Reference no: EM131253166

EXERCISE 1 -

Prepare a balance sheet and income statement as of December 31 2013 for this company from the following information:

Inventory                                                    6,500

Capital                                                       45,000

Cash                                                          16,550

Operating expenses                                      1,350

Notes Payable                                                 600

Interest expense                                             900

Depreciation expense                                      500

Net sales                                                    12,800

Accounts Receivable                                      9,600

Accounts Payable                                           4,800

Long term Debt                                            55,000

Cost of Goods sold                                         5,750

Buildings and Equipment                                88,000

Tax expenses                                                 1,290

Retained Earnings                                         to be calculated

The following transactions occurred in the month of January:

1. The Company shipped and billed products to a customer for 5,000. The related cost of goods sold amounted to 3,000.

2. The Company paid 600 the rent of the 3 months January to March

3. A customer settled his balance for 2,000

4. Products were purchased on account for 1,000

5. Operating expenses were paid for 500

6. The Company paid to the bank 1500 as interest for the period from October to December

7. The Company recorded depreciation expenses: 250 on equipment, 100 on furniture

8. The tax rate was 30%

Indicate which accounts are affected by each of these above transactions. Prepare the Income statement and the Balance sheet for the month of January. You must respect the format and headings of these financial statements.

EXERCISE 2 -

XYZ manufactures candy and sells only to retailers. It's not a publicly owned company and its financial statements are not audited.

In October, management met to discuss the fiscal year ending December 31. Due to a sluggish economy, the company was having difficulty collecting its accounts receivable and its cash position is unusually low. Management knew that if the December 31 balance sheet will not look good, the company will have difficulty borrowing money to boost production for the following year.

The purpose of the meeting was to explore ways in which the company can improve its December balance sheet. Some of the ideas are as follows:

1. Offer customers a 10% discount if they make payments immediately instead of the usual 30 days.

2. Sell some Accounts Receivables (Factoring) to financial agencies against immediate Cash

3. For purposes of balance sheet presentation, combine all forms of cash, including cash equivalents, compensating balances, and unused lines of credit

4. Require officers who have borrowed money from the company to repay the amount owed at December. This would convert into cash the " notes receivables from officers" which currently appear in the balance sheet as non-current assets (long term receivables)

5. Present investments in marketable securities at their market value, rather than at cost.

6. Stop all payments to suppliers in December to increase cash.

7. On December 31, draw a large check against one of the company's account in Bank A and deposit in another company's account in bank B. The check will not clear the bank A after year end. This will substantially increase the amount of cash in bank accounts at year end.

Do you consider it's ethical for management to hold this meeting and plan in advance how to improve financial statements that will be distributed to creditors and investors?

Separately evaluate each of these proposals. Consider business and accounting issues.