Analyzing the Effects of Transactions Using T-Accounts, Preparing Financial Statements, and Evaluating the Total Asset Turnover Ratio as a Manager

Brianna Webb, a connoisseur of fine chocolate, opened Bri's Sweets in Collegetown on February 1, 2011. The shop specializes in a selection of gourmet chocolate candies and a line of gourmet ice cream. You have been hired as manager. Your duties include maintaining the store's financial records. The following transactions occurred in February 2011, the first month of operations.

a. Received four shareholders' contributions totaling $27,600 cash to form the corporation; issued stock.

b. Paid three months' rent for the store at $1,880 per month (recorded as prepaid expenses).

c. Purchased and received candy for $5,500 on account, due in 60 days.

d. Purchased supplies for $1,430 cash.

e. Negotiated and signed a two-year $11,000 loan at the bank.

f. Used the money from (e) to purchase a computer for $2,750 (for recordkeeping and inventory tracking); used the balance for furniture and fixtures for the store.

g. Placed a grand opening advertisement in the local paper for $500 cash.

h. Made sales on Valentine's Day totaling $3,000; $2,675 was in cash and the rest on accounts receivable. The cost of the candy sold was $1,200.

i. Made a $550 payment on accounts payable.

j. Incurred and paid employee wages of $1,500.

k. Collected accounts receivable of $155 from customers.

l. Made a repair to one of the display cases for $130 cash.

m. Made cash sales of $2,400 during the rest of the month. The cost of the candy sold was $1,210.

Required:

1. Set up appropriate T-accounts for Cash, Accounts Receivable, Supplies, Inventory, Prepaid Expenses, Equipment, Furniture and Fixtures, Accounts Payable, Notes Payable, Contributed Capital, Sales Revenue, Cost of Goods Sold (expense), Advertising Expense, Wage Expense, and Repair Expense. All accounts begin with zero balances.

2. Record in the T-accounts the effects of each transaction for Bri's Sweets in February, referencing each transaction in the accounts with the transaction letter. Show the ending balances in the T-accounts. Note that transactions (h) and (m) require two types of entries, one for revenue recognition and one for the expense.

3. Prepare financial statements at the end of the month ended February 28, 2011 (income statement, statement of stockholders' equity, and balance sheet).

4. Write a short memo to Brianna offering your opinion on the results of operations during the first month of business.

5. After three years in business, you are being evaluated for a promotion. One measure is how efficiently you managed the assets of the business. The following data are available:

Compute the total asset turnover ratio for 2012 and 2013 and evaluate the results. Do you think you should be promoted?Why?

2012 2013 2011 Total assets Total liabilities Total stockholders' equity Total sales Net income $8,000 49,500 38,500 93,500 22,000 $49,500 $38,500 27,500 22,000 82,500 11,000 55,000 4,400 *At the end of 2013, Brianna decided to apen a second store, requiring loans and inventory purchases prior to the store's opening in early 2014.