Business Level 3 Unit 4 P4
Chapter 4 accounting for merchandising BUSINESSES Problems
P4–1
1.
AQUA CO.
Income Statement
For the Year Ended June 30, 20Y8
Revenue from sales: Sales $ 3,625,000 Less: Sales returns and allowances $ 37,800 Sales discounts 20,200 58,000 Net sales $ 3,567,000
Cost of merchandise sold 2,175,000
Gross profit $ 1,392,000
Operating expenses: Selling expenses: Sales salaries expense $ 388,800 Advertising expense 45,900 Depreciation expense—store equipment 8,300 Miscellaneous selling expense 2,000 Total selling expenses $ 445,000 Administrative expenses: Office salaries expense $ 77,400 Rent expense 39,900 Insurance expense 22,950 Depreciation expense—office equipment 16,200 Office …show more content…
supplies expense 1,650 Miscellaneous administrative expense 1,900 Total administrative expenses 160,000 Total operating expenses 605,000
Income from operations $ 787,000
Other expense: Interest expense 12,000
Net income $ 775,000
P4–1, Continued
2.
AQUA CO.
Retained Earnings Statement
For the Year Ended June 30, 20Y8
Retained earnings, July 1, 20Y7 $ 253,800
Net income for the year $ 775,000
Less dividends 125,000
Increase in retained earnings 650,000
Retained earnings, June 30, 20Y8 $ 903,800
P4–1, Continued
3.
AQUA CO.
Balance Sheet
June 30, 20Y8
Assets
Current assets: Cash $ 83,500 Accounts receivable 150,000 Merchandise inventory 380,000 Office supplies 15,000 Prepaid insurance 12,000 Total current assets $ 640,500
Property, plant, and equipment: Office equipment $ 115,200 Less accumulated depreciation 49,500 $ 65,700
Store equipment $ 511,500 Less accumulated depreciation 186,700 324,800 Total property, plant, and equipment 390,500
Total assets $ 1,031,000
Liabilities
Current liabilities: Accounts payable $ 48,600 Note payable (current portion) 8,000 Salaries payable 9,600 Total current liabilities $ 66,200
Long-term liabilities: Note payable (final payment due in five years) 46,000
Total liabilities $ 112,200
Stockholders’ Equity
Capital stock $ 15,000
Retained earnings 903,800
Total stockholders’ equity 918,800
Total liabilities and stockholders’ equity $ 1,031,000
P4–1, Concluded
4.
a. The multiple-step form of income statement contains various sections for revenues and expenses, with intermediate balances, and concludes with net income. In the single-step form, the total of all expenses is deducted from the total of all revenues. There are no intermediate balances.
b. In the report form of balance sheet, the assets, liabilities, and stockholders’ equity are presented in that order in a downward sequence. In the account form, the assets are listed on the left-hand side, and the liabilities and stockholders’ equity are listed on the right-hand side.
P4–2
1.
AQUA CO.
Income Statement
For the Year Ended June 30, 20Y8
Revenues: Net sales $ 3,567,000
Expenses:
Cost of merchandise sold $ 2,175,000 Selling expenses 445,000 Administrative expenses 160,000 Interest expense 12,000 Total expenses 2,792,000
Net income $ 775,000
2.
AQUA CO.
Retained Earnings Statement
For the Year Ended June 30, 20Y8
Retained earnings, July 1, 20Y7 $ 253,800
Net income for the year $ 775,000
Less dividends 125,000
Increase in retained earnings 650,000
Retained earnings, June 30, 20Y8 $ 903,800
P4–3
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
Jan. 6.
14,000
–8,400
5,600 Jan. 6.
Income Statement
Jan. 6.
Sales
14,000
Cost of merch. sold
–8,400
Net income 5,600
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
Jan. 8.
20,000
–14,000
6,000 Jan. 8.
Income Statement
Jan. 8.
Sales
20,000
Cost of merch. sold
–14,000
Net income 6,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
Jan. 16.
19,500
–11,700
7,800 Jan. 16.
