Chapter 2, Problem 7BP

a.

To determine

Prepare a balance sheet at July 1, 2015.

Explanation of Solution

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

The balance sheet of Company CB is prepared as follows:

Company CB
Balance Sheet
For the year ended July 1, 2015
Assets	Amount ($)	Liabilities & Owners' Equity	Amount ($)
Cash	4,100	Liabilities:
Accounts receivable	8,200	Notes payable	40,000
Supplies	7,000	Accounts payable	7,000
Equipment & fixtures	25,000	Salaries payable	3,700
Building	90,000	Total liabilities	50,700
Land	50,000	Owners' equity:
		Capital stock	100,000
		Retained earnings (1)	33,600
Total Assets	184,300	Total Liabilities & Owners' Equity	184,300

Table (1)

Working note:

Calculate the amount of retained earnings:

$\begin{array}{c}\text{Retained}\text{Earnings}\text{=}\text{Total}\text{assets}-\text{Total}\text{liabilities}-\text{Capital}\text{stock}\\ \text{=\$184,300}-\text{\$50,700}-\text{\$100,000}\\ \text{=\$33,600}\end{array}$

(1)

b.

To determine

Prepare a balance sheet at July 5, 2015 and prepare a statement of cash flows for the period July 1-3.

Explanation of Solution

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities. Operating activities include cash inflows and outflows from business operations. Investing activities includes cash inflows and cash outflows from purchase and sale of land or equipment, or investments. Financing activities includes cash inflows and outflows from issuance of common stock and debt, payment of debt and dividends.

The balance sheet of Company CB is prepared as follows:

Company CB
Balance Sheet
For the Year Ended July 5, 2015
Assets	Amount ($)	Liabilities & Owners' Equity	Amount ($)
Cash	26,100	Liabilities:
Accounts receivable	8,200	Notes payable	40,000
Supplies (4)	8,000	Accounts payable	6,000
Equipment & fixtures (3)	31,000	Salaries payable	3,700
Building	90,000	Total liabilities	49,700
Land	50,000	Owners' equity:
		Capital stock  (2)	130,000
		Retained earnings	33,600
Total Assets	213,300	Total Liabilities & Owners Equity	213,300

Table (2)

Working note:

Calculate the value of capital stock on July 5, 2015:

$\begin{array}{c}\text{Capital}\text{stock}\text{=}\text{Value}\text{of}\text{capital}\text{stock}\text{on}\text{July}5\text{+}\text{Additional}\text{capital}\text{stock}\text{sold}\\ \text{=}\text{\$100,000+\$30,000}\\ \text{=\$130,000}\end{array}$

(2)

Calculate the value of equipment on July 5, 2015:

$\begin{array}{c}\text{Equipment}\text{=}\text{Value}\text{of}\text{equipment}\text{on}\text{August}\text{1}\text{+}\text{Purchase}\text{of}\text{equipment}\\ \text{=}\text{\$25,000+\$6,000}\\ \text{=\$31,000}\end{array}$

(3)

Calculate the value of supplies on July 5, 2015:

$\begin{array}{c}\text{Suppplies}\text{=}\text{Value}\text{of}\text{supplies}\text{on}\text{July}\text{1}\text{+}\text{Purchase}\text{of}\text{supplies}\\ \text{=\$7,000+\$1,000}\\ \text{=\$8,000}\end{array}$

(4)

The statement of cash flows for Company CB is prepared as follows:

Company CB
Statement of Cash Flows
For the Period July 1-5, 2015
Cash flows from operating activities:
Cash payment of accounts payable	(7,000)
Cash purchase of supplies	(1,000)
Cash used in operating activities		(8,000)
Cash flows from investing activities:
None
Cash flows from financing activities:
Sale of capital stock		30,000
Increase in cash		22,000
Cash balance, July 1, 2015		4,100
Cash balance, July 5, 2015		26,100

Table (3)

Therefore, the cash flow statement reported net increase in cash of $22,000.

c.

To determine

Find out whether Company CB is in a stronger financial position on July 1 or on July 5 and explain briefly.

Explanation of Solution

• On July 1, the liquid assets (cash and accounts receivable) amounted to $12,300 but the debt in the near future (accounts payable and salaries payable) amounted to $10,700.
• On July 5, the liquid assets amounted to $34,300 after additional infusion of cash from the sale of stock and the debts that has to be paid in the near future amounted to $9,700.
• Company CB is in a stronger financial position on July 5 than on July 1 since the liquid assets are greater than the debt that has to be paid in the near future as of July 5 balance sheet.