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AC1220 ACCOUNTING I Project Part 2 | Complete Solution
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Project Part 2: Using Accounting Information for Decision Making

 

City Rides, a proprietorship engaged in the sale of mopeds to the public, completes its second year of operations on December 31, 20x3. 

 

Task 1:

 

a.    Adjusted trial balance amounts from the books of City Rides are listed below, for the two years ended December 31, 20x3:

 

Account

At Dec. 20x3

At Dec 20x2

 

DEBIT

CREDIT

DEBIT

CREDIT

Cash

$21,030

 

$19,020

 

Accounts Receivable

18,500

 

12,000

 

Prepaid Rent

1,800

 

1,600

 

Allowance for Uncollectible Accounts

 

$100

 

-

Supplies

500

 

120

 

Inventory

21,250

 

15,720

 

Office Equipment

2,700

 

1,800

 

Truck

15,000

 

-

 

Accumulated Depreciation—Office Equipment

 

900

 

360

Accumulated Depreciation—Truck

 

1,500

 

-

Accounts Payable

 

4,150

 

5,850

Current portion of Long-Term Note Payable

 

5,000

 

-

Long-Term Note Payable

 

20,000

 

-

Capital—Harris

 

45,000

 

45,000

Withdraws—Harris

2,500

 

2,500

 

Sales Revenue

 

25,800

 

16,500

Sales Return and Allowances

800

 

 

 

Cost of Goods Sold

15,450

 

11,040

 

Wages Expense

3,600

 

1,800

 

Rent Expense

800

 

800

 

Depreciation Expense—Office Equipment

540

 

360

 

Depreciation Expense—Truck

1,500

 

-

 

Utilities Expense

550

 

650

 

Supplies Expense

250

 

300

 

Uncollectible Accounts Expense

80

 

-

 

 

$106,850

$106,850

$67,710

$67,710

 

 

Use the above adjusted trial balance amounts to complete the financial statements below by filling in the shaded cells:

 

City Rides

Income Statement

For the Two Years Ended December, 20x3

 

20x3

20x2

Sales Revenue

25,800

16,500

 

 

 

Net Sales Revenue

 

 

 

 

 

Gross profit

 

 

Less: operating expenses:          

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

City Rides

Statement of Owner’s Equity

For the Year Ended December, 20x3

 

20x3

20x2

Beginning Capital

 

 

 

 

 

 

 

 

 

 

 

Ending Capital, Harris

 

 

 

 

 

City Rides

Balance Sheet

At December 31, 20x3, 20x2

Assets

Liabilities

 

20x3

20x2

 

20x3

20x2

Current Assets

Current Liabilities

 

 

 

 

$19,020

 

 

$5,850

 

 

12,000

 

 

-

 

 

-

Total Current Liabilities

$9,150

$5,850

 

 

 

 

 

12,000

 

 

 

 

 

1,600

Long-Term Liabilities

 

 

120

 

 

-

 

 

15,720

Total Liabilities

$29,150

$5,850

Total Current Assets

$59,580

$48,460

 

 

 

 

 

 

 

 

 

 Plant Assets

Owner’s Equity

 

 

1,800

 

 

$45,000

 

 

(360)

Total Owner’s Equity

$45,730

$45,000

 

 

 

 

 

 

 

 

 

 

 

 

Total Plant Assets

 

 

 

 

 

Total Assets

 

$49,900

Total Liabilities and Equity

 

$50,850

 

 

 

 

 

 

 

 

 

b.    The Financial Statements of Extreme Scooter, a direct competitor of City Rides, are presented below. The two businesses have similar operations.  Compare the financial statements of City Rides and Extreme Scooter and refer to these statements as you complete the tasks that follow

Extreme Scooter

Income Statement

For the Two Years Ended December, 20x3

 

20x3

20x2

Net Sales Revenue

30,400

22,500

Less:  Cost of Goods Sold

(19,500)

(14,400)

Gross profit

10,900

8,100

Less: operating expenses:

(7,700)

(5,700)

Net Income

$3,200

$2,400

 

 

 

 

 

Extreme Scooter

Statement of Owner’s Equity

For the Year Ended December, 20x3

 

20x3

20x2

Beginning Capital

$55,000

$ -

Add: additional capital

-

57,600

Net Income (Loss)

3,200

2,400

Less: Drawing, Harris

(20,200)

(5,000)