Income Statement
Jan. 16.
Sales
19,500
Cost of merch. sold
–11,700
Net income 7,800
P4–3, Continued
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Retained
Statement
Cash
+
Rec.
=
Earnings
Jan. 18.
19,800
–20,000
–200 Jan. 18.
Statement of Cash Flows
Income Statement
Jan. 18.
Operating
19,800
Jan. 18.
Sales
discounts
–200
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
Jan. 19.
–4,500
2,700
–1,800 Jan. 19.
Income Statement
Jan. 19.
Sales returns & allow.
–4,500
Cost of merch. sold
2,700
Net income –1,800
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Retained
Statement
Cash
+
Rec.
=
Earnings
Jan. 26.
14,850
–15,000
–150 Jan. 26.
Statement of Cash Flows
Income Statement
Jan. 26.
Operating
14,850
Jan. 26.
Sales
discounts
–150
P4–3, Concluded
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Retained
Statement
Cash
=
Earnings
Jan. 31.
–3,000
–3,000 Jan. 31.
Statement of Cash Flows
Income Statement
Jan. 31.
Operating
–3,000
Jan. 31.
Delivery exp.
–3,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Statement
Cash
+
Rec.
Jan. 31.
14,000
–14,000
Statement of Cash Flows
Jan. 31.
Operating
14,000
P4–4
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
Aug. 3.
33,400
33,400
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
Aug. 9.
–7,000
–7,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Cash
+
Invent.
=
Payable
Aug. 10.
–600
25,600
25,000
Statement of Cash Flows
Aug. 10.
Operating
–600
P4–4, Concluded
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Cash
+
Invent.
=
Payable
Aug. 13.
–25,872
–528
–26,400
Statement of Cash Flows
Aug. 13.
Operating
–25,872
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Statement
Cash
=
Payable
Aug. 31.
–25,000
–25,000
Statement of Cash Flows
Aug. 31.
Operating
–25,000
P4–5
1.
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Cash
+
Rec.
+
Inv.
=
Earnings
June 8.
– 400
18,250
–10,000
7,850 June 8.
Statement of Cash Flows
Income Statement
June 8.
Operating
– 400
June 8.
Sales
18,250
Cost of merch. sold
–10,000
Delivery exp. –400
Net income 7,850
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
June 12.
–5,000
3,000
–2,000 June 12.
Income Statement
June 12.
Sales returns & allow.
–5,000
Cost of merch. sold
3,000
Net income
–2,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Retained
Statement
Cash
+
Rec.
=
Earnings
June 23.
12,985
–13,250
–265 June 23.
Statement of Cash Flows
Income Statement
June 23.
Operating
12,985
June 23.
Sales
discounts
–265
P4–5, Continued
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Inventory
=
Earnings
June 24.
15,000
–9,000
6,000 June 24.
Income Statement
June 24.
Sales
15,000
Cost of merch. sold
–9,000
Net income 6,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Statement
Cash
+
Rec.
June 30.
15,000
–15,000
Statement of Cash Flows
June 30.
Operating
15,000
2.
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
June 8.
18,250
18,250
P4–5, Continued
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
June 12.
–5,000
–5,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Cash
+
Invent.
=
Payable
June 23. –12,985
–265
–13,250
Statement of Cash Flows
June 23.
Operating
–12,985
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
June 24.
15,000
15,000
P4–5, Concluded
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Statement
Cash
+
Inv.
June 26.
–375
375
Statement of Cash Flows
June 26.
Operating
–375
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Statement
Cash
=
Payable
June 30. –15,000
–15,000
Statement of Cash Flows
June 30.
Operating
–15,000
P4–6 (Appendix)
1.
OMEGA SYSTEMS INC.
