CHAPTER 1 ASSIGNMENT_BASIGA, JESSA MAY TH 5:30-7:30PM

Problem 1-4:  Acme Consulting

Answers:
a. Explain each transaction.
Txn 1. The owners of the company, Acme Consulting, invested $20,000 as equity capital.
Txn 2. The company purchased an equipment worth $7,000; wherein $5,000 paid in cash
and $2,000 as accounts payable. ($2,000 on account)
Txn 3. The company bought supplies inventory worth $1,000 in cash.
Txn 4. The company paid employees’ salaries worth $4,500 in cash.
Txn 5. The company earned $10,000 as revenue; wherein $5,000 has been acquired in
cash while the other is owed to the company by its customers (accounts receivable)
Txn 6. The company’s accounts payable worth $1,500 are paid in cash.
Txn 7. The customers paid their owe to the company of $1,000 of $5,000.
Txn 8. The company’s rental expense of $750 is paid in cash.
Txn 9. The company’s utilities of $500 are paid in cash.
Txn 10. The company incurred $200 travel expense but not yet settled or paid.
Txn 11. The company consumed $200 supplies inventory.

b. ACME Consulting Balance Sheet

 ACME CONSULTING
BALANCE SHEET AS OF JULY 31, XXXX
ASSETS LIABILITIES & OWNERS’ EQUITY
Cash $12,750 Accounts Payable $700
Accounts Receivable $4,000
Supplies Inventory $800 ___________
Current Assets$17,550 Current Liabilities $700
Equipment $7,000 Owners’ Equity $23,850

TOTAL LIABILITIES &

TOTAL ASSETS $24,550 OWNER’S EQUITY $24,550

c. ACME Consulting Income Statement

ACME CONSULTING
INCOME STATEMENT JULY 1-31, XXXX

REVENUES $10,000
EXPENSES
SALARIES $4,500
RENT $750
UTILITIES $500
TRAVEL $200
SUPPLIES $200 $6,150

NET INCOME $ 3,850

d. ACME Consulting Cash Account

ACME CONSULTING
 CASH RECEIPTS AND DISBURSEMENTS JULY 1-31, XXXX

RECEIPTS
Owner’s investment $20,000
Cash Sales $5,000
Collection of Accounts Receivable $1,000
TOTAL RECEIPTS $26,000
DISBURSEMENT
Equipment Purchase $5,000
Supplies Purchase $1,000
Salaries paid $4,500
Payment to Sellers $1,500
Rent Paid $750
Utilities Paid $500
TOTAL DISBURSEMENT $13,250
INCREASE IN CASH $12,750

e. Difference of Cash amount and Income

The change in the cash account includes the owners’ investment which is not
included in the income statement. The income statement includes revenues and expenses
that have not yet been received nor paid in cash. Moreover, the cash paid to purchase the
equipment is not reflected in the income statement too.

Problem 1-5:  Bon Voyage Travel

 ANSWERS:
a. Transaction Analysis

CASH + ACCOUNTS SUPPLIES EQUIPMENT ACCOUNTS OWNERS’ EQUITY

RECEIVABLES+ INVENTORY+ = PAYABLE+
1 +$25,000 + $25,000 Investment
2 - $500 - $500 Rent
3 + $8,000 + $8,000
4 - $500 + $500
5 - $750 - $750 Advertising
6 - $3,000 - $3,000 Salaries
7 + $2,000 + $8,000 + $10,000 Commissions
8 - $5,000 - $5,000
9 - $100 - $100
10 +$1,000 - $1,000 Expenses

b. Bon Voyage Travel Balance Sheet

 BON VOYAGE TRAVEL
BALANCE SHEET AS OF JUNE 30, XXXX
ASSETS LIABILITIES & OWNERS’ EQUITY
Cash $17,250 Accounts Payable $4,000
Accounts Receivable $8,000
Supplies Inventory $400 ___________
Current Assets$25,650 Current Liabilities $4,000
Equipment $8,000 Owners’ Equity $29,650

TOTAL LIABILITIES &

TOTAL ASSETS $33,650 OWNER’S EQUITY $33,650

c. Bon Voyage Travel Income Statement

BON VOYAGE TRAVEL

INCOME STATEMENT JUNE 1-30, XXXX

COMMISSIONS $10,000
EXPENSES
RENT $500
ADVERTISING $750
SALARIES $ 3,000
SUPPLIES $100
MISC EXPENSES $1,000 $5,350

NET INCOME $ 4,650

d. Bon Voyage Travel Cash Account

BON VOYAGE TRAVEL

 CASH RECEIPTS AND DISBURSEMENTS JUNE 1-30, XXXX

RECEIPTS
Owner’s investment $25,000
Collection of Commissions $2,000
TOTAL RECEIPTS $27,000
DISBURSEMENT
Rent Paid $500
Supplies Purchase $500
Advertising $750
Salaries $3,000
Paid Sellers $5,000
TOTAL DISBURSEMENT $9,750
INCREASE IN CASH $17,250

a. Difference of Cash amount and Income

Same with Problem 1-4, the change in the cash account includes the owners’
investment which is not included in the income statement. The income statement includes
revenues and expenses that have not yet been received nor paid in cash. Moreover, the
cash paid to purchase the equipment is not reflected in the income statement too.

