Withe the help of required financia statements you are suppose to solve the question. Mr. M is the owner of EXLO Inc. Mr. M has just received his end of the year financial statements from his accountant. When he sees his gross and net income he is discouraged. With almost Rs. 250,000 in gross profit he just doesn’t understand why he is always short on cash to pay his employees and suppliers. One of his largest suppliers notified him just last month that they would no longer extend him credit and he would have to pre-pay all of his orders. He puts a call into his accountant to set up a meeting with her to discuss the financial health of his business. Required: a) Using your understanding of financial statements how do you find the following balance sheet related with income statement? b) If you are provided the information that all of rent expense of the company is related to the next year, do you think that this will improve company’s profits? If yes, explain how? c) What would be the treatment of Rent expense if it is related to the next financial year? Make necessary adjustments. Financial Statements: EXLO Inc. Income Statement For the year ended December 31, 20XX Merchandise Sales Rs. 500,000 Cost of Goods Sold Rs. 255,000 Gross Profit Rs. 245,000 Wage Expense Rs. 140,000 Rent Expense Rs. 45,000 General and Administrative Rs. 45,000 Total Expenses Rs. 230,000 Earnings Before Interest & Taxes (EBIT) Rs. 15,000 Interest Rs. 5,000 Income before tax Rs. 10,000 Tax (@ 25% rate) Rs. 2,500 Net Income/(Loss) Rs. 7,500 EXLO Inc. Balance Sheet As of December 31, 20XX Assets Current Assets Cash and Cash Equivalents Rs. 29,500 Accounts Receivable Rs. 10,000 Merchandise Inventory Rs. 100,000 Prepaid Expenses Rs. 7,500 Total Current Assets Rs. 147,000 Property, Plant, and Equipment Rs. 5,000 Total Assets Rs. 152,000 Liabilities Current Liabilities Accounts Payable Rs. 74,250 Wages Payable Rs. 10,250 Total Current Liabilities Rs. 84,500 Long-Term Debt Rs. 55,000 Total Liabilities Rs. 139,500 Owner's Equity Rs. 12,500 Total Liabilities and Owner's Equity Rs. 152,000
The Effect Of Prepaid Taxes On Assets And Liabilities
Many businesses estimate tax liability and make payments throughout the year (often quarterly). When a company overestimates its tax liability, this results in the business paying a prepaid tax. Prepaid taxes will be reversed within one year but can result in prepaid assets and liabilities.
Final Accounts
Financial accounting is one of the branches of accounting in which the transactions arising in the business over a particular period are recorded.
Ledger Posting
A ledger is an account that provides information on all the transactions that have taken place during a particular period. It is also known as General Ledger. For example, your bank account statement is a general ledger that gives information about the amount paid/debited or received/ credited from your bank account over some time.
Trial Balance and Final Accounts
In accounting we start with recording transaction with journal entries then we make separate ledger account for each type of transaction. It is very necessary to check and verify that the transaction transferred to ledgers from the journal are accurately recorded or not. Trial balance helps in this. Trial balance helps to check the accuracy of posting the ledger accounts. It helps the accountant to assist in preparing final accounts. It also helps the accountant to check whether all the debits and credits of items are recorded and posted accurately. Like in a balance sheet debit and credit side should be equal, similarly in trial balance debit balance and credit balance should tally.
Adjustment Entries
At the end of every accounting period Adjustment Entries are made in order to adjust the accounts precisely replicate the expenses and revenue of the current period. It is also known as end of period adjustment. It can also be referred as financial reporting that corrects the errors made previously in the accounting period. The basic characteristics of every adjustment entry is that it affects at least one real account and one nominal account.
- Withe the help of required financia statements you are suppose to solve the question.
Mr. M is the owner of EXLO Inc. Mr. M has just received his end of the year financial statements from his accountant. When he sees his gross and net income he is discouraged. With almost Rs. 250,000 in gross profit he just doesn’t understand why he is always short on cash to pay his employees and suppliers. One of his largest suppliers notified him just last month that they would no longer extend him credit and he would have to pre-pay all of his orders. He puts a call into his accountant to set up a meeting with her to discuss the financial health of his business.
Required:
- a) Using your understanding of financial statements how do you find the following
balance sheet related with income statement? - b) If you are provided the information that all of rent expense of the company is related to the next year, do you think that this will improve company’s profits? If yes, explain how?
- c) What would be the treatment of Rent expense if it is related to the next financial year? Make necessary adjustments.
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Financial Statements: EXLO Inc. |
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Income Statement |
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For the year ended December 31, 20XX
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Merchandise Sales |
Rs. 500,000 |
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Cost of Goods Sold |
Rs. 255,000 |
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Gross Profit |
Rs. 245,000 |
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Wage Expense |
Rs. 140,000 |
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Rent Expense |
Rs. 45,000 |
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General and Administrative |
Rs. 45,000 |
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Total Expenses |
Rs. 230,000 |
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Earnings Before Interest & Taxes (EBIT) |
Rs. 15,000 |
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Interest |
Rs. 5,000 |
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Income before tax |
Rs. 10,000 |
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Tax (@ 25% rate) |
Rs. 2,500 |
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Net Income/(Loss) |
Rs. 7,500 |
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EXLO Inc. |
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Balance Sheet |
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As of December 31, 20XX |
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Assets |
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Current Assets |
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Cash and Cash Equivalents |
Rs. 29,500 |
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Rs. 10,000 |
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Merchandise Inventory |
Rs. 100,000 |
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Prepaid Expenses |
Rs. 7,500 |
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Total Current Assets |
Rs. 147,000 |
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Property, Plant, and Equipment |
Rs. 5,000 |
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Total Assets |
Rs. 152,000 |
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Liabilities |
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Current Liabilities |
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Accounts Payable |
Rs. 74,250 |
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Wages Payable |
Rs. 10,250 |
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Total Current Liabilities |
Rs. 84,500 |
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Long-Term Debt |
Rs. 55,000 |
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Total Liabilities |
Rs. 139,500 |
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Owner's Equity |
Rs. 12,500 |
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Total Liabilities and Owner's Equity |
Rs. 152,000 |
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