Teagan Fitzgerald is the owner of Newport Jewelry, a store specializing in gold, platinum, and special stones. During the past year, in response to increased demand, Teagan doubled her selling space by expanding into the vacant building space next door to her store. This expansion has been expensive because of the need to increase inventory and to purchase new store fixtures and equipment, including carpeting and state-of-the-art built-in fixtures. Teagan notes that the company’s cash position has gone down and she is worried about future demands on cash to finance the growth.
Teagan presents you with a statement showing the assets, liabilities, and her equity for year-end 2018 and 2019, and asks your opinion on the company’s ability to pay for the recent expansion. She did not have income and expense data available at the time. She commented that she had not made any new investment in the business in the past two years and was not financially able to do so presently. The information presented is shown below:
INSTRUCTIONS
- 1. Prepare classified balance sheets for Newport Jewelry for December 31, 2018, and December 31, 2019. (Ignore depreciation.)
- 2. Based on the information presented in the classified balance sheets, what is your opinion of Newport Jewelry’s ability to pay its current bills in a timely manner?
- 3. What is the advantage of a classified
balance sheet over a balance sheet that is not classified?
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- You are a financial adviser with a client in the wholesale produce business that just completed its first year of operations. Due to weather conditions, the cost of acquiring produce to resell has escalated during the latter part of this period. Your client, Javonte Gish, mentions that because her business sells perishable goods, she has striven to maintain a FIFO flow of goods. Although sales are good, the increasing cost of inventory has put the business in a tight cash position. Gish has expressed concern regarding the ability of the business to meet income tax obligations. Required Prepare a memorandum that identifies, explains, and justifies the inventory method you recommend that Ms. Gish adopt.arrow_forwardPaul Sabin organized Sabin Electronics 10 years ago in order to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the cash account and $400,000 of which will be used to modernize certain key items of equipment. The company’s financial statements for the two most recent years follow: SABIN ELECTRONICS Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 70,400 $ 124,000 Marketable securities — 15,200 Accounts receivable, net 495,800 248,000 Inventory 995,000 496,000 Prepaid expenses 19,800 17,800 Total current assets 1,581,000 901,000 Plant and equipment, net 1,200,000…arrow_forwardSmitty’s Home Repair Company, a regional hardware chain that specializes in do-it-yourself materials and equipment rentals, is cash rich because of several consecutive good years. One of the alternative uses for the excess funds is an acquisition. Linda Wade, Smitty’s treasurer and your boss, has been asked to place a value on a potential target, Hill’s Hardware, a small chain that operates in an adjacent state, and she has enlisted your help. Table 1 indicates Wade’s estimates of Hill’s earnings potential if it comes under Smitty’s management (in millions of dollars). The interest expense listed here includes the interest (1) on Hill’s existing debt,(2) on new debt that Smitty’s would issue to help finance the acquisition, and (3) on new debt expected to be issued over time to help finance expansion within the new “H division,” the code name given to the target firm. The retentions represent earnings that will be reinvested within the H division to help finance its growth. Hill’s…arrow_forward
- Smitty’s Home Repair Company, a regional hardware chain that specializes in do-it-yourself materials and equipment rentals, is cash rich because of several consecutive good years. One of the alternative uses for the excess funds is an acquisition. Linda Wade, Smitty’s treasurer and your boss, has been asked to place a value on a potential target, Hill’s Hardware, a small chain that operates in an adjacent state, and she has enlisted your help. Table below indicates Wade’s estimates of Hill’s earnings potential if it comes under Smitty’s management (in millions of dollars). The interest expense listed here includes the interest (1) on Hill’s existing debt, (2) on new debt that Smitty’s would issue to help finance the acquisition, and (3) on new debt expected to be issued over time to help finance expansion within the new “H division,” the code name given to the target firm. The retentions represent earnings that will be reinvested within the H division to help finance its growth.