Question

PB3-4   Analyzing, JournaIizing and Interpreting Business Activities (LO 3-3, 3-5 & then some) -

The following items present a sample of business activities involving Dry Cleaner Corporation (DCC) for the year ended December 31st. DCC provides cleaning services for individual customers and for employees of several large companies in the city.

Dec 1:       DCC’s owner paid $10,000 cash to acquire 200 of DCC’s common shares.

Dec 2:       DCC borrows $2,000 cash from BofA and signs a promissory note to repay the

principal and interest at 1% per annum on December 1, 2018.

Dec 3:       DCC ordered cleaning supplies at a total cost of $2,000. The supplies are

expected to be received in early January.

   Dec 4:       DCC paid $1,500 cash to its landlord which consisted of December’s Rent of

           $1,000 and a Security Deposit of $500.

Dec 7:       Customers paid $200 cash to DCC to obtain DCC gift cards that they could use to

       obtain future cleaning services at no additional cost.

Dec 15:       Customers paid $1,000 cash to DCC for cleaning services performed during the

first two weeks of December.

Dec 21:       DCC ran advertising in the local newspaper today at a total cost of $500. DCC is

not required to pay for the advertising until January 21st.

   Dec 22:       DCC paid $1,000 to the landlord for January rent.

   Dec 23:       DCC’s owner sold 20 of his own DSS common shares to a private investor, at a

selling price of $1,200.

   Dec 28:       DCC paid in full for the advertising run in the local newspaper on December 21st.

   Dec 29:       The cleaning supplies ordered on December 3rd were received today. DCC does

not have to pay for these supplies until January 29th.

Dec 31:   Today, DCC completed cleaning services for several large companies at a total price of $2,000. The companies are expected to pay for the services by January 31st.

1) Prepare a Trial Balance at 12/31/2017.

2) What was the source of the company’s financing – Debt or Equity

3) Prepare the Current Ratio and the Quick Ratio (aka Acid Test). Are the ratios good or bad? What standard did you use? New – Net Profit Ratio – compute.

4) Why could the financial statements be inaccurate? Hint - See Chapter 4 Topics for some ideas. Give a couple reasons.

Answer 1

working
Date	Accounts Title	Dr	Cr
1-Dec	Cash	$10,000
	Common stock		$10,000
2-Dec	Cash	$2,000
	Notes payable		$2,000
3-Dec	no entry required
4-Dec	Rent expenses	$1,000
	Security deposit	$500
	Cash		$1,500
7-Dec	Cash	$200
	Gift card Liabilities		$200
15-Dec	Cash	$1,000
	Cleaning services revenue		$1,000
21-Dec	Advertising expenses	$500
	Accounts Payable		$500
22-Dec	Prepaid rent	$1,000
	Cash		$1,000
23-Dec	no entry required
28-Dec	Accounts Payable	$500
	Cash		$500
29-Dec	Cleaning supplies	$2,000
	Accounts payable		$2,000
31-Dec	Accounts Receivable	$2,000
	Cleaning services revenue		$2,000

Ans 1
Trial Balance
As on 12/31/2017
	Dr	Cr
Cash	$10,200
Accounts Receivable	2000
Cleaning supples	2000
Prepaid rent	1000
Securities deposit	500
Accounts Payable		2000
Gift card Liabilities		200
Notes payable		2000
Common stock		10000
Cleaning services revenue		3000
Advertising expenses	500
Rent expenses	1000
Total	$17,200	$17,200
ans 2
Company used both equity and debt for financing. But majorily
the company used Equity for financing its operations.
ans 3
Current ratio	3.74
Current assets/Current liabilities
15700/4200
Cash	$10,200
Accounts Receivable	2000
Cleaning supples	2000
Prepaid rent	1000
Securities deposit	500
Total current assets	$15,700
Accounts Payable	2000
Gift card Liabilities	200
Notes payable	2000
Total current liabilities	4200
Quick ratio	2.90
Quick assets/CL
(10200+2000)/4200
The current and quick ratio are good as the current assets
is able to meet the short term obligations.
Net Profit ratio
Net profit/revenue*100
(3000-500-1000)/3000*100	50	%
0r .5
ans 4
Financial statements can be inaccurate as the adjusting
entries have not been passed so as to show correct balances
of the accounts. For example cleaning supplies must have been
used in December but no entry passed. 2) Interest expense
for the month of December not accured.