123
P4–3
1. Snipes Company
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
Cash Flows Accts. Retained Statement
Cash + Rec. +Inv. = Earnings
*$17,885 = $18,250 – ($18,250 × 2%)
Balance Sheet
Statement of Assets = Liabilities + Stockholders’ Equity Income
Cash Flows Accts. Est. Ret. Cust. Refunds Retained Statement
Rec. + Inventory +Inventory = Payable + Earnings
*$4,900 = $5,000 – ($5,000 × 2%)
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
Cash Flows Accts. Retained Statement
124
P4–3, Continued
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
Cash Flows Accts. Retained Statement
Rec. + Inventory = Earnings
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
Cash Flows Accts. Statement
2. Beejoy Company
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
Cash Flows Accts. Statement
Inventory = Payable
125
P4–3, Continued
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
*$4,900 = $5,000 – ($5,000 × 2%)
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
Cash Flows Accts. Statement
Cash = Payable
*$12,985 = $17,885 – $4,900
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
Cash Flows Accts. Statement
Inventory = Payable
126
P4–3, Concluded
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
Cash Flows Statement
Cash + Inventory
Balance Sheet
Statement of Assets =Liabilities +Stockholders’ Equity Income
Cash Flows Accts. Statement
Cash = Payable
June 30. (15,000) (15,000)
127
P4–4
1.
PRESCOTT INC.
Income Statement
For the Year Ended September 30, 20Y8
Sales ………………………………………………………. $ 7,134,000
Cost of goods sold ………………………………….. (4,350,000)
Gross profit …………………………………………….. $ 2,784,000
Operating expenses:
Selling expenses:
Sales salaries expense …………………… $777,600
Advertising expense ………………………. 91,800
Depreciation expense—store
equipment …………………………………. 16,600
2.
PRESCOTT INC.
Statement of Stockholders’ Equity
For the Year Ended September 30, 20Y8
Common Stock Retained Earnings Total
128
P4–4, Continued
3.
PRESCOTT INC.
Balance Sheet
September 30, 20Y8
Assets
Current assets:
Cash …………………………………………………… $ 167,000
Accounts receivable ……………………………. 300,000
Store equipment ………………………………….. $1,023,000
Less accumulated depreciation …………. (373,400) 649,600
Total property, plant, and
equipment ………………………………………. 781,000
Total assets ……………………………………………… $ 2,062,000
Liabilities
Stockholders’ Equity
129
P4–4, Concluded
4. The multiple-step form of income statement includes numerous sections and
P4–5
1.
PRESCOTT INC.
Income Statement
For the Year Ended September 30, 20Y8
2.
PRESCOTT INC.
Statement of Stockholders’ Equity
For the Year Ended September 30, 20Y8
Common Stock Retained Earnings Total
130
P4–6 (Appendix)
1. OMEGA SYSTEMS INC.
Statement of Cash Flows
For the Year Ended March 31, 20Y5
Cash flows from operating activities:
Net income …………………………………………………. $105,450
Decrease in prepaid insurance ……………….. 525
Increase in accounts payable …………………. 10,725
Increase in customer refunds payable …….. 1,500
Decrease in salaries payable …………………. (540)
Decrease in unearned rent …………………….. (900) (6,845)
2. Depreciation is added to net income in determining net cash flows from
operating activities. This is because depreciation is deducted in arriving at net
income, but it does not involve any cash payments.
131
METRIC-BASED ANALYSIS
MBA 4–1
As shown below, purchase transactions have no effect on the liquidity metric
working capital. This is because purchases increase Inventory and Accounts
Payable (purchases on account) or decrease Cash (cash purchases) by the same
amount. As a result, the liquidity metric working capital is unchanged. Since pur-
chase transactions do not involve revenue (sales) or expense (cost of goods
sold), there is also no effect on the profitability metric gross profit percent.
Metric Effects
MBA 4–2
Metric Effects
Liquidity Profitability
Transaction Working Capital Ability to Achieve Gross
Profit Percent of 30%