a.
Prepare a
a.
Explanation of Solution
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (
The balance sheet of Company FB is prepared as follows:
Company FB | |||
Balance Sheet | |||
For the Year Ended August 1, current year | |||
Assets | Amount ($) | Liabilities & Owners' Equity | Amount ($) |
Cash | 6,940 | Liabilities: | |
11,260 | Notes payable | 74,900 | |
Supplies | 7,000 | Accounts payable | 16,200 |
Equipment & fixtures | 44,500 | Salaries payable | 8,900 |
Building | 84,000 | Total liabilities | 100,000 |
Land | 67,000 | Owners' equity: | |
Capital stock | 80,000 | ||
| 40,700 | ||
Total Assets | 220,700 |
Total Liabilities and Owners' equity | 220,700 |
Table (1)
Working note:
Calculate the amount of retained earnings:
b.
Prepare a balance sheet at August 3, current year and prepare a statement of
b.
Explanation of Solution
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.
Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities. Operating activities include
The balance sheet of Company FB is prepared as follows:
Company FB | |||
Balance Sheet | |||
For the Year Ended August 3, current year | |||
Assets | Amount ($) | Liabilities & Owners' Equity | Amount ($) |
Cash | 14,490 | Liabilities: | |
Accounts receivable | 11,260 | Notes payable | 74,900 |
Supplies (4) | 8,250 | Accounts payable ( refer to note) | 7,200 |
Equipment & fixtures (3) | 51,700 | Salaries payable | 8,900 |
Building | 84,000 | Total liabilities | 91,000 |
Land | 67,000 | Owners' equity: | |
Capital stock (2) | 105,000 | ||
Retained earnings | 40,700 | ||
Total Assets | 236,700 | Total Liabilities and stockholders' equity | 236,700 |
Table (2)
Note: Accounts payable was paid in full on August 2 and the amount for accounts payable was 7,200 since the equipment was purchased on credit on August 3.
Working note:
Calculate the value of capital stock on August 3, current year:
Calculate the value of equipment on August 3, current year:
Calculate the value of supplies on August 3, current year:
The statement of cash flows for Company FB is prepared as follows:
Company FB | ||
Statement of Cash Flows | ||
For the Period August 1-3, current year | ||
Cash flows from operating activities: | Amount ($) | Amount ($) |
Cash payment of accounts payable | (16,200) | |
Cash purchase of supplies | (1,250) | |
Cash used in operating activities: | (17,450) | |
Cash flows from investing activities: | ||
None | ||
Cash flows from financing activities: | ||
Sale of capital stock | 25,000 | |
Increase in cash | 7,550 | |
Cash balance, August 1, current year | 6,940 | |
Cash balance, August 3, current year | 14,490 |
Table (3)
Therefore, the cash flow statement reported net increase in cash of $7,550.
c.
Find out whether Company FB is in a stronger financial position on August 1 or on August 3 and explain briefly.
c.
Explanation of Solution
- On August 1, the liquid assets (cash and accounts receivable) amounted to $18,200 but the debt in the near future (accounts payable and salaries payable) amounted to $25,100.
- On August 3, the liquid assets amounted to $25,750 after additional infusion of cash from the sale of stock and the debts that has to be paid in the near future amounted to $16,100.
- Company FB is in a stronger financial position on August 3 than on August 1 since the liquid assets are greater than the debt that has to be paid in the near future as of August 3 balance sheet.
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