Ending Capital, Harris

$38,000

$55,000

 

 

 

 

 

Extreme Scooter

Balance Sheet

At December 31, 20x3, 20x2

Assets

Liabilities

 

20x3

20x2

 

20x3

20x2

Current Assets

Current Liabilities

Cash

$4,550

$14,600

Accounts Payable

$22,800

$500

Accounts Receivable, Net

44,500

40,000

Wages Payable

1,200

2,500

Prepaid Expenses

 

2,200

3,500

Total Current Liabilities

$24,000

$3,000

Supplies

450

400

 

 

 

Inventory

24,000

5,500

 

 

 

Total Current Assets

$75,700

$64,000

Long-Term Liabilities

 

 

 

Long-Term Note Payable

20,000

12,000

 

 

 

Total Liabilities

$44,000

$15,000

 

 

 Plant Assets

Owner’s Equity

Office Equipment

7,400

6,500

Capital, Drew

$38,000

$55,000

Less: Accumulated Depreciation-Office Equipment

(1,100)

(500)

Total Owner’s Equity

$38,000

$55,000

Total Plant Assets

$6,300

$6,000

 

 

 

Total Assets

$82,000

$70,000

Total Liabilities and Equity

$82,000

$70,000

 

 

Task 2

 

a.    Compare the trend in net sales for City Rides and Extreme Scooter.  Which business has the larger net sales in dollar terms?

b.    Compare the ending capital account balances of City Rides and Extreme Scooter. Compute the dollar increase or decrease in ending capital balance for each business. Suggest a reason for the large change in ending capital of Extreme Scooter.

 

c.     Compare inventory balances of City Rides and Extreme Scooter. Which business tends to have more inventories on hand at the end of any given year? Mention one advantage and one disadvantage of keeping large amounts of inventory on hand.

 

d.    Compare the accounts receivable balances of City Rides and Extreme Scooter. Which business tends to sell more on account?  Mention one disadvantage associated with sales on account.

 

 

 

 

 

 

 

Task 2

Compute the following accounting ratios for the year ended December 31, 20x3, for City Rides and for Extreme Scooters (a business that is comparable to City Rides).  Refer to the appendix below for the necessary formulae and page references.

Accounting Ratio

City Rides

Extreme Scooter

20x3

20x2

20x3

20x2

Current Ratio

 

 

 

 

Debt Ratio

 

 

 

 

Gross Profit Percentage

 

 

 

 

Day’s Sales in Receivables

 

 

 

 

 

Task 3

 

Imagine that you are an accountant who reports to the senior commercial loan officer of a regional bank, Ms. Heather Coldwell.  Coldwell is deciding which of two loan applications to approve and is having trouble doing so because the two applicants have very similar business operations and both meet the bank’s minimum lending standards.  The first is an application for a $25,000 bank loan to City Rides, and the second is an application for a $25,000 bank loan to Extreme Scooters. Your job is to compare and analyze the financial health of City Rides and Extreme Scooter based on their financial statements. You will summarize your findings and final recommendation in a memorandum (“memo”) addressed to Ms. Coldwell.  Based on your memorandum, Ms. Caldwell will approve one loan and deny the other.

 

Complete the memo on the following pages.  Divide your memo into the following sections:

 

Introduction

 

Briefly outline the purpose of the memo, mentioning the names of the businesses analyzed.

 

Accounting Ratios

 

Explain each of the ratios computed in Task 2 above, and indicate whether the ratio is:

 

  • Favorable or unfavorable for each business
  • Showing an  improving or deteriorating trend over time

 

Financial Statements

 

Summarize the answers you provided to the questions in Task 1 here.

 

Recommendation

 

Recommend which business you believe should receive the bank loan.  Justify your recommendation by referring back to at least one key issue raised in the body of the memo.

 

The memo should not exceed 2 pages.  Use 11 point Arial font, double-spaced.  Spelling and grammar counts!

 

TO:                 Ms. H. Caldwell, Senior Loan Officer

FROM:                        _____________________, Staff Accountant

DATE:            January 5, 20x4

SUBJECT:     Financial Statement Analysis and Loan Recommendation

Appendix:  Accounting Ratios

Current Ratio (pp.214)

Debt Ratio (pp.214)

Gross Profit Percentage (pp.274)

 

Day’s Sales in Receivables (pp. 424)

 

 

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AC1220 ACCOUNTING I Project Part 2 | Complete Solution
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