The Submission Is To Beone Excel Fileincluding Text Submission On Curr
The Submission Is To Beone Excel Fileincluding Text Submission On Curr
The submission is to be one Excel file including a text submission on current ratio and a memo. You can type your text submission in Word and copy it into your Excel spreadsheet or type the text submission directly into a text box in Excel. All parts should be included on one sheet. If any calculations are required, they must be shown. I will be able to review the Excel formulas in your worksheet.
Utilize Excel formulas to the fullest extent possible. Formatting counts. Use the examples provided in Chapters 1 through 4 for correct formats. The case study answers must be clearly marked and easy to follow. Please title your excel file with your last name & "Case Study 1".
MBA 5850 – Spring 2017 Block 2 Case Study 1 You have been hired by a company that offers design services and sells household goods, My Best Friend’s House. The company has been in business for several years but does not have a good accounting system in place. The owner of the company, Mr. Erie, has provided you with the following account balances as of January 31, 2017. Income and expense amounts are for the month of January 2017.
Cash 8,350
Accounts payable 900
Accounts receivable 3,500
Accumulation depreciation 2,700
Additional paid-in capital 6,000
Common stock 1,200
Depreciation expense 900
Income tax expense 700
Income tax payable 250
Insurance expense 1,800
Interest expense 600
Interest payable 700
Inventory 12,000
Land 17,000
Note payable - current portion 3,000
Note payable - long-term 8,000
Office equipment 4,500
Rent expense 6,000
Retained earnings 7,875
Salary expense 12,000
Salaries payable 800
Service revenue 35,000
Travel expense 1,275
Unearned revenue 2,200
The president has told you that although the accounts are shown with a positive balance, they have the normal debit or credit balance that accounts in their account type have (e.g., – assets have a debit balance, liabilities have a credit balance).
There are six shareholders and Mr. Erie reports financial information to them on a monthly basis. Required: (1) Prepare a trial balance, income statement, and balance sheet using the account balances provided. Set up your financial statements so that going forward, the president can enter the account balances in the trial balance and the amounts flow to the correct financial statements. (2) Calculate the current ratio for My Best Friend’s House. What does this tell you about the company? (3) After you have completed your financial statements, Mr. Erie tells you that he believes a couple of mistakes have been made but he is not certain and doesn’t want to change any amounts on the trial balance because “eventually it will all wash out.” $500 of the $1,275 travel expenses are for a sales trip that he has planned for March 2017. A utility bill in the amount of $650 was received on February 10th for January usage. Mr. Erie received a deposit of $5,000 in January 2017 for an engagement scheduled for February 2017. He
recorded this amount as Service Revenue when he received the deposit.
Prepare a memo to Mr. Erie detailing what journal entries, if any, need to be recorded for these items and include the total effect of any adjustments on the income statement. Include a brief explanation of why it is important to report accurate financial amounts.
Paper For Above instruction
The financial health and accurate reporting of a business are crucial for decision-making, investor confidence, and compliance with accounting standards. In this case study, we analyze the financial statements of "My Best Friend’s House," prepare necessary adjustments, and interpret the company's liquidity position through the current ratio. The process involves creating a trial balance, income statement, and balance sheet, calculating key financial ratios, and assessing the impact of adjustments on financial reports, all within the context of proper accounting practices.
Introduction
The company "My Best Friend’s House" operates in the household goods and design services industry. With limited existing systems, the owner, Mr. Erie, seeks a clear understanding of the company's financial position to attract shareholders and guide strategic decisions. Accurate financial reporting is not only essential for transparency but also for assessing liquidity, profitability, and solvency.
Preparation of Financial Statements
Using the provided account balances, a trial balance was prepared, categorizing accounts into assets, liabilities, equity, revenues, and expenses. The trial balance ensures all debits and credits are balanced and serves as the foundation for the financial statements. The income statement calculates net income by subtracting total expenses from total revenues, notably $35,000 in service revenue and various expenses including depreciation, rent, salaries, insurance, and interest. The balance sheet presents the company's financial position, listing assets such as cash, accounts receivable, inventory, land, and office equipment; liabilities like accounts payable, notes payable, interest payable, and salaries payable; and shareholders' equity, comprising common stock, additional paid-in capital, and retained earnings.
