Question

On January 1, 2021, the general ledger of Dynamite Fireworks includes the following account balances:

Accounts	Debit				Credit
Cash	$	25,500
Accounts Receivable		6,900
Supplies		4,800
Land		67,000
Accounts Payable					$	4,900
Common Stock						82,000
Retained Earnings						17,300
Totals	$	104,200			$	104,200

During January 2021, the following transactions occur:

January		2		Purchase rental space for one year in advance, $11,100 ($925/month).
January		9		Purchase additional supplies on account, $5,200.
January		13		Provide services to customers on account, $27,200.
January		17		Receive cash in advance from customers for services to be provided in the future, $5,400.
January		20		Pay cash for salaries, $13,200.
January		22		Receive cash on accounts receivable, $25,800.
January		29		Pay cash on accounts payable, $5,700.

What is the amount of profit reported for the month of January?

Calculate the ratio of current assets to current liabilities at the end of January.

Based on Dynamite Fireworks’ profit and ratio of current assets to current liabilities, indicate whether Dynamite Fireworks appears to be in good or bad financial condition.

(GOOD or BAD)

Answer 1

Statement of Transactions				January Transactions
S. No	Nature	Particulars	Opening	2	9	13	17	20	22	29	Closing
1	Assets	Cash	25,500	(11,100)			5,400	(13,200)	25,800	(5,700)	26,700
2		Accounts Receivable	6,900			27,200			(25,800)		8,300
3		Supplies	4,800		5,200						10,000
4		Land	67,000								67,000
5		Prepaid Rent		10,175							10,175
6	Liabilities	Accounts Payable	4,900		5,200		5,400			(5,700)	9,800
7		Common Stock	82,000								82,000
8		Retained Earnings	17,300	(925)		27,200		(13,200)			30,375

Statement of Profit can be concluded from Retained Earning Transactions which have been in the above table i.e. 30,375 - 17,300 i.e. $13,075

Hence, the amount of profit reported for the month of January is $ 13,075.

Purchase rental space for one year in advance, leads to Prepaid Advance.

Ratio of current assets to current liabilities = Current Assets / Current Liabilities

Where, Current Assets= Cash + Accounts Receivable + Supplies + Prepaid Rent

                                =26,700 + 8,300 + 10,000 + 10,175

                                  i.e. $55,175

Also, current Liabilities = Accounts Payable = $9,800

Hence, Ratio of current assets to current liabilities = 55,185 / 9,800 i.e 5.63

Here, Financial position is Good as Current Asset is 5.63 times of Current Liabilities which shows backing up of liabilities.

Also, Profit is increasing & there is no debt over the company. So business is having Good Financial Position.