Project Part 2: Using Accounting Information for Decision Making

 

City Rides, a proprietorship engaged in the sale of mopeds to the public, completes its second year of operations on December 31, 20x3. 

 

Task 1:

 

a.    Adjusted trial balance amounts from the books of City Rides are listed below, for the two years ended December 31, 20x3:

 

Account	At Dec. 20x3		At Dec 20x2
	DEBIT	CREDIT	DEBIT	CREDIT
Cash	$21,030		$19,020
Accounts Receivable	18,500		12,000
Prepaid Rent	1,800		1,600
Allowance for Uncollectible Accounts		$100		-
Supplies	500		120
Inventory	21,250		15,720
Office Equipment	2,700		1,800
Truck	15,000		-
Accumulated Depreciation—Office Equipment		900		360
Accumulated Depreciation—Truck		1,500		-
Accounts Payable		4,150		5,850
Current portion of Long-Term Note Payable		5,000		-
Long-Term Note Payable		20,000		-
Capital—Harris		45,000		45,000
Withdraws—Harris	2,500		2,500
Sales Revenue		25,800		16,500
Sales Return and Allowances	800
Cost of Goods Sold	15,450		11,040
Wages Expense	3,600		1,800
Rent Expense	800		800
Depreciation Expense—Office Equipment	540		360
Depreciation Expense—Truck	1,500		-
Utilities Expense	550		650
Supplies Expense	250		300
Uncollectible Accounts Expense	80		-
	$106,850	$106,850	$67,710	$67,710

 

 

Use the above adjusted trial balance amounts to complete the financial statements below by filling in the shaded cells:

 

City Rides
Income Statement
For the Two Years Ended December, 20x3
	20x3	20x2
Sales Revenue	25,800	16,500
Net Sales Revenue
Gross profit
Less: operating expenses:
Net Income

 

 

 

City Rides
Statement of Owner’s Equity
For the Year Ended December, 20x3
	20x3	20x2
Beginning Capital
Ending Capital, Harris

 

 

City Rides
Balance Sheet
At December 31, 20x3, 20x2
Assets			Liabilities
	20x3	20x2		20x3	20x2
Current Assets			Current Liabilities
		$19,020			$5,850
		12,000			-
		-	Total Current Liabilities	$9,150	$5,850
		12,000
		1,600	Long-Term Liabilities
		120			-
		15,720	Total Liabilities	$29,150	$5,850
Total Current Assets	$59,580	$48,460
Plant Assets			Owner’s Equity
		1,800			$45,000
		(360)	Total Owner’s Equity	$45,730	$45,000
Total Plant Assets
Total Assets		$49,900	Total Liabilities and Equity		$50,850

 

 

 

 

 

 

 

 

b.    The Financial Statements of Extreme Scooter, a direct competitor of City Rides, are presented below. The two businesses have similar operations.  Compare the financial statements of City Rides and Extreme Scooter and refer to these statements as you complete the tasks that follow

Extreme Scooter
Income Statement
For the Two Years Ended December, 20x3
	20x3	20x2
Net Sales Revenue	30,400	22,500
Less:  Cost of Goods Sold	(19,500)	(14,400)
Gross profit	10,900	8,100
Less: operating expenses:	(7,700)	(5,700)
Net Income	$3,200	$2,400

 

 

 

 

 

Extreme Scooter
Statement of Owner’s Equity
For the Year Ended December, 20x3
	20x3	20x2
Beginning Capital	$55,000	$ -
Add: additional capital	-	57,600
Net Income (Loss)	3,200	2,400
Less: Drawing, Harris	(20,200)	(5,000)
Ending Capital, Harris	$38,000	$55,000

 

 

 

 

 

Extreme Scooter
Balance Sheet
At December 31, 20x3, 20x2
Assets			Liabilities
	20x3	20x2		20x3	20x2
Current Assets			Current Liabilities
Cash	$4,550	$14,600	Accounts Payable	$22,800	$500
Accounts Receivable, Net	44,500	40,000	Wages Payable	1,200	2,500
Prepaid Expenses	2,200	3,500	Total Current Liabilities	$24,000	$3,000
Supplies	450	400
Inventory	24,000	5,500
Total Current Assets	$75,700	$64,000	Long-Term Liabilities
			Long-Term Note Payable	20,000	12,000
			Total Liabilities	$44,000	$15,000
Plant Assets			Owner’s Equity
Office Equipment	7,400	6,500	Capital, Drew	$38,000	$55,000
Less: Accumulated Depreciation-Office Equipment	(1,100)	(500)	Total Owner’s Equity	$38,000	$55,000
Total Plant Assets	$6,300	$6,000
Total Assets	$82,000	$70,000	Total Liabilities and Equity	$82,000	$70,000

 

 

Task 2

 

a.    Compare the trend in net sales for City Rides and Extreme Scooter.  Which business has the larger net sales in dollar terms?

b.    Compare the ending capital account balances of City Rides and Extreme Scooter. Compute the dollar increase or decrease in ending capital balance for each business. Suggest a reason for the large change in ending capital of Extreme Scooter.

 

c.     Compare inventory balances of City Rides and Extreme Scooter. Which business tends to have more inventories on hand at the end of any given year? Mention one advantage and one disadvantage of keeping large amounts of inventory on hand.

 

d.    Compare the accounts receivable balances of City Rides and Extreme Scooter. Which business tends to sell more on account?  Mention one disadvantage associated with sales on account.

 

 

 

 

 

 

 

Task 2

Compute the following accounting ratios for the year ended December 31, 20x3, for City Rides and for Extreme Scooters (a business that is comparable to City Rides).  Refer to the appendix below for the necessary formulae and page references.

Accounting Ratio	City Rides		Extreme Scooter
	20x3	20x2	20x3	20x2
Current Ratio
Debt Ratio
Gross Profit Percentage
Day’s Sales in Receivables

 

Task 3

 

Imagine that you are an accountant who reports to the senior commercial loan officer of a regional bank, Ms. Heather Coldwell.  Coldwell is deciding which of two loan applications to approve and is having trouble doing so because the two applicants have very similar business operations and both meet the bank’s minimum lending standards.  The first is an application for a $25,000 bank loan to City Rides, and the second is an application for a $25,000 bank loan to Extreme Scooters. Your job is to compare and analyze the financial health of City Rides and Extreme Scooter based on their financial statements. You will summarize your findings and final recommendation in a memorandum (“memo”) addressed to Ms. Coldwell.  Based on your memorandum, Ms. Caldwell will approve one loan and deny the other.

 

Complete the memo on the following pages.  Divide your memo into the following sections:

 

Introduction

 

Briefly outline the purpose of the memo, mentioning the names of the businesses analyzed.

 

Accounting Ratios

 

Explain each of the ratios computed in Task 2 above, and indicate whether the ratio is:

 

• Favorable or unfavorable for each business
• Showing an  improving or deteriorating trend over time

 

Financial Statements

 

Summarize the answers you provided to the questions in Task 1 here.

 

Recommendation

 

Recommend which business you believe should receive the bank loan.  Justify your recommendation by referring back to at least one key issue raised in the body of the memo.

 

The memo should not exceed 2 pages.  Use 11 point Arial font, double-spaced.  Spelling and grammar counts!

TO:                 Ms. H. Caldwell, Senior Loan Officer

FROM:                        _____________________, Staff Accountant

DATE:            January 5, 20x4

SUBJECT:     Financial Statement Analysis and Loan Recommendation