…arrow_forwardPaul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $610,000 long-term loan from Gulfport State Bank, $155,000 of which will be used to bolster the Cash account and $455,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 114,000 $ 260,000 Marketable securities 0 29,000 Accounts receivable, net 620,000 410,000 Inventory 1,055,000 705,000 Prepaid expenses 30,000 33,000 Total current assets 1,819,000 1,437,000 Plant and equipment, net 1,977,800 1,480,000 Total assets $ 3,796,800 $ 2,917,000 Liabilities and Stockholders' Equity…arrow_forwardPaul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $610,000 long-term loan from Gulfport State Bank, $155,000 of which will be used to bolster the Cash account and $455,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 114,000 $ 260,000 Marketable securities 0 29,000 Accounts receivable, net 620,000 410,000 Inventory 1,055,000 705,000 Prepaid expenses 30,000 33,000 Total current assets 1,819,000 1,437,000 Plant and equipment, net 1,977,800 1,480,000 Total assets $ 3,796,800 $ 2,917,000 Liabilities and Stockholders' Equity…arrow_forward
- In 2002, Mr. Rollerball started Mighty Mouse, Inc., a small, 75-employee firm that produces and sells wireless keyboards and other devices to vendors through its manufacturing plant in Little Rock, Arkansas. In its first 2 years of business, MM saw a substantial growth in sales and at current capacity was unable to keep up with demand. To compete, MM enlarged its manufacturing facilities. The new facility increased to 250 employees. During this period of expansion, MM has paid little attention to internal control procedures.Security Recently, systems problems and hardware failures have caused the operating system to crash. Mr. Rollerball was extremely concerned to discover that confidential company information had been printed out on the printers as a result of these crashes. Also, important digital documents were erased from storage media. Malicious programs such as viruses, worms, and Trojan horses have plagued the company and caused significant data corruption. MM has devoted…arrow_forwardPaul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $610,000 long-term loan from Gulfport State Bank, $155,000 of which will be used to bolster the Cash account and $455,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 114,000 $ 260,000 Marketable securities 0 29,000 Accounts receivable, net 620,000 410,000 Inventory 1,055,000 705,000 Prepaid expenses 30,000 33,000 Total current assets 1,819,000 1,437,000 Plant and equipment, net 1,977,800 1,480,000 Total assets $ 3,796,800 $ 2,917,000 Liabilities and Stockholders' Equity…arrow_forwardHome Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this store, which currently has an abandoned warehouse located on it. Last month, the marketing department spent $10,000 on market research to determine the extent of customer demand for the new store. Now Home Builder Supply must decide whether to build and open the new store. Which of the following should be included as part of the incremental earnings for the proposed new retail store?arrow_forward
- After working for years as a regional manager for a retail organization, Scott Parry opened his own business with Susan Gonzalez, one of his district managers, as his partner. They formed S&S to sell appliances and consumer electronics. Scott and Susan pursued a “clicks and bricks” strategy by renting a building in a busy part of town and adding an electronic storefront. Scott and Susan invested enough money to see them through the first six months. They will hire 15 employees within the next two weeks – three to stock the shelves, four sales representatives, six checkout clerks, and two to develop and maintain the electronic storefront. Scott and Susan will host S&S’s grand opening in five weeks. To meet that deadline, they have to address the following important issues: 16. What business processes are needed, and how should they be carried out? 17. What functionality should be provided on the website?arrow_forwardPaul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $600,000 long-term loan from Gulfport State Bank, $150,000 of which will be used to bolster the Cash account and $450,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 110,000 $ 250,000 Marketable securities 0 28,000 Accounts receivable, net 607,000 400,000 Inventory 1,045,000 695,000 Prepaid expenses 30,000 32,000 Total current assets 1,792,000 1,405,000 Plant and equipment, net 1,946,400 1,470,000 Total assets $ 3,738,400 $ 2,875,000 Liabilities and Stockholders Equity…arrow_forwardPaul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $600,000 long-term loan from Gulfport State Bank, $150,000 of which will be used to bolster the Cash account and $450,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 110,000 $ 250,000 Marketable securities 0 28,000 Accounts receivable, net 607,000 400,000 Inventory 1,045,000 695,000 Prepaid expenses 30,000 32,000 Total current assets 1,792,000 1,405,000 Plant and equipment, net 1,946,400 1,470,000 Total assets $ 3,738,400 $ 2,875,000 Liabilities and Stockholders Equity…arrow_forward
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