Question

The balance sheet for Bua Enterprises as of December 31, 2020 is shown below:

Bua Enterprises, Inc. Balance Sheet As of December 31, 2020
Assets:			Liabilities:
Cash	$10,000		Accounts payable	$1,000
Accounts receivable, net of $1,000 allowance	3,000		Salaries payable	2,000
Inventory	7,000		Total current liabilities	3,000
Total current assets	20,000		Notes payable, 5%, due 2025	10,000
Equipment, net of $10,000 accumulated depreciation	20,000		Total liabilities	13,000
Total assets	$40,000		Equity:
			Common stock	10,000
			Retained earnings	17,000
			Total liabilities and equity	$40,000

In January 2021, Bua had the following events/transactions take place:

January 1: Sold inventory costing $1,000 for $3,000 to customers on account.

January 2: Purchased $5,000 of inventory on account.

January 5: Paid $1,000 to suppliers of inventory for past purchases.

January 7: Paid salaries owed to employees as of December 31.

January 10: Signed an agreement with S. Young to serve as CFO beginning February 15, 2021.

January 15: Paid salaries to employees for the first two weeks of January, $2,000.

January 17: Sold inventory costing $2,000 for $5,000 to customers on account.

January 28: Paid the electricity, internet, trash, water, and sewer bills for the month of January, $500.

January 29: Collected $3,000 from customers for past sales transactions.

January 30: Paid $6,000 to the owner of Bua’s facilities for rent for January through June 2021.

Other information:

1. As of January 31, employees who collectively earn $2,000 every 2 weeks have not been paid since January 15.
2. The Note Payable was borrowed on December 31, 2020. Interest on the note is not required to be paid until 2025 but accumulates during the term of the loan.
3. Bua estimates that $1,500 of the accounts receivable will likely not be collectible.
4. Bua’s board of directors decided to declare a dividend of $1,000 on January 31, to be paid February 15.
5. On February 10 (after month end but before the financial statements were prepared), Bua entered into a significant joint venture with Owens Corporation to manufacture accounting professor action figures for sale in the Boston metropolitan area.
6. Depreciation of $500 needs to be recorded on the equipment.

Required:

1. Briefly list and describe any disclosures that Bua would need to make in the narrative that accompanies the financial statements, assuming that Bua is NOT a publicly-traded company.
2. Compute the current ratio and debt to equity ratio as of December 31 and January 31 and comment on Bua’s liquidity and solvency. Compute Bua’s return on assets and comment on Bua’s profitability in the month of January.

Answer 1

Income Statement	Amount/Calculations	Total Amount
Sales Revenue	3000+5000	$           8,000.00
Total Cost of Goods Sold	7000+5000-9000	$           3,000.00
Gross Profit		$           5,000.00
Salary Expense	2000*2	$           4,000.00
Operating Expenses (Electricity, internet , trash , water & more	$                                                 500.00	$              500.00
Rent Expenses	6000/6	$           1,000.00
Interest on Note Payable	5%*10000*1/12	$                41.67
Bad Debts Expense	1,500.00	$           1,500.00
Depreciation on Equipment	$                                                 500.00	$              500.00
Total Operating Expenses		$           7,541.67
Net Income		$         (2,541.67)

	December	January
Balance Sheet	Amount	Amount/Calculations	Total Amount
Current Assets:
Cash	$ 10,000.00	10000-1000-2000-2000-500+3000-6000	$       1,500.00
Account Receivable	$    4,000.00	4000+3000+5000-3000	$       9,000.00
Allowance for Bad Debts	$   (1,000.00)	`-1000-1500	$     (2,500.00)
Net Account Receivable	$    3,000.00		$       6,500.00
Inventory	$    7,000.00	7000-1000+5000-2000	$       9,000.00
Prepaid Rent	$                -	0+(6000*5/6)	$       5,000.00
Total Current Assets	$ 20,000.00		$     22,000.00
Fixed Assets
Equipment	$ 30,000.00	30,000.00	30,000.00
Accumulated Depreciation on Equipment	$(10,000.00)	`-10000-500	(10,500.00)
Net Equipment	$ 20,000.00		$     19,500.00
Total Fixed Assets	$ 20,000.00		$     19,500.00
Total Assets	$ 40,000.00		$     41,500.00
Liabilities
Account Payable	$    1,000.00	1000+5000-1000	$       5,000.00
Salaries Payable	$    2,000.00	2000-2000+2000	$       2,000.00
Dividend Payable	$                -	0+1000	$       1,000.00
Total Current Liabilities	$    3,000.00		$       8,000.00
Notes payable, 5%, due 2025	$ 10,000.00		$     10,000.00
Interest Payable on Notes	$                -	0+(5%*10000*1/12)	$            41.67
Total Liabilities	$ 13,000.00		$     18,041.67
Equity
Common Stock	$ 10,000.00	$                                                  10,000.00	$     10,000.00
Retained Earnings	$ 17,000.00	17000-1000-2541.67	$     13,458.33
Total Liabilities & Shareholders Equity	$ 40,000.00		$     41,500.00

Ratios	Formula	December(2020)	January(2021)	Comments
Current Ratio	Current Asset/ Current Liabilities	6.67	2.75	Current Ratio is lowered in January when comparing it with December
Liquidity Ratio	Liquid Assets/Current Liabilities	4.33	1.00	Liquidity Ratio is also lowered when comparing it with December. Although it seems to be at par with the standards and company has liquid assets equal to pay for the current liabilities
Debt to Equity Ratio	Total Liabilities/ Shareholder Equity	0.48	0.77	Debt Equity Ratio has also increased for the company due to additional interest accumulated and the decrease in retained earning thus shareholders equity
Return on Assets	Net Income / Total Assets		-6.12%	RoA has been negative for the company indicating inefficiency of the assets in generating enough profits
Profitability (Net Profit %)	Net Income/ Total Sales *100		-31.77%	Net Income/profit has been negative for the January and it is very high due to lesser volume of sales and higher costs
Profitability (Gross Profit %)	Gross Profit/ Total Sales *100		62.50%	Gross Profit of the company seems to be very good at 62.5%, however due to higher operating expenses, Net Profit is negative