 2019

The Company repurchased $2,000 of its own common stock (no additional common stock was

sold) during fiscal 2019

No cash dividends were paid during fiscal 2019

Year ended June 30, 2018

No sales of building, furniture and equipment or land during fiscal 2018

$20,000 of furniture and equipment was purchased and was 100% financed by a new loan (no

other new loans)

The Company sold common stock for $4,900 in cash during fiscal 2018