Statement of Cash Flows For the Year Ended March 31, 20Y5
Cash flows from operating activities:
Net income $ 105,450 Depreciation expense—store equipment $ 24,650
Depreciation expense—office equipment 3,735
Changes in current operating assets and liabilities: Increase in accounts receivable (36,120)
Increase in merchandise inventory (10,600)
Decrease in office supplies 180
Decrease in prepaid insurance 525
Increase in accounts payable 12,225
Decrease in salaries payable (540)
Decrease in unearned rent (900) (6,845)
Net cash flows from operating activities $ 98,605
Cash flows used for investing activities:
Purchase of store equipment $ (65,000)
Purchase of office equipment (8,355)
Net cash flows used for investing activities (73,355)
Cash flows used for financing activities:
Payment of note payable $ (7,500)
Payment of dividends (7,500)
Net cash flows used for financing activities (15,000)
Net increase in cash $ 10,250
April 1, 20Y4, cash balance 29,250
March 31, 20Y5, cash balance $ 39,500 2. Depreciation is added to net income in determining net cash flows from operating activities. This is because depreciation is deducted in arriving at net income, but it does not involve any cash payments.
FINANCIAL ANALYSIS
FA4–1
1. Year 2 Year 1
Gross profit percent: ($20,561 ÷ $107,100) 19.2% ($20,219 ÷ $95,778) 21.1%
2. Average markup percent: ($20,561 ÷ $86,539) 23.8% ($20,219 ÷ $75,559) 26.8%
3. Ratio of sales to assets: ($107,100 ÷ $63,356) 1.69 ($95,778 ÷ $61,905) 1.55
4. The gross profit percent declined 1.9% from 21.1% in Year 1 to 19.2% in Year 2. This is an unfavorable trend. Likewise, the average markup percent declined 3.0% from 26.8% in Year 1 to 23.8% in Year 2. This is consistent with the decline in the gross profit percent and is also an unfavorable trend. The decline in the gross profit percent and average markup percent could be due to increasing competition for Walgreen and others. A favorable trend is the increase of 0.14 in the ratio of sales to assets to 1.69 in Year 2 from 1.55 in Year 1. In other words, CVS is generating $0.14 more sales per operating asset dollar in Year 2 than in Year 1.
P4–1
1.
AQUA CO.
Income Statement
For the Year Ended June 30, 20Y8
Revenue from sales: Sales $ 3,625,000 Less: Sales returns and allowances $ 37,800 Sales discounts 20,200 58,000 Net sales $ 3,567,000
Cost of merchandise sold 2,175,000
Gross profit $ 1,392,000
Operating expenses: Selling expenses: Sales salaries expense $ 388,800 Advertising expense 45,900 Depreciation expense—store equipment 8,300 Miscellaneous selling expense 2,000 Total selling expenses $ 445,000 Administrative expenses: Office salaries expense $ 77,400 Rent expense 39,900 Insurance expense 22,950 Depreciation expense—office equipment 16,200 Office …show more content…
supplies expense 1,650 Miscellaneous administrative expense 1,900 Total administrative expenses 160,000 Total operating expenses 605,000
Income from operations $ 787,000
Other expense: Interest expense 12,000
Net income $ 775,000
P4–1, Continued
2.
AQUA CO.
Retained Earnings Statement
For the Year Ended June 30, 20Y8
Retained earnings, July 1, 20Y7 $ 253,800
Net income for the year $ 775,000
Less dividends 125,000
Increase in retained earnings 650,000
Retained earnings, June 30, 20Y8 $ 903,800
P4–1, Continued
3.
AQUA CO.
Balance Sheet
June 30, 20Y8
Assets
Current assets: Cash $ 83,500 Accounts receivable 150,000 Merchandise inventory 380,000 Office supplies 15,000 Prepaid insurance 12,000 Total current assets $ 640,500
Property, plant, and equipment: Office equipment $ 115,200 Less accumulated depreciation 49,500 $ 65,700
Store equipment $ 511,500 Less accumulated depreciation 186,700 324,800 Total property, plant, and equipment 390,500
Total assets $ 1,031,000
Liabilities
Current liabilities: Accounts payable $ 48,600 Note payable (current portion) 8,000 Salaries payable 9,600 Total current liabilities $ 66,200
Long-term liabilities: Note payable (final payment due in five years) 46,000
Total liabilities $ 112,200
Stockholders’ Equity
Capital stock $ 15,000
Retained earnings 903,800
Total stockholders’ equity 918,800
Total liabilities and stockholders’ equity $ 1,031,000
P4–1, Concluded
4.