Calculating the Current Ratio
The current ratio is a liquidity metric calculated by dividing current assets by current liabilities. Current assets include cash, accounts receivable, inventory, and any other short-term assets. Current liabilities
encompass accounts payable, salaries payable, interest payable, unearned revenue, and the current portion of notes payable. Based on the balances:
Current assets: Cash ($8,350) + Accounts receivable ($3,500) + Inventory ($12,000) = $23,850
Current liabilities: Accounts payable ($900) + Salaries payable ($800) + Interest payable ($700) + Unearned revenue ($2,200) + Current portion of note payable ($3,000) = $7,600
Thus, the current ratio = $23,850 / $7,600 ≈ 3.14. A current ratio above 1 indicates that the company has sufficient short-term assets to cover its short-term liabilities. A ratio of approximately 3.14 suggests a strong liquidity position, implying that "My Best Friend’s House" is well-positioned to meet its immediate obligations.
Adjustments and Their Impact on Financial Statements
Mr. Erie indicated potential errors or adjustments needed without altering the trial balance figures initially. The two specific items are: (1) reclassification of $500 of travel expenses for a future sales trip in March, and (2) the correction of the utility expense for January, which was paid in February. Additionally, the deposit received for February service, recorded as revenue prematurely, requires an adjustment.
Journal Entries Needed
Reclassify the $500 travel expense to a prepaid expense or deferred cost since it pertains to a future period:
Debit: Prepaid Travel Expenses $500
Credit: Travel Expense $500
Such an entry moves part of the expense to the period in which the trip occurs, matching expenses to revenues per the matching principle.
Adjust utility expenses to recognize the January usage, which was prepaid but not yet incurred:
Debit: Utility Expense $650
Credit: Utilities Payable or Prepaid Utilities $650
This ensures expenses are recognized in the proper period.
Record the deposit received for February as a liability until services are delivered:
No entry needed if properly recorded. If already recorded as revenue, an adjusting entry to defer recognition:
Debit: Service Revenue $5,000
Credit: Unearned Revenue $5,000
This reclassifies the revenue to the period when the service is provided.
Effects on Income Statement
The total adjustments affect the net income primarily through the reclassification of expenses and revenue recognition timing. The $500 travel expense adjustment reduces expenses for January, increasing net income for that period. The utility expense correction increases expenses, reducing net income correspondingly. Correct revenue recognition aligns revenue with services rendered, preventing overstatement of income in the period.
Importance of Accurate Financial Reporting
Accurate financial data are vital for stakeholders to assess the company's performance accurately. Misstated expenses or revenues can lead to poor decision-making, misallocation of resources, or loss of investor confidence. Precise financials support compliance with accounting standards, enable meaningful ratio analysis, and foster transparency, ultimately facilitating sustainable business growth and stakeholder trust.
Conclusion
This case study underscores the importance of proper financial statement preparation, cautious adjustments, and the significance of accurate reporting. The strong liquidity position indicated by the current ratio suggests stability, while identified adjustments enhance the accuracy and reliability of financial information. Regular review and adherence to accounting principles are critical for ensuring integrity in financial reporting, which underpins sound managerial decisions and investor confidence.
References
Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
Gelinas, U. J., Sutton, S. G., & Jacobs, C. M. (2019). Financial Accounting (13th Edition). Cengage Learning.
Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2018). Introduction to Financial Accounting. Pearson. Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis (12th Edition). McGraw-Hill Education.
Understanding Financial Statements. (n.d.). Investopedia. https://www.investopedia.com/terms/f/financialstatements.asp Financial Ratios. (n.d.). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-ratios/ American Institute of CPAs. (2020). Generally Accepted Accounting Principles (GAAP). www.aicpa.org
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting. Wiley.
Kaplan, R. S., & Norton, D. P. (1996). Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review.
Accounting Standards Codification. (2023). Financial Accounting Standards Board (FASB). https://fasb.org
