Teagan Fitzgerald is the owner of Newport Jewelry, a store specializing in gold, platinum, and special stones. During the past year, in response to increased demand, Teagan doubled her selling space by expanding into the vacant building space next door to her store. This expansion has been expensive because of the need to increase inventory and to purchase new store fixtures and equipment, including carpeting and state-of-the-art built-in fixtures. Teagan notes that the company’s cash position has gone down and she is worried about future demands on cash to finance the growth.
Teagan presents you with a statement showing the assets, liabilities, and her equity for year-end 2018 and 2019, and asks your opinion on the company’s ability to pay for the recent expansion. She did not have income and expense data available at the time. She commented that she had not made any new investment in the business in the past two years and was not financially able to do so presently. The information presented is shown below:
INSTRUCTIONS
- 1. Prepare classified balance sheets for Newport Jewelry for December 31, 2018, and December 31, 2019. (Ignore
depreciation. ) - 2. Based on the information presented in the classified balance sheets, what is your opinion of Newport Jewelry’s ability to pay its current bills in a timely manner?
- 3. What is the advantage of a classified
balance sheet over a balance sheet that is not classified?
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- Del Rio began Rio Enterprises on January 1 with 200 units of inventory. During the year, 500 additional units were purchased, 500 units were sold, and Del ended the year with 200 units. Del is very satisfied with his first year of business although the cost of replacing his inventory rose continually throughout the year. The 500 units sold for a total of 320,000 and the 500 units purchased to replace them cost 256,000, so his cash account has increased by 64,000. Del is concerned however because he has three obligations yet to meet: taxes, dividends, and his wife. Federal and state income taxes will take 40% of his income. His investors are to receive dividends equal to half of any income after taxes are paid. And finally, Del promised his wife a big trip to Hawaii if she let him quit his job as a professor and start his own business. He promised her hed make at least 50,000 after taxes. That will give us 25,000 after paying off the investors. Del kept fairly good records during the year and knows the specific cost of each inventory unit sold. He has prepared the following table to summarize his purchases and sales. Del has heard that the choice of an inventory cost flow assumption can have a significant effect on net income and taxes. He asks you to show him the differences between the specific identification method and the cost flow assumptions of FIFO, LIFO, and weighted average methods. Review the worksheet FIFOLIFO that follows these requirements. Note that all of the problem data have been entered in the Data Section of the worksheet.arrow_forwardDel Rio began Rio Enterprises on January 1 with 200 units of inventory. During the year, 500 additional units were purchased, 500 units were sold, and Del ended the year with 200 units. Del is very satisfied with his first year of business although the cost of replacing his inventory rose continually throughout the year. The 500 units sold for a total of 320,000 and the 500 units purchased to replace them cost 256,000, so his cash account has increased by 64,000. Del is concerned however because he has three obligations yet to meet: taxes, dividends, and his wife. Federal and state income taxes will take 40% of his income. His investors are to receive dividends equal to half of any income after taxes are paid. And finally, Del promised his wife a big trip to Hawaii if she let him quit his job as a professor and start his own business. He promised her hed make at least 50,000 after taxes. That will give us 25,000 after paying off the investors. Del kept fairly good records during the year and knows the specific cost of each inventory unit sold. He has prepared the following table to summarize his purchases and sales. Examine your completed worksheet and answer the following questions: a. Which inventory cost flow assumption produces the most net income? b. Which inventory cost flow assumption produces the least net income? c. What caused the difference between your answers to a and b? d. Which inventory cost flow assumption produces the highest ending cash balance? e. Which inventory cost flow assumption produces the lowest ending cash balance? f. Does the assumption that produces the highest net income also produce the highest cash balance? Explain. g. As you recall, Del originally used the specific identification method in his initial calculations when he projected 51,600 net income. According to Dels reckoning, that should have left him cash of 25,800 (50% of 51,600) after paying his investors. Why would he only have 3,800 left? Explain. h. Which inventory cost flow assumption would you suggest Del use? Explain.arrow_forwardDel Rio began Rio Enterprises on January 1 with 200 units of inventory. During the year, 500 additional units were purchased, 500 units were sold, and Del ended the year with 200 units. Del is very satisfied with his first year of business although the cost of replacing his inventory rose continually throughout the year. The 500 units sold for a total of 320,000 and the 500 units purchased to replace them cost 256,000, so his cash account has increased by 64,000. Del is concerned however because he has three obligations yet to meet: taxes, dividends, and his wife. Federal and state income taxes will take 40% of his income. His investors are to receive dividends equal to half of any income after taxes are paid. And finally, Del promised his wife a big trip to Hawaii if she let him quit his job as a professor and start his own business. He promised her hed make at least 50,000 after taxes. That will give us 25,000 after paying off the investors. Del kept fairly good records during the year and knows the specific cost of each inventory unit sold. He has prepared the following table to summarize his purchases and sales. Reset the purchase prices to their original values (cells C11 through C14). Suppose Del had purchased 250 units on November 20 rather than 150. Enter 250 in cell C14 and alter column G in the Data Section. Explain what happens to net income under each inventory cost flow assumption and why. Also, what management implications might this have for Del?arrow_forward
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