a. The multiple-step form of income statement contains various sections for revenues and expenses, with intermediate balances, and concludes with net income. In the single-step form, the total of all expenses is deducted from the total of all revenues. There are no intermediate balances.
b. In the report form of balance sheet, the assets, liabilities, and stockholders’ equity are presented in that order in a downward sequence. In the account form, the assets are listed on the left-hand side, and the liabilities and stockholders’ equity are listed on the right-hand side.
P4–2
1.
AQUA CO.
Income Statement
For the Year Ended June 30, 20Y8
Revenues: Net sales $ 3,567,000
Expenses:
Cost of merchandise sold $ 2,175,000 Selling expenses 445,000 Administrative expenses 160,000 Interest expense 12,000 Total expenses 2,792,000
Net income $ 775,000
2.
AQUA CO.
Retained Earnings Statement
For the Year Ended June 30, 20Y8
Retained earnings, July 1, 20Y7 $ 253,800
Net income for the year $ 775,000
Less dividends 125,000
Increase in retained earnings 650,000
Retained earnings, June 30, 20Y8 $ 903,800
P4–3
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
Jan. 6.
14,000
–8,400
5,600 Jan. 6.
Income Statement
Jan. 6.
Sales
14,000
Cost of merch. sold
–8,400
Net income 5,600
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
Jan. 8.
20,000
–14,000
6,000 Jan. 8.
Income Statement
Jan. 8.
Sales
20,000
Cost of merch. sold
–14,000
Net income 6,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
Jan. 16.
19,500
–11,700
7,800 Jan. 16.
Income Statement
Jan. 16.
Sales
19,500
Cost of merch. sold
–11,700
Net income 7,800
P4–3, Continued
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Retained
Statement
Cash
+
Rec.
=
Earnings
Jan. 18.
19,800
–20,000
–200 Jan. 18.
Statement of Cash Flows
Income Statement
Jan. 18.
Operating
19,800
Jan. 18.
Sales
discounts
–200
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
Jan. 19.
–4,500
2,700
–1,800 Jan. 19.
Income Statement
Jan. 19.
Sales returns & allow.
–4,500
Cost of merch. sold
2,700
Net income –1,800
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Retained
Statement
Cash
+
Rec.
=
Earnings
Jan. 26.
14,850
–15,000
–150 Jan. 26.
Statement of Cash Flows
Income Statement
Jan. 26.
Operating
14,850
Jan. 26.
Sales
discounts
–150
P4–3, Concluded
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Retained
Statement
Cash
=
Earnings
Jan. 31.
–3,000
–3,000 Jan. 31.
Statement of Cash Flows
Income Statement
Jan. 31.
Operating
–3,000
Jan. 31.
Delivery exp.
–3,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Statement
Cash
+
Rec.
Jan. 31.
14,000
–14,000
Statement of Cash Flows
Jan. 31.
Operating
14,000
P4–4
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
Aug. 3.
33,400
33,400
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
Aug. 9.
–7,000
–7,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Cash
+
Invent.
=
Payable
Aug. 10.
–600
25,600
25,000
Statement of Cash Flows
Aug. 10.
Operating
–600
P4–4, Concluded
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Cash
+
Invent.
=
Payable
Aug. 13.
–25,872
–528
–26,400
Statement of Cash Flows
Aug. 13.
Operating
–25,872
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Statement
Cash
=
Payable
Aug. 31.
–25,000
–25,000
Statement of Cash Flows
Aug. 31.
Operating
–25,000
P4–5
1.
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Cash
+
Rec.
+
Inv.
=
Earnings
June 8.
– 400
18,250
–10,000
7,850 June 8.
Statement of Cash Flows
Income Statement
June 8.
