Problem 1:

Based on the facts provided in problem and on your labeling of the accounts as assets, liabilities, permanent equity, or temporary equity, prepare the following financial statements for The Clothing Outlet, Inc.:

a) A multiple-step Income Statement for the year-ended December 31, 20X9, as shown in Exhibit 2.2. Calculate earnings per share for use in this financial statement based on the assumption that there were 500,000 shares of common stock outstanding all year.

b) A Statement of Retained Earnings for the year-ended December 31, 20X9, as shown in Exhibit 2.4.

c) A Statement of Financial Position as of December 31, 20X9, as shown in Exhibit 2.1.

Note: Recall that it is important to prepare the financial statements in this order so that net income is determined first for use in the statement of retained earnings, and then the year end (December 31, 20X9) retained earnings balance is determined for use in the statement of financial position.

Problem 2:

a) Based on your answers to problem 2, calculate working capital, the current ratio, and the quick (acid test) ratio of The Clothing Outlet, Inc. as of December 31, 20X9.

b) Based on your answers to problem 2, calculate the gross profit ratio of The Clothing Outlet, Inc. for the year ended December 31, 20X9.

c) Suppose the industry's gross profit ratio is currently, and had been in past years, approximately 45% and that The Clothing Outlet Inc.'s gross profit ratio had been at approximately industry average in past years. Based on your calculation of the Clothing Outlet Inc.'s gross profit ratio in part (b) for 20X9, what may be occurring?