Susans Drawing Studio has been very successful, with annual sales and profits at a record high. Susan wants to evaluate and better understand the studio's profitability and performance based on the following year-end account balances:

 Required

a. Prepare a balance sheet and a multiple-step income Statement.

b. Evaluate Susan's net income relative to her sales volume.

c. What is Susan's net income as a percentage of sales? Why do you think most firms do not have net income ratios this high?

d. Would your conclusions about Susan's net income change if you learned that she had been withdrawing $10,000 every month and charging these payments to Miscellaneous Expenses? Why?

e. How would your conclusions change if you learned that Susan, who is a gifted artist, could be earning $40,000 a month by working for her former employer, the Degas Drawing Corporation?

f. Given that Susan has a Building and Equipment account, what basic type of expense is missing from her income statement? Would calculation of that item change your conclusions about her relative profitability? How large would this item have to be to change your views about Susan's profitability? Why? What other information would you need before drawing firm conclusions about this issue?

g. Why do you think shareholders’ equity has a lower balance than the net income (part a)?

h. Are there any other major elements of information missing? If so, what are they, and why would you like more information about these items?

Transcribed Image Text:

Sales Property tax expense Supplies inventory Accounts payable Wages expense Receivables Taxes payable $400,000 2,550 12,400 2,450 13,240 2,200 2,670 Supplies used Cash Building and equipment Wages payable Shareholders equity Advertising expense Miscellaneous expenses $ 25,600 32,300 110,000 1,200 2 2,400 120,000 Sales Property tax expense Supplies inventory Accounts payable Wages expense Receivables Taxes payable $400,000 2,550 12,400 2,450 13,240 2,200 2,670 Supplies used Cash Building and equipment Wages payable Shareholders equity Advertising expense Miscellaneous expenses $ 25,600 32,300 110,000 1,200 2 2,400 120,000

Answer rating: 100% (QA)

a Balance Sheet ASSETS Cash 32300 Accounts Receivable 2200 Supplies Inventory 12400 Building and Equipment 120000 Total Assets 166900 LIABILITIES Acco... View the full answer