Question

General Journal, Income Statement, Statement of SE, Balance Sheet

On January 1, 2021, the general ledger of Dynamite Fireworks includes the following account balances: Credit Accounts Cash Accounts Receivable Supplies Land Accounts Payable Common Stock Retained Earnings Totals Debit $ 24,900 6,300 4,200 61,000 $ 4,300 76,000 16,100 $ 96,400 $96,400 During January 2021, the following transactions occur: January 2 Purchase rental space for one year in advance, $9,300 ($775/month). January 9 Purchase additional supplies on account, $4,600. January 13 Provide services to customers on account, $26,600. January 17 Receive cash in advance from customers for services to be provided in the future, $4,800. January 20 Pay cash for salaries, $12,600. January 22 Receive cash on accounts receivable, $25,200. January 29 Pay cash on accounts payable, $5,100. The following information is available on January 31. • Rent for the month of January has expired. • Supplies remaining at the end of January total $3,900. • By the end of January, $4,025 of services has been provided to customers who paid in advance on January 17. • Unpaid salaries at the end of January are $5,030.

Answer 1

a) The amount of profit reported for the month of January is $ 7,320. The working is shown below:

Details	Amount	Calculation
Revenue	$         30,625	($ 26,600 + $ 4,025 - these are all services provided in January)
Less: Supplies consumed	$         (4,900)	(beginning balance + purchases - ending balance , i.e. 4,200 + 4,600 - 3,900)
Less: Salary expense	$       (17,630)	( $12,600 cash paid + $ 5,030 salary unpaid for Jan)
Less: Rent expense for January	$             (775)
Profit for the month of January	$            7,320

b) The ratio of current assets to current liabilities at the end of January is 5 (48,025 /9,605). Calculations are shown below:

Current Assets =	Cash + Supplies inventory + Accounts Receivable + Prepaid Expenses
=	27,900 + 3,900 + 7,700 + 8,525
=	$ 48,025
Current Liabilities =	Accounts Payable + Accrued Liabilities
=	3,800 + 5,805
=	$9,605

	Cash - opening balance	$         24,900
2nd Jan	Rental space for 1 year	$         (9,300)
17th Jan	Received from customer	$            4,800
20th Jan	Salaries paid	$       (12,600)
22nd Jan	Received from customer	$         25,200
29th Jan	Paid to suppliers	$         (5,100)
	Ending balance	$         27,900

	Accounts Receivable - opening balance	$            6,300
13th Jan	Serivces provided	$         26,600
22nd Jan	Cash received	$       (25,200)
	Ending balance	$            7,700

	Prepaid expenses - opening balance	$                   -
2nd Jan	Rent paid for 12 months	$            9,300
31st Jan	Rent for January incurred	$             (775)
	Ending balance	$            8,525

	Accounts Payable - opening balance	$            4,300
9th Jan	Purchases made on account	$            4,600
29th Jan	Cash paid to suppliers	$         (5,100)
	Ending balance	$            3,800

	Accrued liabilities
31st Jan	Unpaid salaries	$            5,030
31st Jan	Advance received from customer for services yet to be delivered i.e. deferred revenue (4,800 - 4,025)	$               775
	Ending balance	$            5,805

d) Based on the profit and current ratio of the company, Dynamite Fireworks appears to be in a good financial condition as at the end of January. It is able to achieve a decent profit margin of over 20% in January. The high current ratio however is a little concerning. A ratio between 1.5-2% means the working capital is efficiently managed. A high ratio like Dynamite Fireworks suggests that there is excess working capital and that the liquid assets of the company are not being efficiently utilized. The company should look at re-evaluating its working capital needs and make some changes to more efficiently manage working capital (e.g. reduce cash balance at hand)