Question: Lila Corentine is an aspiring entrepreneur and your friend. She is having difficulty understanding the purposes of financial statements and how they fit together across time.
Write a one-page memorandum to Corentine explaining the purposes of the four financial statements and how they are linked across time.
Financial statements are the final books of accounts that represent the financial position at a particular point in time. Financial statements include – profit and loss account, retained earnings statement, balance sheet, and cash flow statement.
The objective of these four statements is to provide the right information for making different decisions for different types of users. The financial information is divided into our groups pertaining to the operating performance, income distribution, ownership status, and direction and degree of cash low.
Each financial statement is linked together. The profit and loss account evaluates the profit earned by the business by listing all incomes and gains on one side and all expenses on the other side.
From the profit or loss calculated in P&L account, the retained earnings statement is prepared that shows the amount of income distributed and retained by the business.
After retained earnings statement Balance sheet is prepared. In the balance sheet, the ‘Retained earnings’ balance works as a balancing figure to match the liabilities with all assets.
Cash flow statement is primarily dependent on the balance sheet and profit and loss account and takes all the figures from these two statements to get the flow of cash during a period.
Question: Assume that Catherine Mahugu of Soko plans on expanding her business to accommodate more product lines. She is considering financing her expansion in one of two ways: (1) contributing more of her own funds to the business or (2) borrowing the funds from a bank.
Identify at least two issues that Catherine should consider when trying to decide on the method for financing her expansion.
Question: Assume that you are a cashier and your manager requires that you immediately enter each sale when it occurs. Recently, lunch hour traffic has increased and the assistant manager asks you to avoid delays by taking customers’ cash and making change without entering sales. The assistant manager says she will add up cash and enter sales after lunch. She says that, in this way, customers will be happy and the register record will always match the cash amount when the manager arrives at three o’clock. The advantage to the process proposed by the assistant manager includes improved customer service, fewer delays, and less work for you. The disadvantage is that the assistant manager could steal cash by simply recording less sales than the cash received and then pocketing the excess cash. You decide to reject her suggestion without the manager’s approval and to confront her on the ethics of her suggestion.
Propose and evaluate two other courses of action you might consider, and explain why.
Business transactions completed by Hannah Venedict during the month of September are as follows.
a. Venedict invested $60,000 cash along with office equipment valued at $25,000 in exchange for common stock of a new company named HV Consulting.
b. The company purchased land valued at $40,000 and a building valued at $160,000. The purchase is paid with $30,000 cash and a long-term note payable for $170,000.
c. The company purchased $2,000 of office supplies on credit.
d. Venedict invested her personal automobile in the company in exchange for more common stock. The automobile has a value of $16,500 and is to be used exclusively in the business.
e. The company purchased $5,600 of additional office equipment on credit.
f. The company paid $1,800 cash salary to an assistant.
g. The company provided services to a client and collected $8,000 cash.
h. The company paid $635 cash for this month’s utilities.
i. The company paid $2,000 cash to settle the account payable created in transaction c.
j. The company purchased $20,300 of new office equipment by paying $20,300 cash.
k. The company completed $6,250 of services for a client, who must pay within 30 days.
l. The company paid $1,800 cash salary to an assistant.
m. The company received $4,000 cash in partial payment on the receivable created in transaction k.
n. The company paid $2,800 cash in dividends.
2. Open the following ledger accounts—their account numbers are in parentheses (use the balance column format): Cash (101); Accounts Receivable (106); Office Supplies (108); Office Equipment (163); Automobiles (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250); Common Stock (307); Dividends (319); Fees Earned (402); Salaries Expense (601); and Utilities Expense (602). Post the journal entries from part 1 to the ledger accounts and enter the balance after each posting.
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