Chapter 3, Problem 4P

1 and 2

To determine

Prepare the T- account and enter the transaction into their respective accounts for calculating the ending balance.

Explanation of Solution

Prepare the T-accounts:

Cash account:

Accounts receivable account:

Supplies account:

Inventory account:

Prepaid expenses account:

Equipment account:

Furniture and fixtures account:

Accounts payable account:

Notes payable account:

Common stock account:

Additional paid-in capital account:

Cost of goods sold account:

Repair expense account:

Sales revenue account:

Advertising expense account:

Wages expense account:

Thus, the t-accounts are prepared and the ending balances are calculated.

3.

To determine

Prepare an unadjusted income statement for the month February.

Explanation of Solution

Prepare an unadjusted income statement:

Company KS
Income statement (unadjusted)
For the month ended 28th February
Particulars	Amount ($)	Amount ($)
Revenues:
Sales revenue (1)	4,700
Total revenues (A)		4,700
Expenses:
Cost of goods sold (2)	2,200
Advertising expense	400
Wage expense	1,300
Repair expense	400
Total expenses (B)		4,300
Net Income $\left(\text{A}-\text{B}\right)$		$400

Table (1)

Working note (1):

Calculate the total sales revenue:

$\begin{array}{c}\text{Total sales revenue}=\text{Sales in transaction (h)}+\text{Sales in transaction (m)}\\ =\$3,500+\$1,200\\ =\$4,700\end{array}$

Working note (2):

Calculate the total cost of goods sold:

$\begin{array}{c}\text{Total cost of goods sold}=\left[\text{Cost of goods sold in transaction (h)}\right]\\ +\left[\text{Cost of goods sold in transaction (m)}\right]\\ =\$1,600+\$600\\ =\$2,200\end{array}$

Hence, the net income of Company KS is $400.

4.

To determine

Write a memo to Person K regarding the results of operations during the first month of the business.

Explanation of Solution

MEMO

From

XYZ

To

Person K

Company KS

28^th February,

Subject: Results of operations during the first month of the business.

After the evaluation of effects of the transactions of Company KS, one can conclude that the company has earned a profit of $400. But these are based upon unadjusted amounts. There are several expenses such as rent, supplies, depreciation, furniture and fixtures, interest on the borrowing and wages. The company does not seem to be profitable, as this situation is very common in small businesses during the inception of the operations. The company must focus on increasing revenues and while maintaining the expenses that should result in the upcoming years. The company should prepare budgeted cash flows for each month in the upcoming years that would help the management to handle the probable cash shortages.

Regards,

XYZ

5.

To determine

Compute the net profit margin ratio for each year and explain the reason for promoting the manager.

Explanation of Solution

Compute the net profit margin ratio:

Net profit margin ratio for 2021:

$\begin{array}{c}\text{Net profit margin ratio}=\frac{\text{Net income}}{\text{Net sales revenue}}\\ =\frac{\$22,000}{\$93,500}\\ =0.235\end{array}$

Hence, the net profit margin ratio for the year 2021 is 0.235.

Net profit margin ratio for 2020:

$\begin{array}{c}\text{Net profit margin ratio}=\frac{\text{Net income}}{\text{Net sales revenue}}\\ =\frac{\$11,000}{\$82,500}\\ =0.133\end{array}$

Hence, the net profit margin ratio for the year 2020 is 0.133.

Net profit margin ratio for 2019:

$\begin{array}{c}\text{Net profit margin ratio}=\frac{\text{Net income}}{\text{Net sales revenue}}\\ =\frac{\$4,400}{\$55,000}\\ =0.080\end{array}$

Hence, the net profit margin ratio for the year 2019 is 0.080.

• By evaluating the net profit margin ratio, it is clear that the profit level of the Company has increased.
• This states that the company is very efficient in generating the revenue from the sales and controlling the expenses.
• Based on this the reasons, the company should promote its manager to the next level.