Question

The balance sheet items of The Sweet Shop (arranged in alphabetical order) were as follows at the close of the business on September 30, current year $9,000 72,000 $ 6,800 Furniture and Fixtures Accounts Receivable . 5,000 Land 80,000 Notes Payable... 6,900 Supplies . Capital Stock Cash 19,100 3,000 . ..1 100,000 Retained Earnings.. The transactions occurring during the first week of October were as follows. Oct. 3 Additional capital stock was sold for $30,.000. The accounts payable were paid in full. Oct. 6 Furnitu (No payment was made on the notes payable.) re was purchased on account at a cost of $8,000, to be paid within 30 days. Supplies were purchased for $900 cash from a restaurant supply center that was going out of business. These supplies would have cost $2.000 if purchased under normal circumstances. Revenues of $8,000 were earned and received in cash. Expenses revenues of $3,200 were incurred and paid in cash. Oct. 1-6 Instructions a. Prepare a balance sheet at September 30, current year. (You will need to compute the missing b. figure for Notes Payable.) Prepare a balance sheet at October 6, current year. Also prepare an income statement and a statement of cash flows for the period October 1-6, current year. In your statement of cash flows, treat the purchase of supplies and the payment of accounts payable as operating activities Assume the notes payable do not come due for several years. Is The Sweet Shop in a stronger financial position on September 30 or on October 6? Explain briefly c.

Answer 1

Part A

THE SWEET SODA SHOP                                                                

Balance Sheet                                                                  

September 30, Current year

Assets		Liabilities and owner’s equity
Cash	6900	Liabilities:
Accounts receivable	5000	Notes payable	50000
Supplies	3000	Accounts payable	6800
Land	72000	Total liabilities	56800
Building	80000	Owner’s equity:
Furniture and fixtures	9000	Capital stock	100000
		Retained earnings	19100
total	175900	total	175900

Notes payable = total assets – accounts payable – capital stock – retained earnings = 175900-6800-100000-19100                               

Part B

THE SWEET SODA SHOP                                                                

Balance Sheet                                                                  

October 6, Current year

Assets		Liabilities and owner’s equity
Cash	34000	Liabilities:
Accounts receivable	5000	Notes payable	50000
Supplies	3900	Accounts payable	8000
Land	72000	Total liabilities	58000
Building	80000	Owner’s equity:
Furniture and fixtures	17000	Capital stock	130000
		Retained earnings	23900
total	211900	total	211900

Capital stock = 100000+30000 = 130000

Accounts payable = 6800-6800+8000

Cash = 6900+30000+8000-3200-6800-900

Supplies = 3000+900 = 3900

Furniture and fixtures = 9000+8000 = 17000

Retained earnings = total assets – total liabilities – common stock = 211900-58000-130000 = 23900

THE SWEET SODA SHOP                                                                

Income Statement                                                                         

For the Period October 1-6, current year

Revenues	8000
expenses	(3200)
Net income	4800

                                                                               

THE SWEET SODA SHOP                                                                

Statement of Cash flows                                                                             

For the Period October 1-6, current year

Cash flows from operating activities:
Cash received from revenues	8000
Cash paid for expenses	(3200)
Cash paid for accounts payable	(6800)
Cash paid for supplies	(900)
Cash used in operating activities		(2900)
Cash flows from investing activities:
None
Cash flows from financing activities:
Cash received from sale of capital stock		30000
Increase in cash		27100
Cash balance October 1, current year		6900
Cash balance October 6, current year		34000

Part C

Compared to September 30, the financial position of The Sweet Soda Shop is stronger on October 6. On September 30, the liquid assets in terms of cash and accounts receivable were only $11900 compared to its short-term obligation of $6800 in terms of accounts payable. It increased greatly on October 6, due to the issue of capital stock. It has a sufficient amount of liquid assets to meet its short term obligations.