Question

You work for a small accounting firm in Halifax and are filling in as a temp during the winter
semester. It is February 5th 2020 and you are working on the January month-end accounting
file for a local mobile tire installation and repair business called The Good Rubber Company
(GRC) which has just opened. The following events happened during its first month of
operations.
1) On January 10th, GRC purchased $7,500 worth of inventory (new tires) from suppliers, on
account.
2) GRC also began its tire rotation and changeover service, collecting $110 from each of the 45
customers serviced that month.
3) At the beginning of the month GRC purchased a van and equipment for $30,000. GRC paid
$3,000 cash, and financed the rest from the supplier.
a) The interest rate on the outstanding balance is 5%, due annually (first payment of interest
and principle is PAYABLE NEXT January).
b) The estimated useful life of both the van and equipment is 10 years with no residual value
4) GRC was founded on January 1st with a cash investment from the one owner of $30,000 in
exchange for 3,000 shares.
5) Additionally, it sold eight (8) gift cards for $110 each, that can be redeemed for 1 service
each, at any point in the future. At the end of the month two (2) gift cards had been
redeemed / used.
6) GRC made a payment of $2,500 to its suppliers on January 15th, the remainder is due on
February 15th
.
7) The GRC paid $2,400 for a 1-year insurance policy to cover the Van used in operations as
well as general liability.
8) The owner of the company is also the operator (employee) and has elected to take a
monthly salary of $2,000. At the end of the month none of it had been paid.
General Journal entries for 1-3 have been completed (but not adjusting entries), please record
all the remaining necessary journal entries for the month of January. If no entry is required for
an event, please note it.
After this is complete please record all adjusting entries, update the general ledger (T-accounts)
and prepare an adjusted trial balance, income statement, and statement of financial position
for January 31st (please use the template provided, it is already formatted and some formulas
are already included) the company uses straight line depreciation. Do not worry about current
or non-current assets and liabilities for this month.
I will prepare a statement of cash flows, so you do not need to worry about that, however I am
concerned that our client will not understand the statement of cash flows, as this is the first
time they have received formal financial statements. Could you please prepare a professional
memo that explains the purpose of the cash flow statement, and the main business activities
that are included. It would be helpful to include examples for each business activity.
Bonus: Calculate the Return on Assets (ROA) for the month

Answer 1

General Journal

Adjustment Jpurnals

T-Accounts

Adjusted Trial balance

Income Statement

Statement of Financial Position

Purpose of Cash Flow Statement

The objective of a cash flow statement is to provide an analysis of the change in Cash on account of business activities in a period.These activities can result in Cash Inflow or Outflow.The business activities for Cssh Flow are primarily divided in three categories -

• Operating Activities
• Investing Activities
• Financing Activities.

Examples of these different categories are as hereunder -

Operating Activities - Cash from sales of Goods , Payment to employees,Tax Payments etc.

Investing Activities - Asset sales proceeds,Securities purchase , Sale of marketable securities

Financing Activities - Receipt from shares issue,cash dividends to shareholders,Borrowing payments etc.

Return on Assets:

Formula = Net Income / Total Assets = 2607 / 67380 = 3.87%