Question
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, 20×3.

Task 1:

a. Adjusted trial balance amounts from the books of City Rides are listed below, for the two years ended December 31, 20×3:

Account

At Dec. 20×3

At Dec 20×2

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, 20×3

20×3

20×2

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, 20×3

20×3

20×2

Beginning Capital

Ending Capital, Harris

City Rides

Balance Sheet

At December 31, 20×3, 20×2

Assets

Liabilities

20×3

20×2

20×3

20×2

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, 20×3

20×3

20×2

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, 20×3

20×3

20×2

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, 20×3, 20×2

Assets

Liabilities

20×3

20×2

20×3

20×2

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, 20×3, 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

20×3

20×2

20×3

20×2

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, 20×4

SUBJECT:Financial Statement Analysis and Loan Recommendation

Appendix: Accounting Ratios
Current Ratio (pp.214)
Debt Ratio (pp.214)
Gross Profit Percentage (pp.274)
Day’s Sales in Receivables (pp. 424)