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Questions and Answers
What is the total pre-tax earnings reported for the summer?
What is the total pre-tax earnings reported for the summer?
- $80
- $100
- $50
- $64 (correct)
What is the total tax liability calculated with a tax rate of 25 percent?
What is the total tax liability calculated with a tax rate of 25 percent?
- $12.00
- $8.00
- $16.00 (correct)
- $20.00
After writing off the rotting lemons, what will be reduced on the right side of the Balance Sheet?
After writing off the rotting lemons, what will be reduced on the right side of the Balance Sheet?
- Earnings (correct)
- Equity
- Assets
- Liabilities
Which of the following represents a liability in the Balance Sheet provided?
Which of the following represents a liability in the Balance Sheet provided?
What action should be taken for the very rotten lemons as stated in the accounting context?
What action should be taken for the very rotten lemons as stated in the accounting context?
What impact would higher Cost of Goods Sold have on the Gross Profit?
What impact would higher Cost of Goods Sold have on the Gross Profit?
What should have been done with the lemons that went bad?
What should have been done with the lemons that went bad?
What does the presence of dust and cobwebs in a warehouse indicate about inventory?
What does the presence of dust and cobwebs in a warehouse indicate about inventory?
How can a business determine the value of its Accounts Receivables?
How can a business determine the value of its Accounts Receivables?
What was the result of overstating assets when presenting financial statements?
What was the result of overstating assets when presenting financial statements?
What is a sign that a company’s inventory management may require attention?
What is a sign that a company’s inventory management may require attention?
What must a business do to correctly report its cash balance on the Balance Sheet?
What must a business do to correctly report its cash balance on the Balance Sheet?
When determining inventory status, what is one of the most challenging factors to assess?
When determining inventory status, what is one of the most challenging factors to assess?
What effect does writing off $10 of inventory have on taxes?
What effect does writing off $10 of inventory have on taxes?
What is the purpose of making corrections to the Balance Sheet?
What is the purpose of making corrections to the Balance Sheet?
What happens to earnings after the write-off?
What happens to earnings after the write-off?
What is the total amount in cash at the end of summer?
What is the total amount in cash at the end of summer?
How much was collected from receivables?
How much was collected from receivables?
What is the total equity as detailed in the balance sheet?
What is the total equity as detailed in the balance sheet?
How much cash is received as a refund from the canceled insurance policy?
How much cash is received as a refund from the canceled insurance policy?
What does liquidity refer to in the context of assets on a Balance Sheet?
What does liquidity refer to in the context of assets on a Balance Sheet?
If the building and wagon are liquidated for less than their book value, what is recognized in the financial records?
If the building and wagon are liquidated for less than their book value, what is recognized in the financial records?
Why might selling the building and wagon be considered difficult?
Why might selling the building and wagon be considered difficult?
What is the main purpose of creating a final Income Statement for the summer?
What is the main purpose of creating a final Income Statement for the summer?
Which item is likely to be included in total expenses on the Income Statement?
Which item is likely to be included in total expenses on the Income Statement?
Which of these options could be a consequence of choosing to liquidate the assets?
Which of these options could be a consequence of choosing to liquidate the assets?
What is typically included in cost of goods sold on the Income Statement?
What is typically included in cost of goods sold on the Income Statement?
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Study Notes
Financial Statements
- Balance Sheet:
- Accounts Payable: $46.00
- Notes Payable: $0.00
- Tax Liability: $16.00
- Total Liabilities: $91.00
- Total Assets: $91.00
- Total Equity: $45.00
- Income Statement:
- Ending Inventory: $0.00
- Cost of Goods Sold: $10.00
- Gross Profit: $50.00
- Total Expenses: $45.00
- Net Profit Before Taxes: $5.00
- Income Taxes: $1.25
- Net Profit After Taxes: $3.75
Inventory Valuation
- First In, Still Here (FISH):
- A method for tracking inventory in which older items are used first.
- Requires writing off old or expired inventory.
- Lemon Example:
- Represents inventory going bad.
- Written off as an expense.
- Affects Gross Profit and ending inventory.
- A reminder of the importance of accurate inventory valuation.
Balance Sheet Cleaning
- Receivables:
- Collect outstanding payments.
- Insurance:
- Cancel policies and receive refunds.
- Payables:
- Pay off suppliers and outstanding taxes.
Liquidity
- Asset Order:
- Assets on a Balance Sheet are listed in descending order of liquidity, meaning how quickly they can be converted to cash.
- Cash:
- The most liquid asset.
Business Valuation
- Inventory:
- The most challenging asset to value, as it can become obsolete or damaged.
- Requires expertise to determine its true value.
Ending Notes
- Decision Points:
- Whether to liquidate the business or continue operations.
- Consider the amount of cash on hand compared to equity.
- Next Steps:
- Analyze the summer's performance.
- Prepare for the back-to-school season.
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