Question

The following are the summary account balances from a recent statement of financial position of Modern Sportswear Inc. The accounts are followed by a list of transactions for the month of January 2015. All amounts are shown in millions of dollars:
The accounts have normal debit or credit balances, but they are not necessarily listed in good order. The following additional information is also available:
a. Purchased new equipment costing $ 150 by issuing long- term debt.
b. Received $ 900 on trade receivables.
c. Received and paid the telephone bills for $ 1.
d. Earned $ 500 in sales to customers on account; the cost of sales was $ 300.
e. Paid employees $ 100 for wages earned in January.
f. Paid half of the income taxes payable.
g. Purchased inventory for $ 223 on account.
h. Prepaid rent for February for a warehouse for $ 12.
i. Paid $ 10 of long- term borrowings and $ + in interest on the debt.
j. Purchased a patent (an intangible asset) for $ 8 cash.
Required
1. Set up T-accounts for the preceding list and enter the respective balances. (You will need additional T-accounts for statement of earnings accounts.)
2. For each transaction, record the effects in the T- accounts. Label each by using the letter of the transaction. Compute ending balances.
3. Show the effects (direction and amount) of each transaction on net earnings and cash.
4. Prepare in good form a statement of earnings for the month of January 2015 and a classified statement of financial position as at January 31, 2015.
5. Prepare the operating activities section of the statement of cash flows for January 2015, and explain the difference between the cash flow from operating activities and the net earnings computed in (3).
6. Compute the company’s total asset turnover ratio. What does this ratio suggest to you about Modern Sportswear Inc.?


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  • CreatedAugust 04, 2015
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