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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 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.

.

Trial Balances

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.

2004

2005

2006

Industry Average

Liquidity

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

Debt to Total Assets (%)

51.06%

49.89%

47.99%

46.84%

Times Interest Earned

5.12

5.99

6.31

6.89

Activity

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

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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