Financial Accounting
Financial Accounting
17th Edition
ISBN: 9781259692390
Author: Jan Williams, Susan Haka, Mark S Bettner, Joseph V Carcello
Publisher: McGraw-Hill Education
Question
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Chapter 2, Problem 7PB

a.

To determine

Prepare a balance sheet at July 1, current year.

a.

Expert Solution
Check Mark

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.

The balance sheet of Company CB is prepared as follows:

Company CB
Balance Sheet
For the year ended July 1, current year
AssetsAmount ($)Liabilities & Owners' EquityAmount ($)
Cash4,920Liabilities: 
Accounts receivable9,840    Notes payable48,000
Supplies8,400    Accounts payable8,400
Equipment & fixtures30,000    Salaries payable4,440
Building108,000          Total liabilities60,840
Land60,000 Owners' equity: 
       Capital stock 120,000
       Retained earnings (1)40,320
Total Assets221,160 Total Liabilities & Owners' Equity221,160

Table (1)

Working note:

Calculate the amount of retained earnings:

RetainedEarnings=TotalassetsTotalliabilitiesCapitalstock=$221,160$60,840$120,000=$40,320 (1)

b.

To determine

Prepare a balance sheet at July 5, current year and prepare a statement of cash flows for the period July 1-3.

b.

Expert Solution
Check Mark

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 cash inflows and outflows from business operations. Investing activities includes cash inflows and cash outflows from purchase and sale of land or equipment, or investments. Financing activities includes cash inflows and outflows from issuance of common stock and debt, payment of debt and dividends.

The balance sheet of Company CB is prepared as follows:

Company CB
Balance Sheet
For the Year Ended July 5, current year
AssetsAmount ($)Liabilities & Owners' EquityAmount ($)
Cash31,320Liabilities: 
Accounts receivable9,840    Notes payable48,000
Supplies (4)9,600    Accounts payable7,200
Equipment & fixtures (3)37,200    Salaries payable4,440
Building108,000          Total liabilities59,640
Land60,000 Owners' equity: 
       Capital stock  (2)156,000
       Retained earnings40,320
Total Assets255,960 Total Liabilities & Owners Equity255,960

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 July 5.

Working note:

Calculate the value of capital stock on July 5, current year:

Capitalstock=ValueofcapitalstockonAugust1+Additionalcapitalstocksold=$120,000+$36,000=$156,000 (2)

Calculate the value of equipment on July 5, current year:

Equipment=ValueofequipmentonAugust1+Purchaseofequipment=$30,000+$7,200=$37,200 (3)

Calculate the value of supplies on July 5, current year:

Suppplies=ValueofsuppliesonAugust1+Purchaseofsupplies=$8,400+$1,200=$9,600 (4)

The statement of cash flows for Company CB is prepared as follows:

Company CB
Statement of Cash Flows
For the Period July 1-5, current year
Cash flows from operating activities:  
Cash payment of accounts payable(8,400) 
Cash purchase of supplies(1,200)  
   Cash used in operating activities  (9,600)
Cash flows from investing activities:  
None  
Cash flows from financing activities:  
Sale of capital stock 36,000
Increase in cash 26,400
Cash balance, July 1, current year 4,920
Cash balance, July 5, current year 31,320

Table (3)

Therefore, the cash flow statement reported net increase in cash of $26,400.

c.

To determine

Find out whether Company CB is in a stronger financial position on July 1 or on July 5 and explain briefly.

c.

Expert Solution
Check Mark

Explanation of Solution

  • On July 1, the liquid assets (cash and accounts receivable) amounted to $14,760 but the debt in the near future (accounts payable and salaries payable) amounted to $12,840.
  • On July 5, the liquid assets amounted to $41,160 after additional infusion of cash from the sale of stock and the debts that has to be paid in the near future amounted to $11,640.
  • Company CB is in a stronger financial position on July 5 than on July 1 since the liquid assets are greater than the debt that has to be paid in the near future as of July 5 balance sheet.

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