Question

In: Accounting

Gaze Co. Adjusted Trial Balance at 31 December 2019 &nbs

Gaze Co.

Adjusted Trial Balance

at 31 December 2019

Debit Credit

Cash € 51,402

Accounts receivable 2,400

Office supplies 600

Prepaid rent 1,440

Office equipment 64,800

Accumulated depreciation: office equipment € 42,300

Accounts payable 1,680

Interest payable 432

Income taxes payable 2,100

Unearned revenue 10,800

Capital stock 36,000

Retained earnings 9,600

Dividends 1,200

Consulting services revenue 72,000

Office supplies expense 726

Depreciation expense: office equipment 9,900

Rent expense 1,212

Salaries expense 32,520

Interest expense 432

Income taxes expense 8,280

Totals € 174,912 €174,912

Instructions:

Using Adjusted Trial Balance above, perform the following tasks:

(5) Prepare an after-closing trial balance dated December 31, 2019 (10 points).

(6) Does the company appear to be liquid? Explain. Justify your conclusion with calculation of working capital and current ratio (15 points).

(7) Has the company been profitable in the past? What about this year? Justify your conclusion with calculation of net income percentage and return on equity (15 points).

Expert Solution

(5) Prepare an after-closing trial balance dated December 31, 2019

Gaze Co.

After-closing Trial Balance

at 31 December 2019

	Debit	Credit
Cash	€ 51,402
Accounts receivable	2,400
Office supplies	600
Prepaid rent	1,440
Office equipment	64,800
Accumulated depreciation: office equipment		€ 42,300
Accounts payable		1,680
Interest payable		432
Income taxes payable		2,100
Unearned revenue		10,800
Capital stock		36,000
Retained earnings		27,330
	120,642	120,642

Retained earnings
Opening balance		€ 9,600
Less: Dividend		(1,200)
Add: Net income-
Consulting services revenue	72,000
Office supplies expense	(726)
Depreciation expense: office equipment	(9,900)
Rent expense	(1,212)
Salaries expense	(32,520)
Interest expense	(432)
Income taxes expense	(8,280)	18,930
		€ 27,330

(6) Does the company appear to be liquid? Explain. Justify your conclusion with calculation of working capital and current ratio

Working capital = Current asset less current liabilities

Working capital = 55,842-15,012

Working capital =40,830

Current ratio = Current asset divided by current liabilities

Current ratio = 55,842/15,012

Current ratio = 3.72

Working capital and current ratio are liquidity indicators for an organisation and helps evaluate the short-term cashflows needs of the organisation. Current liabilities are expense due within one year and current asset are asset convertible in cash within one year. Current ratio and working capital helps to know if the organisation has sufficient source of short-term cash inflows to meet its short-term cash outflow requirement.

In the current case, working capital is positive by 40,380, which means that the organisation has short term inflows in surplus of its short term liabilities by 40,380.

Similarly the current ration is 3.72 which means that the oganisation has short-term fund 3,72 times of its short-term obligations. Hence, Company appears liquid.

Current asset
Cash	€ 51,402
Accounts receivable	2,400
Office supplies	600
Prepaid rent	1,440
	55,842

Current liabilities
Accounts payable	1,680
Interest payable	432
Income taxes payable	2,100
Unearned revenue	10,800
	15,012

(7) Has the company been profitable in the past? What about this year? Justify your conclusion with calculation of net income percentage and return on equity

Net income percentage = (Net Income divided by Revenue)*100

Net income percentage = (18,930 divided by 72,000)*100

Net income percentage = 26%

Return on equity = Net Income divided by Shareholder equity

Return on equity for 2019 = 18,930 divided by (27330+36000)

Return on equity for 2019= 0.30

Return on equity (ROE) is also a profitability ratio like Net income percentage. ROE is read as percentage of profit to the investor for every currency spent. Here it means that the investor of the Company is earning 30% of every € spent.

Net income percentage means percentage of net income as compare to revenue. Here it means that Company earns a net income of 26% of each € 1 of Consulting services revenue.

Accordingly the Company is profitable in current year. The ROE is also positive and higher than Net income percentage of current year which indicates that it was profitable in past year as well.

ekkarill92 answered 1 year ago

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