Case 1-1:  Ribbons an' Bows, Inc.

Answers:

QUESTION 1a. How would you report on the 3-month operations of Ribbon an’ Bows, Inc.,
through June 30?
Figure 1 presents the company’s initial three month income statement. Customer has
paid ($7,400) cash for ribbons and accessories and credit sales ($320). Cost of sales is derived
from the following equation: beginning merchandise inventory ($3,300) plus purchases
($2,900) less ending merchandise inventory $4,100 equals cost of sales $2,100. Rent expense is
$1,800 of $600 per month times three months. Part-time employee expenses ($1,600) is the
sum of cash paid ($1,510) plus amount owed ($90). The prepaid advertising ($150) was run by
the local paper on April 2. The benefit of the asset expired so the asset became an expense. The
commercial sewing machine purchased led to a $1,800 asset being recorded. The asset’s
benefit was partly consumed during May and June resulting in a $60 depreciation charge. Some
of the future benefits of the computer and related software asset were consumed during the
three month period. A $250 depreciation charge must be recognized. Carmen has lended her
cousin’s money for four month that costs $10,000. ($10,000 * 0.06 interest *4 /12) = $200.
Thus the interest for four month is $200.

Question 1b. Was the company profitable?

Ribbon an’ Bows performance from April to June 2010 shows a net income (before tax)
of $1,480. As a start-up company, it was able to sustain its operations and produce its key
business elements. The company is profitable during this period but may not be as impressive
as those from established businesses but fairly satisfactory.

Question 1c. Why did it’s cash in the bank decline during the 3-month operating period?
Moreover, according to income statement, the reasons why the cash balance declined
during the three month profitable operating period are: (1) the company purchased commercial
sewing machine that reduced cash by $1,800 while the related depreciation charge only
reduces income by $60. And (2) ending inventory was higher than beginning inventory and the
increase was paid for with cash That is, more inventory was bought for cash ($2,900) than the
cost of goods sold ($2,100).

Figure 2 present a cash flow analysis for the three month operating period.

Figure 1

RIBBONS AN’ BOWS

INCOME STATEMENT
For the Period of April 1 to June 30, 2010

Sales $7,720
Cost Of Sales ($2,100)
Gross Margin $5,620

Employee Wages ($1,600)

Rent ($1,800)
Office Supplies ($80)
Depreciation (Computer) ($250)
Depreciation (Sewing Machine) ($60)
Interest ($200)
Advertising ($150)
Profit before Taxes $1,480
Figure 2
 RIBBONS AN’ BOWS
ANALYSIS OF CASH FLOWS
For the Period of April 1 to June 30, 2010
Beginning Cash $4,000
Sales $7,400
Wages ($1,510)
Rent ($1,800)
Merchandise Inventory ($2,900)
Sewing Machine ($1,800)
Ending Cash $3,390

QUESTION 2. How would you report the financial condition of the business on June 30, 2010?

Figure 3 presents the company’s June 30 balance sheet.

Figure 3

RIBBONS AN’ BOWS

BALANCE SHEET AS OF JUNE 30, 2010
ASSETS LIABILITIES
Cash $3,390 Wages owed $90
Accounts Receivable $320 Interest owed $200
Merchandise Inventory $4,100 Cousin’s loan $10,000
Supplies $20 $10,290
Prepaid Rent $1,200 OWNER’S EQUITY
Computer (net) $1,750
Sewing Machine (net) $ 1,740 Carmen’s equity $1,000
Cash Register Deposit $250 Earnings $1,480
TOTAL $12,770 TOTAL $12,770

QUESTION 3. Do you believe Carmen’s first three months of operation could be characterized
as “successful”?
Ribbon an’ Bows Inc., within its three months of the operation shows the company has a
good start off. The income statement shows that the company is profitable with the sales
equivalent to $7,720. The cash flow shows that the cash ending balance is less than the
beginning balance due to Carmen’s decision in expanding her business which has reduced the
cash. Moreover, the balance sheet on the other hand shows that the company’s debt is not
excessive. Lastly, the company has more potential in increasing their profit. They should
consider using more effective market plan and advertisement to promote their products and
services. Moreover, Carmen should also consider paying herself any meaningful compensation
and repay her cousin’s loan at the end of the year.