Question ASSIGNMENT FOR WEEK NINE

ASSIGNMENT FOR WEEK NINE

Part A – Inventory and Depreciation

Consider this Balance Sheet situation:

Three years ago Mr. Jones bought a new machine that inserts pimentos into

green olives. He paid $10,000 for the machine, and it went happily to work

and has been filling 5,000 green olives per day with bright red pimentos.

At the time of purchase, Mr. Jones’ accountant told him that the standard

useful life for this type of equipment was 10 years. Mr. Jones decided to use

the straight-line method to calculate depreciation.

Please answer the following questions:

1. What amount would go on the Balance Sheet at the time of

purchase?

2. Where would this amount have been posted on the Balance

Sheet?

3. What is the current book value of the equipment?

4. How much accumulated depreciation is posted?

Consider this Income Statement situation:

Mr. Jones started the year with no olives in inventory. He bought 5,000

green olives at 25 cents each in March, 10,000 at 50 cents each in July, and

10,000 at 75 cents each in November. At year end he had 2,000 olives left

in inventory.

Calculate his ending inventory value using:

5. Average cost method

6. FIFO

7. LIFO

8. Which method should he use when he prepares his Income

Statement to show the bank?

Part B – Financial Statement Analysis

Please solve the following Financial Statement Ratios using

the Balance Sheet and Income Statement found below.

Also tell me, in a sentence or two, what we have learned

from each one.

1. CURRENT RATIO

2. QUICK, OR ACID TEST RATIO

3. WORKING CAPITAL

4. DEBT TO WORTH (or Owners Equity) RATIO

5. ROI (Return on Investment).

6. EARNINGS PER SHARE

7. INVENTORY TURNOVER

FIGURE A

Jim Jones, dba Jim’s Cool Stuff

BALANCE SHEET

As of December 31, 2009

ASSETS LIABILITIES

Current Assets Current Liabilities

Cash 250 Accounts Payable 500

Accts. Receivable 550 Notes Payable 600

Inventory 750 Contracts Payable 300

Prepaid Expenses 1,000 Total Curr. Liabilities 1,100

Total Curr. Assets 2,550

Long-Term Liabilities

Fixed Assets Mortgage 15,000

Land 40,000 Long Term Contract 1,500

Truck 2,000 Total LT Liabilities 16,500

Accum. Dep. (250) 1,750 TOTAL LIABILITIES 17,600

Total Fixed Assets 41,750

TOTAL ASSETS: 44,300 EQUITY

Common Stock

(1,000 shares)

26,700

TOTAL EQUITY 26,700

LIABILITIES & EQUITY 44,300

FIGURE B

Jim Jones, dba Jim’s Cool Stuff

INCOME STATEMENT

For the 12 months ending December 31, 2009

REVENUE $1,000,000

EXPENSES

Cost of Goods Sold:

Beginning Inventory 125,000

Plus Purchases 550,000

Less Ending Inventory (100,000)

= Cost of Goods Sold $575,000

Gross Profit $425,000

Operating Expenses

Rent 175,000

Payroll 217,700

Utilities 11,000

Office Expenses 500

Depreciation 50

Local Taxes 250

Legal Fees 500

Total Operating Expenses 405,000

NET INCOME BEFORE TAX 20,000

Federal Income Taxes (25%) 5,000

NET INCOME 15,000

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