1 and 2
Prepare the T- account and enter the transaction into their respective accounts for calculating the ending balance.
1 and 2
Explanation of Solution
T-account:
T-account is the form of the ledger account, where the
The components of the T-account are as follows:
a) The title of the account
b) The left or debit side
c) The right or credit side
Prepare the T-accounts:
Cash account:
Cash account | |||
Beginning balance | $0 | (b) | $5,250 |
(a) | $30,200 | (d) | $1,560 |
(e) | $11,000 | (f) | $11,000 |
(h) | $2,675 | (g) | $400 |
(k) | $600 | (i) | $550 |
(m) | $1,200 | (j) | $1,300 |
(l) | $400 | ||
Ending balance | $25,215 |
Accounts receivable account:
Accounts receivable account | |||
Beginning balance | $0 | (k) | $600 |
(h) | $825 | ||
Ending balance | $225 |
Supplies account:
Supplies account | |||
Beginning balance | $0 | ||
(d) | $1,560 | ||
Ending balance | $1,560 |
Inventory account:
Inventory account | |||
Beginning balance | 0 | (h) | $1,600 |
(c) | $6,000 | (m) | $600 |
Ending balance | $3,800 |
Prepaid expenses account:
Prepaid expenses account | |||
Beginning balance | $0 | ||
(b) | $5,250 | ||
Ending balance | $5,250 |
Equipment account:
Equipment account | |||
Beginning balance | $0 | ||
(h) | $2,750 | ||
Ending balance | $2,750 |
Furniture and fixtures account:
Furniture and fixtures account | |||
Beginning balance | $0 | ||
(e) | $8,250 | ||
Ending balance | $8,250 |
Accounts payable account:
Accounts payable account | |||
Beginning balance | 0 | ||
(i) | $550 | (c) | $6,000 |
Ending balance | $5,450 |
Notes payable account:
Notes payable account | |||
Beginning balance | $0 | ||
(e) | $11,000 | ||
Ending balance | $11,000 |
Common stock account:
Common stock account | |||
Beginning balance | $0 | ||
(a) | $40 | ||
Ending balance | $40 |
Additional paid-in capital account:
Additional paid-in capital account | |||
Beginning balance | $0 | ||
(a) | 30,160 | ||
Ending balance | $30,160 |
Cost of goods sold account:
Cost of goods sold account | |||
Beginning balance | $0 | ||
(h) | $1,600 | ||
(m) | $600 | ||
Ending balance | $2,200 |
Repair expense account:
Repair expense account | |||
Beginning balance | $0 | ||
(l) | $400 | ||
Ending balance | $400 |
Sales revenue account:
Sales revenue account | |||
Beginning balance | 0 | ||
(h) | $3,500 | ||
(m) | $1,200 | ||
Ending balance | $4,700 |
Advertising expense account:
Advertising expense account | |||
Beginning balance | 0 | ||
(g) | $400 | ||
Ending balance | $400 |
Wages expense account:
Wages expense account | |||
Beginning balance | 0 | ||
(j) | $1,300 | ||
Ending balance | $1,300 |
Thus, the t-accounts are prepared and the ending balances are calculated.
3.
Prepare an income statement for the month February.
3.
Explanation of Solution
Income statement:
The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare an income statement:
Company KS | ||
Income statement | ||
For the month ended 28th February | ||
Particulars | Amount ($) | Amount ($) |
Revenues: | ||
Sales revenue (1) | 4,700 | |
Total revenues (A) | 4,700 | |
Expenses: | ||
Cost of goods sold (2) | 2,200 | |
Advertising expense | 400 | |
Wage expense | 1,300 | |
Repair expense | 400 | |
Total expenses (B) | 4,300 | |
Net Income | $400 |
Table (1)
Working note:
Calculate the total sales revenue:
Calculate the total cost of goods sold:
Hence, the net income of Company KS is $400.
4.
Write a memo to Person K regarding the results of operations during the first month of the business.
4.
Explanation of Solution
MEMO
From
XYZ
To
Person K
Company KS
28th February,
Sub: Results of operations during the first month of the business.
After the evaluation of effects of the transactions of Company KS, one can conclude that the company has earned a profit of $400. But, these are based upon unadjusted amounts. There are several expenses such as rent, supplies, depreciation, furniture and fixtures, interest on the borrowing and wages. The company does not seem to be profitable, as this situation is very common in small businesses during the inception of the operations. The company must focus on increasing revenues and while maintaining the expenses that should result in the upcoming years. The company should prepare budgeted cash flows for each month in the upcoming years that would help the management to handle the probable cash shortages.
Regards,
XYZ
5.
Compute the net profit margin ratio for each year and explain the reason for promoting the manager.
5.
Explanation of Solution
Net profit margin ratio:
Net profit is the financial ratio that shows the relationship between the net profit and net sales (Operating revenue). Net profit is the difference between total operating revenue and total operating expenses. It can be calculated by dividing net profit and net sales revenue.
Compute the net profit margin ratio:
Net profit margin ratio for 2018:
Hence, the net profit margin ratio for the year 2018 is 0.235.
Net profit margin ratio for 2017:
Hence, the net profit margin ratio for the year 2017 is 0.133.
Net profit margin ratio for 2016:
Hence, the net profit margin ratio for the year 2016 is 0.080.
- By evaluating the net profit margin ratio, it is clear that the profit level of the Company has increased.
- This states that the company is very efficient in generating the revenue from the sales and controlling the expenses.
- Based on this the reasons, the company should promote its manager to the next level.
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Chapter 3 Solutions
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