Question

Establish an Excel Worksheet for the financial statement analysis framework. Refer to the following information:

a. On January 1, 2014, Frances Corporation started doing business and the owners contributed $200,000 capital in cash.

b. The company paid $24,000 to cover the rent for the office space for the 24-month period from January 1, 2014 to December 31, 2015.

c. On March 1, 2014, MSK Inc. entered into a consulting contract under which Frances Corporation promised to provide consulting to MSK Inc. for the 10-month period from March 1, 2014, to December 31, 2014. In return, MSK promised to pay a monthly consulting fee of $15,000, which was to be paid in January 2015. Frances fulfilled its contractual obligation during 2014.

d. On July 1, 2014, Frances purchased office equipment for $100,000 cash. The equipment has an estimated useful life of five years and no salvage value. The equipment was immediately placed into use. Frances uses the straight-line method of depreciation. It records depreciation expense in proportion to the number of months’ usage.

e. Through November 30, 2014, the company had paid $66,000 to its employees for 11 months of salaries. Accrued salaries on December 31, 2014, were $6,000.

f. On December 31, 2014, Norbert Corporation advanced $20,000 to Frances Corporation for consulting services to be provided during 2015.

Questions:

1. For each of these transactions, using the financial statement effect template, analyze the effects of the above transactions on financial statements.

2. At the end of the year, analyze how the adjustment for accrual basis accounting affects the financial statements.

3. Prepare financial statements for the year ended December 31, 2014.

(balance sheet / income statement/ cash flow statement)

4. If Frances recognized "rent expense" instead of "prepaid rent" on Jan. 1, discuss the effect of this error on the financial statements.

Answer 1

1 & 2) Effect of transactions and adjustment for accural basis :
	Balance Sheet		Income Statement		Cash flow Statement
Transaction	Assets	Liabilities & SH Eq	Revenues	Expenses	Inflow	Outflow
a	Cash 200000	Capital 200000			200000
b	Cash -24000, Prepaid rent 12000			Rent exp 12000		24000
c		Accounts Payable 150000		Consultancy exp 150000
d	Cash -100000, Equipment 100000					100000
	Equipment -10000			Depreciation exp 10000
e	Cash - 66000	Salary payable 6000		72000		66000
f	Cash 20000	Unearned revenue 20000			20000
3) Financial Statements:
Income Statement:
Revenues	0
less: Expenses:
Rent	-12000
Consultancy	-150000
Depreciation	-10000
salary	-72000
NOL	-244000
Balance Sheet:
Assets:	Amount $	Liabilities	Amount $
Cash	30000	AP	150000
Prepaid rent	12000	Salary payable	6000
Equipment	90000	Unearned revenue	20000
		Capital	200000
		NOL	-244000
Total Assets	132000	Total Liabilities	132000
Cash flow Statement:
From operation:
Net Loss	-244000
add: depreciation	10000
less: Prepaid rent increase	-12000
add: AP increases	150000
add:salary payable increases	6000
add: Unearned rev increases	20000
Cash outflow of operations	-70000
From investing:
less: equip purchase	-100000
Cash outflow of investing	-100000
From financing:
add: shares issues	200000
Cash inflow of financing	200000
Net cash inflow of all	30000
Opening Cash	0
Closing Cash	30000
4) If Rent expense is used to record the transaction, then the prepaid
rent adjustment is necessary at the year end. The entry should be:
Debit	Prepaid Rent	$12,000
Credit	Rent Expense	$12,000