The exercise consists of 13 questions:

Q1-10 (worth 8 points each) and Q 11(worth 10 points each), 12, 13 (worth 5 points each)

You must show calculation, not just an answer

100 Maximum points possible

1. With Bobs help, Richard has purchased, installed and set up his new accounting software program. In fact, he has just printed his first income statement and balance sheet, reproduced below.

		Warrior Industries
		Income Statement
		for year ending 12/31/20XX
Sales revenue				456,428
Less cost of goods sold				205,200
Gross margin				251,228
Less operating expenses
	Marketing		40,000
	Sales and administrative		20,000
	Depreciation		10,000
		Total operating expenses		70,000
Operating income				181,228
Less interest expense				7,000
Income before taxes				174,228
Income tax expense				40,000
Net income				134,228

		Warrior Industries
		Balance Sheet
		for 12/31/20XX
Assets
Current Assets
	Cash		$ 52,400.00
	Accounts receivable		$ 11,000.00
	Inventory		$ 15,900.00
		Total current assets	$ 79,300.00
Fixed assets
	Property, plant and equipment		$ 80,000.00
	Accumulated depreciation		$ (20,000.00)
	Net fixed assets		$ 60,000.00
Total assets			$139,300.00
Liabilities and Owner's Equity
Current liabilities
	Accounts payable		$ 5,300.00
	Note payable to bank		$ 2,700.00
	Deposits from customers		$ 6,000.00
		Total current liabilities	$ 14,000.00
Long term mortgage			$ 40,000.00
		Total liabilities	$ 54,000.00
Owner's Equity
	Retained earnings		$ 85,300.00
	Total Owners' Equity		$ 85,300.00
Total liability and equities			$139,300.00

To see if he really understands whats going on, Bob asked Richard the following questions. Richard answered most of them correctly, can you?

1. How much revenue did the business produce?

They produced $456,428

2. What costs did the business have for financing?

$7,000

3. What can you turn into cash in one year?

Cash assets=$79,300

4. What did it cost to make your product?

$205,200

5. What is the value of everything the company owns?

$139,500

6. How much profit did the company make?

$134,228

7. How much is the business worth to Richard?

$85,300

8. How much does the business need for its continuing operation?

$70,000

Hint: Net Fixed Assets is the purchase price of all fixed assets (Land, buildings, equipment,

machinery, vehicles, leasehold improvements) less accumulated Depreciation

9. What debts will take longer than a year to pay?

$40,000

10. Can this business be considered liquid?

Hint: Current ratio = current assets / current liabilities

By the rule of thumb, it should be 2 or greater. The current ratio is an indicator of a business' ability to repay debt when it is due.

79,300/14,000 = 5.66

Yes, it can be considered liquid because they have 5.66 current assets for each

current liabilities.