Question
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
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.
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| Warrior Industries |
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| Income Statement |
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| for year ending 12/31/20XX |
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Sales revenue |
| 456,428 | ||
Less cost of goods sold |
| 205,200 | ||
Gross margin |
| 251,228 | ||
Less operating expenses |
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| Marketing | 40,000 |
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| Sales and administrative | 20,000 |
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| Depreciation | 10,000 |
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| 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 | ||
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| Warrior Industries |
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| Balance Sheet |
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| for 12/31/20XX |
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Assets |
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Current Assets |
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| Cash | $ 52,400.00 | |
| Accounts receivable | $ 11,000.00 | |
| Inventory | $ 15,900.00 | |
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| Total current assets | $ 79,300.00 |
Fixed assets |
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| Property, plant and equipment | $ 80,000.00 | |
| Accumulated depreciation | $ (20,000.00) | |
| Net fixed assets | $ 60,000.00 | |
Total assets | $139,300.00 | ||
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Liabilities and Owner's Equity |
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Current liabilities |
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| Accounts payable | $ 5,300.00 | |
| Note payable to bank | $ 2,700.00 | |
| Deposits from customers | $ 6,000.00 | |
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| Total current liabilities | $ 14,000.00 |
Long term mortgage | $ 40,000.00 | ||
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| Total liabilities | $ 54,000.00 |
Owner's Equity |
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| Retained earnings | $ 85,300.00 | |
| Total Owners' Equity | $ 85,300.00 | |
Total liability and equities | $139,300.00 | ||
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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.
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