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:
1. Favorable or unfavorable for each business
2. Showing an improving or deteriorating trend over time