Problems: Set A
Presented below are five independent situations.
(a) Three physics professors at MIT have formed a business to improve the speed of information transfer over the Internet for stock exchange transactions. Each has contributed an equal amount of cash and knowledge to the venture. Although their approach looks promising, they are concerned about the legal liabilities that their business might confront.
(b) Ed Toth, a college student looking for summer employment, opened a bait shop in a small shed at a local marina.
(c) Joan Stuebben and Ron Klinke each owned separate shoe manufacturing businesses. They have decided to combine their businesses. They expect that within the coming year they will need significant funds to expand their operations.
(d) Crystal, Allie, and Harry recently graduated with marketing degrees. They have been friends since childhood. They have decided to start a consulting business focused on marketing sporting goods over the Internet.
(e) Mark Willis wants to rent CD players and CDs in airports across the country. His idea is that customers will be able to rent equipment and CDs at one airport, listen to the CDs on their flights, and return the equipment and CDs at their destination airport. Of course, this will require a substantial investment in equipment and CDs, as well as employees and locations in each airport. Mark has no savings or personal assets. He wants to maintain control over the business.
In each case, explain what form of organization the business is likely to take—sole proprietorship, partnership, or corporation. Give reasons for your choice.
Financial decisions often place heavier emphasis on one type of financial statement over the others. Consider each of the following hypothetical situations independently.
(a) The North Face, Inc. is considering extending credit to a new customer. The terms of the credit would require the customer to pay within 30 days of receipt of goods.
(b) An investor is considering purchasing common stock of Amazon.com. The investor plans to hold the investment for at least 5 years.
(c) Chase Manhattan is considering extending a loan to a small company. The company would be required to make interest payments at the end of each year for 5 years, and to repay the loan at the end of the fifth year.
(d) The president of Campbell Soup is trying to determine whether the company is generating enough cash to increase the amount of dividends paid to investors in this and future years, and still have enough cash to buy equipment as it is needed.
In each situation, state whether the decision maker would be most likely to place primary emphasis on information provided by the income statement, balance sheet, or statement of cash flows. In each case provide a brief justification for your choice. Choose only one financial statement in each case.
Determine forms of business organization.
(SO 1) C
Identify users and uses of financial statements.
(SO 2, 4, 5) K
Problems: Set A
On June 1, Beardsley Service Co. was started with an initial investment in the company of $22,100 cash. Here are the assets and liabilities of the company at June 30, and the revenues and expenses for the month of June, its first month of operations:
Cash $ 4,600
Notes payable $12,000
Accounts receivable 4,000
Accounts payable 500
Service revenue 7,500
Supplies expense 1,000
Maintenance and repairs expense 600
Advertising expense 400
Utilities expense 300
Salaries and wages expense 1,400
In June, the company issued no additional stock, but paid dividends of $1,400.
(a) Prepare an income statement and a retained earnings statement for the month of June and a balance sheet at June 30, 2012.
(b) Briefly discuss whether the company’s first month of operations was a success.
(c) Discuss the company’s decision to distribute a dividend.
Presented below is selected financial information for Yvonne Corporation for December 31, 2012.
Inventory $ 25,000
Cash paid to purchase equipment $ 12,000
Cash paid to suppliers 104,000
Common stock 50,000
Cash received from customers 132,000
Cash dividends paid 7,000
Cash received from issuing common stock 22,000
(a) Determine which items should be included in a statement of cash flows and then prepare the statement for Yvonne Corporation.
(b) Comment on the adequacy of net cash provided by operating activities to fund the company’s investing activities and dividend payments.
Gabelli Corporation was formed on January 1, 2012. At December 31, 2012, John Paulus, the president and sole stockholder, decided to prepare a balance sheet, which appeared as follows.
December 31, 2012
Assets Liabilities and Stockholders’ Equity Cash $20,000
Accounts payable $30,000
Accounts receivable 50,000
Notes payable 15,000
Boat loan 22,000
Stockholders’ equity 64,000
John willingly admits that he is not an accountant by training. He is concerned that his balance sheet might not be correct. He has provided you with the following additional information.
1. The boat actually belongs to Paulus, not to Gabelli Corporation. However, because he thinks he might take customers out on the boat occasionally, he decided to list it as an asset of the company. To be consistent, he also listed as a liability of the corporation his personal loan that he took out at the bank to buy the boat.
2. The inventory was originally purchased for $25,000, but due to a surge in demand John now thinks he could sell it for $36,000. He thought it would be best to record it at $36,000.
3. Included in the accounts receivable balance is $10,000 that John loaned to his brother 5 years ago. John included this in the receivables of Gabelli Corporation so he wouldn’t forget that his brother owes him money.
(a) Comment on the proper accounting treatment of the three items above.
(b) Provide a corrected balance sheet for Gabelli Corporation.
(Hint: To get the balance sheet to balance, adjust stockholders’ equity.)
(a) Net increase $31,000
Prepare an income statement, retained earnings statement, and balance sheet; discuss results.
(SO 4, 5)
Determine items included in a statement of cash flows, prepare the statement, and comment.
(SO 4, 5)
Comment on proper accounting treatment and prepare a corrected balance sheet.
(SO 4, 5)
Marginal check figures (in blue) provide a key number to let you know you are on the right track.
(a) Net income $3,800
Ret. earnings $2,400
Tot. assets $37,000
Tot. assets $85,000