Operating
– 400
June 8.
Sales
18,250
Cost of merch. sold
–10,000
Delivery exp. –400
Net income 7,850
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Invent.
=
Earnings
June 12.
–5,000
3,000
–2,000 June 12.
Income Statement
June 12.
Sales returns & allow.
–5,000
Cost of merch. sold
3,000
Net income
–2,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Retained
Statement
Cash
+
Rec.
=
Earnings
June 23.
12,985
–13,250
–265 June 23.
Statement of Cash Flows
Income Statement
June 23.
Operating
12,985
June 23.
Sales
discounts
–265
P4–5, Continued
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Merch.
Retained
Statement
Rec.
+
Inventory
=
Earnings
June 24.
15,000
–9,000
6,000 June 24.
Income Statement
June 24.
Sales
15,000
Cost of merch. sold
–9,000
Net income 6,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Statement
Cash
+
Rec.
June 30.
15,000
–15,000
Statement of Cash Flows
June 30.
Operating
15,000
2.
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
June 8.
18,250
18,250
P4–5, Continued
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
June 12.
–5,000
–5,000
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Cash
+
Invent.
=
Payable
June 23. –12,985
–265
–13,250
Statement of Cash Flows
June 23.
Operating
–12,985
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Accts.
Statement
Invent.
=
Payable
June 24.
15,000
15,000
P4–5, Concluded
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Merch.
Statement
Cash
+
Inv.
June 26.
–375
375
Statement of Cash Flows
June 26.
Operating
–375
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accts.
Statement
Cash
=
Payable
June 30. –15,000
–15,000
Statement of Cash Flows
June 30.
Operating
–15,000
P4–6 (Appendix)
1.
OMEGA SYSTEMS INC.
Statement of Cash Flows For the Year Ended March 31, 20Y5
Cash flows from operating activities:
Net income $ 105,450 Depreciation expense—store equipment $ 24,650
Depreciation expense—office equipment 3,735
Changes in current operating assets and liabilities: Increase in accounts receivable (36,120)
Increase in merchandise inventory (10,600)
Decrease in office supplies 180
Decrease in prepaid insurance 525
Increase in accounts payable 12,225
Decrease in salaries payable (540)
Decrease in unearned rent (900) (6,845)
Net cash flows from operating activities $ 98,605
Cash flows used for investing activities:
Purchase of store equipment $ (65,000)
Purchase of office equipment (8,355)
Net cash flows used for investing activities (73,355)
Cash flows used for financing activities:
Payment of note payable $ (7,500)
Payment of dividends (7,500)
Net cash flows used for financing activities (15,000)
Net increase in cash $ 10,250
April 1, 20Y4, cash balance 29,250
March 31, 20Y5, cash balance $ 39,500 2. Depreciation is added to net income in determining net cash flows from operating activities. This is because depreciation is deducted in arriving at net income, but it does not involve any cash payments.
FINANCIAL ANALYSIS
FA4–1
1. Year 2 Year 1
Gross profit percent: ($20,561 ÷ $107,100) 19.2% ($20,219 ÷ $95,778) 21.1%
2. Average markup percent: ($20,561 ÷ $86,539) 23.8% ($20,219 ÷ $75,559) 26.8%
3. Ratio of sales to assets: ($107,100 ÷ $63,356) 1.69 ($95,778 ÷ $61,905) 1.55
4. The gross profit percent declined 1.9% from 21.1% in Year 1 to 19.2% in Year 2. This is an unfavorable trend. Likewise, the average markup percent declined 3.0% from 26.8% in Year 1 to 23.8% in Year 2. This is consistent with the decline in the gross profit percent and is also an unfavorable trend. The decline in the gross profit percent and average markup percent could be due to increasing competition for Walgreen and others. A favorable trend is the increase of 0.14 in the ratio of sales to assets to 1.69 in Year 2 from 1.55 in Year 1. In other words, CVS is generating $0.14 more sales per operating asset dollar in Year 2 than in Year 1.