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

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Prepare the T-accounts:

Cash account:

Cash account
Beginning balance	$0	(b)	$5,250
(a)	$30,200	(d)	$1,560
(e)	$11,000	(f)	$11,000
(h)	$2,675	(g)	$400
(k)	$600	(i)	$550
(m)	$1,200	(j)	$1,300
		(l)	$400
Ending balance	$25,215

Accounts receivable account:

Accounts receivable account
Beginning balance	$0	(k)	$600
(h)	$825
Ending balance	$225

Supplies account:

Supplies account
Beginning balance	$0
(d)	$1,560
Ending balance	$1,560

Inventory account:

Inventory account
Beginning balance	0	(h)	$1,600
(c)	$6,000	(m)	$600
Ending balance	$3,800

Prepaid expenses account:

Prepaid expenses account
Beginning balance	$0
(b)	$5,250
Ending balance	$5,250

Equipment account:

Equipment account
Beginning balance	$0
(h)	$2,750
Ending balance	$2,750

Furniture and fixtures account:

Furniture and fixtures account
Beginning balance	$0
(e)	$8,250
Ending balance	$8,250

Accounts payable account:

Accounts payable account
		Beginning balance	0
(i)	$550	(c)	$6,000
		Ending balance	$5,450

Notes payable account:

Notes payable account
		Beginning balance	$0
		(e)	$11,000
		Ending balance	$11,000

Common stock account:

Common stock account
		Beginning balance	$0
		(a)	$40
		Ending balance	$40

Additional paid-in capital account:

Additional paid-in capital account
		Beginning balance	$0
		(a)	30,160
		Ending balance	$30,160

Cost of goods sold account:

Cost of goods sold account
Beginning balance	$0
(h)	$1,600
(m)	$600
Ending balance	$2,200

Repair expense account:

Repair expense account
Beginning balance	$0
(l)	$400
Ending balance	$400

Sales revenue account:

Sales revenue account
		Beginning balance	0
		(h)	$3,500
		(m)	$1,200
		Ending balance	$4,700

Advertising expense account:

Advertising expense account
Beginning balance	0
(g)	$400
Ending balance	$400

Wages expense account:

Wages expense account
Beginning balance	0
(j)	$1,300
Ending balance	$1,300

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

3.

To determine

Prepare an income statement for the month February.

Explanation of Solution

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare an income statement:

Company KS
Income statement
For the month ended 28th February 2014
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:

Calculate the total sales revenue:

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

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 2014,

Sub: 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

Net profit margin ratio:

Net profit is the financial ratio that shows the relationship between the net profit and net sales (Operating revenue). Net profit is the difference between total operating revenue and total operating expenses. It can be calculated by dividing net profit and net sales revenue.

Compute the net profit margin ratio:

Net profit margin ratio for 2016:

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

Hence, the net profit margin ratio for the year 2016 is 0.235.

Net profit margin ratio for 2015:

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

Hence, the net profit margin ratio for the year 2015 is 0.133.

Net profit margin ratio for 2014:

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

Hence, the net profit margin ratio for the year 2014 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.