Use T-accounts to record the 4 months’ of transactions noted below for this new start-up company. Record all entries affecting the income statement into “Equity” since there are no separate T-accounts set up for the individual income statement accounts. Once all transactions have been posted, populate the net ending balance for each account for the accounts listed below. A T-account worksheet is provided in Blackboard to assist you as you answer this question. Month 1: $2,000,000 sale of stock occurs with all cash received by the company. $3,000,000 bank loan received from the company’s bank at the end of the month – interest will start accruing next month (interest rate is 1% per month). Principal and interest cash payments will be made in a lump-sum payment at the end of the loan period. Factory is leased at the beginning of the month and prepaid for the entire year up-front at a cost of $720,000. The first month of lease expense is expensed to the income statement now. $2,400,000 investment in factory equipment is made. Total purchase price is payable in 30 days. Equipment will be depreciated on a straight line basis over 10 years. First month of depreciation expense is recorded now. Business insurance with coverage for the entire upcoming year is purchased at the beginning of the month at a cost of $360,000. The policy is fully prepaid for at the time of purchase. The first month of insurance expense is charged to the income statement now. $800,000 of inventory is purchased and received and will be paid to the suppliers in 30 days. Month 2: $550,000 in sales are recorded on 30-day credit terms. The cost of the inventoried product sold is $500,000. Payment for factory equipment purchased in month 1 is made. Payment for inventory purchased in month 1 is made. Additional inventory valued at $500,000 is purchased and received. The supplier requires a 50% down payment at the time of inventory receipt (in other words now) with the remaining 50% due within 30 days. A bad debt reserve of $20,000 is created/recorded since some of the amounts in accounts receivable no longer appear to be collectible. 2nd month of depreciation expense is recorded. 2nd month of prepaid insurance expense is recorded. 2nd month of prepaid lease expense is recorded. The first month of interest expense related to the bank loan received during month 1 is accrued. Month 3: $800,000 is sold to customers on 30-day credit terms. The cost of the inventoried product sold is $800,000. 3rd month of depreciation expense is recorded. 3rd month of prepaid insurance expense is recorded. 3rd month of prepaid lease expense is recorded. Payment for inventory purchased in month 2 is made. An additional $300,000 of inventory is purchased from the same supplier with the supplier requiring a 50% down payment at the time of inventory receipt (in other words now) and the remaining 50% will be due within 30 days. An additional bad debt reserve of $25,000 is created/recorded since additional outstanding accounts receivables have been determined to no longer be collectible. Payment for 90% of the receivables generated during month 2 is received. The second month of interest expense related to the bank loan received during month 1 is accrued. Month 4: 4th month of depreciation expense is recorded. 4th month of prepaid insurance expense is recorded. 4th month of prepaid lease expense is recorded. $600,000 is sold to customers. The cost of the inventoried product sold is $400,000. 50% of the sales are paid for at time of delivery to customer during this month with the remainder due within 30 days. Payment for inventory purchased on terms in month 3 is made. An additional $200,000 of inventory is purchased from the same supplier with payment due within 30 days. $25,000 of inventory has been discovered to be obsolete with no market value whatsoever. The entire amount is scrapped and written off during this month. Payment for 5% of the receivables generated during month 2 and 90% of the receivables generated during month 3 is received. The third month of interest expense related to the bank loan received during month 1 is accrued. A $20,000 dividend is paid during month 4 to shareholders. Cash Net Receivables Inventory Prepaid Expenses Property, Plant, & Equipment Total Assets Accounts Payable Debt & Interest Payable Stockholders' Equity Total Liabilities & Stockholders' Equity
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Use T-accounts to record the 4 months’ of transactions noted below for this new start-up company. Record all entries affecting the income statement into “Equity” since there are no separate T-accounts set up for the individual income statement accounts. Once all transactions have been posted, populate the net ending balance for each account for the accounts listed below.
A T-account worksheet is provided in Blackboard to assist you as you answer this question.
Month 1:
- $2,000,000 sale of stock occurs with all cash received by the company.
- $3,000,000 bank loan received from the company’s bank at the end of the month – interest will start accruing next month (interest rate is 1% per month). Principal and interest cash payments will be made in a lump-sum payment at the end of the loan period.
- Factory is leased at the beginning of the month and prepaid for the entire year up-front at a cost of $720,000. The first month of lease expense is expensed to the income statement now.
- $2,400,000 investment in factory equipment is made. Total purchase price is payable in 30 days. Equipment will be depreciated on a straight line basis over 10 years. First month of
depreciation expense is recorded now. - Business insurance with coverage for the entire upcoming year is purchased at the beginning of the month at a cost of $360,000. The policy is fully prepaid for at the time of purchase. The first month of insurance expense is charged to the income statement now.
- $800,000 of inventory is purchased and received and will be paid to the suppliers in 30 days.
Month 2:
- $550,000 in sales are recorded on 30-day credit terms. The cost of the inventoried product sold is $500,000.
- Payment for factory equipment purchased in month 1 is made.
- Payment for inventory purchased in month 1 is made.
- Additional inventory valued at $500,000 is purchased and received. The supplier requires a 50% down payment at the time of inventory receipt (in other words now) with the remaining 50% due within 30 days.
- A
bad debt reserve of $20,000 is created/recorded since some of the amounts inaccounts receivable no longer appear to be collectible. - 2nd month of depreciation expense is recorded.
- 2nd month of prepaid insurance expense is recorded.
- 2nd month of prepaid lease expense is recorded.
- The first month of interest expense related to the bank loan received during month 1 is accrued.
Month 3:
- $800,000 is sold to customers on 30-day credit terms. The cost of the inventoried product sold is $800,000.
- 3rd month of depreciation expense is recorded.
- 3rd month of prepaid insurance expense is recorded.
- 3rd month of prepaid lease expense is recorded.
- Payment for inventory purchased in month 2 is made. An additional $300,000 of inventory is purchased from the same supplier with the supplier requiring a 50% down payment at the time of inventory receipt (in other words now) and the remaining 50% will be due within 30 days.
- An additional bad debt reserve of $25,000 is created/recorded since additional outstanding accounts receivables have been determined to no longer be collectible.
- Payment for 90% of the receivables generated during month 2 is received.
- The second month of interest expense related to the bank loan received during month 1 is accrued.
Month 4:
- 4th month of depreciation expense is recorded.
- 4th month of prepaid insurance expense is recorded.
- 4th month of prepaid lease expense is recorded.
- $600,000 is sold to customers. The cost of the inventoried product sold is $400,000. 50% of the sales are paid for at time of delivery to customer during this month with the remainder due within 30 days.
- Payment for inventory purchased on terms in month 3 is made. An additional $200,000 of inventory is purchased from the same supplier with payment due within 30 days.
- $25,000 of inventory has been discovered to be obsolete with no market value whatsoever. The entire amount is scrapped and written off during this month.
- Payment for 5% of the receivables generated during month 2 and 90% of the receivables generated during month 3 is received.
- The third month of interest expense related to the bank loan received during month 1 is accrued.
- A $20,000 dividend is paid during month 4 to shareholders.
Cash
Net Receivables
Inventory
Prepaid Expenses
Property, Plant, & Equipment
Total Assets
Accounts Payable
Debt & Interest Payable
Total Liabilities & Stockholders' Equity
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