Mike and Anne Addams have held jobs in a variety of businesses since they have been together. Mike has been a sales representative manager for a pharmaceutical company. Anne has been a legal assistant at a law firm. They both wanted to always own their own business. They have decided to open a jewelry store here in Miami, Florida. They will call the jewelry store Rocks Unlimited. They have been saving up for years to do this and want to branch out on their own now. Here is financial information on the jewelry store as they want your help because you just finished your MBA.

On January 1, Rocks Unlimited issued no par common stock to the Addams for $500,000. Early in January, Mike secured a commercial space for $24,000 for Rocks Unlimited. Then the business purchased store fixtures for $54,000. Then the business purchased a vast amount of different types of jewelry. They bought watches, stones, necklaces, bracelets, etc. The total inventory costs was $270,000. Sales were pretty good so a few months later the business purchased additional inventory on account of $244,000. Before the year ended Rocks Unlimited paid $144,000 of this accounts payable. During the year, Rocks Unlimited sold 2,300 pieces of various jewelry and the average sale was $225. Before the year ended the company collected on 90% of this sales amount. The costs of goods sold for the year totaled $320,000 and the year-end inventory amount was $194,000.

Rocks Unlimited employed three employees and did not pay any overtime throughout the year. The total payroll for the year was $88,000 but Rocks Unlimited still owes the employees $6,000 at year end. At the end of the year, Rocks Unlimited has paid in income tax of $20,000 so there is no reason to have an income tax payable account. The Addams believed they had a rewarding year as they started their own jewelry business. The Addams sacrificed a lot during this first year but did need some money to live on so they took dividends of $35,000 from Rocks Unlimited. The Addams do not know that much about accounting so they asked a friend for advice on how to account for the use of the store fixtures. They want the store fixtures depreciated over 5 years using the straight-line depreciation method with zero residual value.

1. Prepare the income statement for the year ended.

2. Prepare the balance sheet for the company at year end.

3. Prepare the statement of cash flows at year end using the indirect method.

4. Using ratios, analyze the three financial statements from your answer, and assess the company’s performance.

Answer rating: 100% (QA)

Acccount Titles Debit Credit Cash 500000 Common stock 500000 Rent expense 24000 Cash 24000 Store fixtures 54000 Cash 54000 Inventory 270000 Cash 270000 Inventory 244000 Accounts Payable 244000 Account... View the full answer